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Income Tax Appellate Tribunal, “SMC - C” BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO
Per Vijay Pal Rao, Judicial Member
The appeal by the assessee is directed against the order dated 29.09.2016 of CIT(A) for the assessment year 2012-13. The assessee has raised the following grounds.
Ground No. 1 is general in nature and does not require any specific adjudication.
Ground No. 2 & 3 are regarding disallowance of salary paid to the employees, relatives of the partners of the assessee. During the course of Page 3 of 7 the assessment proceedings the AO noted from the books of accounts that the assessee paid the salary to various persons as under. i. Shri R.H. Mahindrakar - Rs. 8,00,000/- ii. Shri M.H. Mahindrakar - Rs. 4,00,000/- iii. Smt. Vani.K. Mahindrakar - Rs. 3,50,000/- iv. Neetha. V. Mahindrakar - Rs. 1,75,000/- v. Ashwin. R. Mahindrakar - Rs. 1,75,000/-
The AO further found that all 5 persons were relatives of the partners of the assessee firm and therefore covered by the section 40A(2)(b) of the IT Act. The AO further noted that the salary was also paid during the year to the partners. Thus the AO was of the view that the salary paid to these 5 persons is excessive having regard to the Fair Market Value (FMV) of the services rendered by them in comparison to the services rendered by the partners. Accordingly, the AO restricted the payment of salary to the above said persons to Rs. 7,50,000/- and disallowed the excess payment of Rs. 15,10,000/- u/s. 40A(2)(a) of the Act. The assessee challenged the action of the AO before the CIT(A) and contented that the assessee firm is a family business partnership. The three partners of the assessee firm are sons of the three erstwhile partners and therefore these three persons had rich knowledge and experience in the field of the business of the assessee firm and contributed a lot in running the business smoothly. Thus the assessee contented that the business of the assessee firm has grown manifold over the years due to the services of these persons. The CIT(A)
Page 4 of 7 did not accept the contention of the assessee. However, the CIT(A) has restricted the salary of Rs. 13,00,000/- and consequently sustain the addition of Rs. 6,00,000/-
Before the tribunal the ld. AR of the assessee has reiterated the contention as raised before the authorities below. He has referred to the turnover of the assessee firm over the years and contented that from the Financial Year 2008-09 to the Financial Year 2011-12 the turnover of the assessee has increased from Rs. 32 Crores to Rs. 51 Crores. Thus the authorities below are not justified in restricting the salary payment to these persons merely on the ground that they are relatives of the partners of the assessee firm and without giving a conclusive finding that the payment to these persons is excessive in comparison to the services rendered by them as well as the comparable payment of salary.
The ld. AR has relied upon the following decisions. I) CIT Vs Forbes Tea Brokers 315 ITR 404 (Madras High Court) II) Voltamp Transformer Pvt. Ltd. Vs CIT 129 ITR 105 III) Neha Proteins Ltd. Vs ACIT 83 TTJ 236 (I.T.A.T. Jodhpur Tribunal)
Page 5 of 7 On the other hand the ld. DR has relied upon the orders of the authorities below and submitted that there is no dispute that all these 5 persons are relatives of the partners of the assessee firm and therefore the provisions of section 40A(2A) are applicable in this case. The AO found that the salary paid to these persons is much more than the salary paid to the partners of the assessee firm. Therefore comparing the services of the partners the salary paid to these persons are excessive.
Having considered the rival submissions and relevant material on record, it is noted that the AO has considered the salary paid to these 5 persons who are relatives of partners of assessee firm is excessive and therefore restricted the salary on estimate basis to Rs. 7,50,000/- and disallowed the excess payment of Rs. 15,10,000/-. The CIT(A) granted part relief to the assessee by allowing the remuneration to these 5 persons of Rs. 13 Lakhs instead of Rs. 7,50,000/- by the AO. Thus the addition sustained by the CIT(A) is Rs. 6,00,000/-. Both AO as well as CIT(A) have estimated the salary for determining the excess / unreasonable payment without considering the FMV of the services provided by these persons. The AO while invoking the provisions of section 40A(2)(a) considered the FMV of the services by comparing the salary paid to the partners. Whereas it is not ascertainable from the record whether the services rendered by these
Page 6 of 7 persons can be compared with the services of the partners to whom the salaries were paid by the assessee firm. It is pertinent to note that the comparison would have been more proper if the salary paid to the unrelated employees of the assessee firm was to be considered as FMV of the services provided by these persons. Therefore this issue has not been properly examined by the authorities below and requires to be reconsidered in the light of the above observation. Hence this issue is set aside to the record of AO for re-computation of the FMV of the services provided by these persons having regard to the salaries paid to the non- related employees of the assessee firm instead of the partners of the assessee firm who cannot be considered as unrelated party.
Ground No. 4 & 5 are regarding disallowance of Rs. 2 Lakhs u/s. 40A(3) of the Act. The AO noted that the assessee has made cash payment of Rs. 2 Lakhs to a sister concern viz., M/s. RISINGSUN Agencies. The assessee explained that the transaction was rooted through accounts of one of the partners and it was done due to business exigency. The AO was not convinced with the explanation of the assessee and held that it was disallowable as per section 40A(3). The assessee challenged the action of the AO before the CIT(A). However, the CIT(A) dismissed the ground of the assessee on this issue.
I have heard the ld. AR as well as the ld. DR and considered the relevant material on record. It appears that this amount of Rs. 2 Lakhs was paid to the sister concern through the partners’ account. However, the assessee has not claimed this amount as an expenditure. Therefore the provisions of section 40A(3) cannot be invoked in the absence of any claim of expenditure. In view of the above fact that this amount was not claimed as an expenditure, no disallowance is called for u/s. 40A(3). Accordingly, this disallowance made by the AO is deleted.
In the result the appeal of the assessee is partly allowed.
Pronounced in the open court on this 3rd day of March, 2017.