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Income Tax Appellate Tribunal, “SMC-C” BENCH : BANGALORE
O R D E R Per Shri A.K. Garodia, Accountant Member These two appeals are filed by two different but connected assessees and these appeals are directed against two separate orders of ld. CIT (A), Belagavi both dated 01.05.2017 for the same Assessment Year 2008-09. Both the appeals were heard together and are being disposed of by way of this common order for the sake of convenience. & 1505/Bang/2017 Page 2 of 8 2. The grounds raised by the assessee in are as under.
“Without prejudice to each other
The order of the learned Commissioner of Income-tax (Appeals) passed under Section 250 of the Act in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
The learned CIT (A) failed to appreciate that the salary paid to Shri. NandlalJ Runwal of Rs. 96,000/- was fair and reasonable given the nature & importance of services rendered by him in appellant's business and that the balance salary of Rs. 48,000/- also be allowed under the facts and circumstances of the case. 3. The learned CIT (A) failed to appreciate that the salary paid to Mrs. Sunita R Runwal of Rs. 96,000/- was fair and reasonable given the nature & importance of services rendered by her in appellant's business and the same be allowed under the facts and circumstances of the case. 4. The learned CIT (A) failed to appreciate that the salary paid to Mrs. Archana K Runwal of Rs. 48,000/- was fair and reasonable given the nature & importance of services rendered by her in appellant's business and the same be allowed under the facts and circumstances of the case. 5. The learned CIT (A) has failed to appreciate the fact that the above salary payments were towards important and crucial services received by the appellant's business and hence the same were ought to be allowed under the facts and circumstances of the case. 6. The learned CIT (A) has failed to take cognisance of various decisions relied upon by the appellant and failed to state as to how they were not relevant to the appellant's case and is hence in violation of principles of natural justice. 7. The lower authorities have failed to fulfil the pre- requisites for making disallowance u/s 40A(2) of the Act by not placing on record any concrete evidence w.r.t excessiveness or unreasonableness of various payments disallowed and have disregarded various evidences produced by the appellant which is grossly in violation of provisions of the Act, decisions of Hon'ble Courts & Tribunals and is also denial of justice and against the principles of natural justice.
The learned assessing officer has made a totalling and mathematical error apparent from record in computation of total assessed income to the tune of Rs. 25,400/- and its consequential tax, cess, interest implications and the appellant prays that the same be ordered to be corrected to provide relief.
9. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal
urged above.
10. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”
3. Similarly the grounds raised by the second assessee in are as under. “Without prejudice to each other
1. The order of the learned Commissioner of Income-tax passed under Section 250 of the Act in so far as it is against the Appellant is opposed to law, weight of evidence, probabilities, facts and circumstances of the Appellant's case.
2. The learned CIT (A) failed to appreciate that the salary paid to Shri. NandlalJ Runwal of Rs. 96,000/- was fair and reasonable given the nature & importance of services rendered by him in appellant's business and that the balance salary of Rs. 48,000/- also be allowed under the facts and circumstances of the case.
3. The learned CIT (A) failed to appreciate that the salary paid to Shri. NimeshK Runwal of Rs. 96,000/- was fair and reasonable given the nature & importance of services rendered by him in appellant's business and the same be allowed under the facts and circumstances of the case.
4. The learned CIT (A) failed to appreciate that the brokerage paid to Shri. Kesarimal N Runwal of Rs. 3,50,000/- was fair and reasonable given crucial role played by him in appellant's firm, the quantum of business generated by him and the prevalent customary practices of the industry and the same be allowed under the facts and circumstances of the case.
5. The learned CIT (A) failed to appreciate and take cognisance of evidences furnished by the appellant in support of brokerage paid to Smt. Kamaladevi Jain of Rs. 50,000/- which was fair and reasonable given that she was an unrelated party, quantum of business generated by her in appellant's firm and the prevalent customary practices of the industry and the same be allowed under the facts and circumstances & 1505/Bang/2017 Page 4 of 8 of the case.
6. The learned CIT (A) has failed to appreciate the fact that the above salary & brokerage payments were towards important and crucial services and the quantum of business received by the appellant's business and also as per the prevalent customary practices of the industry and hence the same were ought to be allowed under the facts and circumstances of the case.
7. The learned CIT (A) has failed to take cognisance of various decisions relied upon by the appellant and failed to state as to how they were not relevant to the appellant's case and is hence in violation of principles of natural justice.
8. The lower authorities have failed to fulfil the pre-requisites for making disallowance u/s 40A(2) of the Act by not placing on record any concrete evidence w.r.t excessiveness or unreasonableness of various payments disallowed and have disregarded various evidences produced by the appellant which is grossly in violation of provisions of the Act, decisions of Hon'ble Courts & Tribunals and is also denial of justice and against the principles of natural justice.
9. The Appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above.
10. For the above and other grounds to be urged during the hearing of the appeal the Appellant prays that the appeal be allowed in the interest of equity and justice.”
4. It was submitted by ld. AR of assessee that ground nos. 1, 9 and 10 in both the appeals are general grounds for which no separate adjudication is called for. He also submitted that the issues to be decided on merit are as per ground nos. 2, 3, 4 and 5 and the remaining grounds i.e. 6, 7 and 8 are supporting grounds.
The ld. AR of assessee submitted that the issue in respect of disallowance out of salary paid to Shri Nandlal J Runwalis is discussed by the AO on pages 3 and 4 of assessment order passed by the AO in the case of Shri Kesarimal Nandlal Runwal (HUF) in and as per the same, it is noted by the AO that Shri Nandlal J Runwal is drawing salary of Rs. 96,000/- from this concern and he is also drawing salary of equal amount from another concern i.e. M/s. Jeetmal Nandlal prop. Sri. Nandlal J Runwal (HUF). He submitted that the AO has disallowed this expenditure to the extent of 50% of salary paid u/s. 40A 2(b) of the IT Act but without pointing out as to how the salary paid to him is excessive or unreasonable. Thereafter, he submitted that in respect of disallowance out of amounts paid to Shri Kesarimal Nandlal Runwal in his individual capacity being commission payment, the AO discussed the issue on page no. 4 of the assessment order and in this regard also, the AO has disallowed the entire amount of this commission payment of Rs. 3.50 lakhs u/s. 40A 2(b) of the IT Act but again without pointing out as to how the payment of commission to this person is excessive or unreasonable.
He further submitted that similarly in respect of payment of brokerage to Smt. Kamaladevi Jain of Rs. 50,000/-, he submitted that on page no. 5 of the assessment order, the AO has discussed the payment of brokerage to Shri Devi hand Jain and Smt. Kamaladevi Jain and disallowed both these payments and when the assessee carried the matter in appeal before the CIT(A), the CIT(A) has deleted the disallowance in respect of payment of brokerage to Shri Devi hand Jain but confirmed the disallowance in respect of similar payment to Smt. Kamaladevi Jain, although there is no difference in facts. He submitted that for none of these disallowances u/s 40A (2b), any basis is indicated by the AO / CIT(A) as to how these payments are excessive or unreasonable and how provisions of section 40A (2b) are applicable. He submitted that all these disallowances should be deleted.
Regarding ground no. 8 in CIT (A) in this regard. In reply, it was submitted by ld. AR of assessee that no such ground was raised before CIT (A). The bench pointed out that in that situation, this ground cannot be raised as part of original ground and it can be raised only as additional ground but the issue involved in this ground cannot be admitted as additional ground also because it is a factual dispute and not a legal dispute. In reply, ld. AR of assessee had nothing to say. The ld. DR of revenue supported the orders of authorities below. & 1505/Bang/2017 Page 6 of 8 8. I have considered the rival submissions. Regarding ground no. 8 in I hold that this ground is not admissible because this is a new ground raised before the Tribunal and this is a factual issue and not a legal issue. Accordingly this ground is rejected.
Regarding the remaining grounds in both the appeals, it is seen that the disallowance was made by the AO by invoking the provisions of section 40A 2(b) of the IT Act. Hence for the sake of ready reference I reproduce the provisions of section 40A 2(a) and 40A 2(b). The same are as under:- “(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub- section, and the 3 Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction: (b) The persons referred to in clause (a) are the following, namely:- (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, any director of the firm, association of persons or company, partner of the Hindu undivided family firm, of member if the association or family, or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation.- For the purposes of this sub- section, a person shall be deemed to have a substantial interest in a business or profession, if,- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.”
From the combined reading of section 40A 2(a) and 40A 2(b) as reproduced above, it comes out that in respect of any payment to a person covered by section 40A 2(b), if the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Hence, it is a pre requirement before making any disallowance under these sections that the AO has to work out the excessive or unreasonable amount by comparing it with the market rate of the services / goods for which the payment in question has been made by the assessee. In the present case, as per the orders of authorities below, there is no indication as to how they have considered that in respect of payment to Shri Nandlal J Runwal and Mrs. Sunitha R Runwal, 50% is excessive and 100% payment to Shri Nimesh K Runwal, Shri Kesarimal N Runwal, Smt. Kamladevi Jain, Mrs. Sunitha R Runwal and Mrs. Archana K Runwalis are excessive and unreasonable. Hence I hold that the disallowance made by the AO in the facts of the present case as per above discussion is not sustainable because there is no basis indicated by him or by CIT(A) as to how the payments made to these persons are excessive and unreasonable by & 1505/Bang/2017 Page 8 of 8 bringing on record market price of the services received by the assessee from these persons. Hence these disallowances are deleted.
In the result, the appeal in the case of Shri Kesarimal Nandlal Runwal (HUF) in ITA No. 1505/Bang/2017 is allowed and the remaining appeal in the case of Shri Nandlal Jeetmal Runwal (HUF) in is partly allowed.
Order pronounced in the open court on the date mentioned on the caption page.