DCIT, CIRCLE-33, KOLKATA, KOLKATA vs. M/S. INDIA HOUSING, KOLKATA

& CO 15/Kol/15 A.Y 2010-11 DCIT, Cir-33, Kol. Vs. M/s India Housing Page 2 2. We notice at the outset CIT(A)’s detailed discussion deleting the impugned section 40A(2)(b) disallowance reads as follows:- “6.2 The submission of AR of the appellant has been analyzed in the light of the assessment order. The asset has been held to be stock in trade by the AO and thus the same is a business asset. I find that the AO invoked the provisions of Section 40A(2) of the Act by stating that payment was not for the purpose of business and that the payment was excessive and unreasonable. However failed to bring on record any material to show how the payments were excessive and unreasonable, this was a jurisdictional fact which was not brought on record by the AO. In absence of material to come to the conclusion regarding the fact of what constituted reasonable expenditure, the AO was not justified in invoking provisions of Section 40A(2). I further find that the appellant has explained that there was no staff deployed by the Mall for looking after its day-to-day management as substantial amount of man-power and technical services are required in the overall supervision of the Mall which comprise of land escaping, parking, plant & machinery and equipment maintenance, fire fighting system, security, air-conditoning, provision of water, electricity sewerage, signage, lift, Escalaor etc. For the above management and technical maintenance, sub-contracts were given to outside agencies since there was no “establishment” available with the appellant firm to make an overall supervision of the Mall which was having about 2,50,000 sq. fit area. Consequently it was decided by the partners that for an overall supervision, agent may be appointed and an agreement was entered into with M/s Shara Prime City Ltd. for the purposes thereof. The AO did not conduct any investigation in this aspect. The appointment of a related party is not banned in law. However, when such transactions take place the scrutiny is to be done in detail to ensure that there is no diversion of income or profits. Thus it was incumbent on the AO to make detailed inquires on spot and with Sahara Prime City Ltd. before coming to conclusion on this matter. The AO, merely on conjecture and surmise, held that it was a case of diversion which, however, is merely an opinion or allegation without any materials or inquiry. The AO, in my opinion exceeded his jurisdiction on this count. The appellant had filed all relevant documents and materials including agreement, bills, TDS, service tax payment etc. but the AO failed to dislodge these documents with any convincing material or finding. I, therefore, hold that the disallowance was not called for. As submitted, the AR has drawn my attention to the various case laws as cited wherein the courts have held in the similar facts and circumstances, that the action of the AO in making disallowance u/s. 40A(2) of the Act to be untenable as well as unjustified. In view of the foregoing, the disallowance of ₹5,50,00,000/- stands deleted.”

Learned Departmental Representative vehemently contends during the course of hearing that the CIT(A) has erred in law as well as on facts in deleting the impugned disallowance as the instant taxpayer’s payment made to its related party was both excessive as well as unreasonable so as to & CO 15/Kol/15 A.Y 2010-11 DCIT, Cir-33, Kol. Vs. M/s India Housing Page 3 attract Section 40A(2)(b) of the Act. We find no merit in either of the two pleadings. There is hardly any dispute that the legislature has specifically provided for the impugned disallowance only qua the excessive component of the specified payment vis-à-vis the market rate thereof. The crucial expression used in the impugned statutory provision is “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”. There is not an even a single comparison in the assessment order about the current market price of the impugned supervision services availed by the assessee form its related party. This has formed the precise reason for the CIT(A) to delete the impugned disallowance. We therefore find Revenue’s former argument to which devoid of merit at the impugned disallowance provision has to be literally construed in view of the prescribed pre-condition of the Act.

Coming to Revenue’s latter plea that the assessee’s impugned payment is unreasonable so far as its business needs are concerned, we find that the instant taxpayer required the service in question in the nature of man-power as well as technical operations for overall supervision of its mall included land escaping, parking, plant & machinery, equipment maintenance, fire fighting system, security, air-conditioning, water supply, electricity, sewerage signage, lift escalator etc. The CIT(A)’s clinching findings qua all the above bundled services to this effect as extracted hereinabove have gone unrebutted from the Revenue side. There is further no issue regarding the genuineness of impugned payment as all the relevant details in the nature of agreement, bills, TDS, service tax etc. formed part of record before the Assessing Officer. We therefore reject Revenue’s instant ground as well as its appeal ITA 124/Kol/2015.

Learned counsel representing assessee informs us that its CO 15/Kol/2015 is only supportive of CIT(A)’s finding under challenge in & CO 15/Kol/15 A.Y 2010-11 DCIT, Cir-33, Kol. Vs. M/s India Housing Page 4 Revenue’s appeal. We hold the same to have been rendered infructuous as we have already upheld the CIT(A)’s order in Revenue’s appeal.