A.C.I.T CIR - 2,DURGAPUR, DURGAPUR vs. SRI RAJAN BABU, DURGAPUR

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-Durgapur dated 15.05.2013. Assessment was framed by ACIT, Circle-2 Durgapur u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 28.03.2013 for assessment year 2010-11. Shri John Vincent Donkupar Langstich, Ld. Departmental Representative represented on behalf of Revenue and Shri Miraj D. Shah, Ld. Authorized Representative appeared on behalf of assessee.

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 2 2. First issue in ground No. 1 to 3 are inter-related and therefore being taken up together where the dispute was raised by the Revenue is whether the ld CIT(A) is justified in deleting the addition made by the AO for Rs. 40 crores on account of non-business expenses.

3.1 However, the AO made certain observations during assessment proceedings as detailed under:- 1) On perusal of agreement between the assessee and RIL, it was found that the activity was limited to the submission of tenders and liaison work. There was no clause in the agreement speaking about the fabrication work or engineering services. 2) Moreover RIL also failed to provide the names and addresses of the professionals engaged in providing the services to the assessee. 3) RIL is primarily engaged in the business of purchase and sale of shares. Thus RIL had no resources, expertise or experience for rendering the services in the nature of fabrication or engineering.

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 3 4) RIL in the year under consideration has shown net profit of Rs. 53,19,121.00 only in spite of the fact that it has received an income exceeding Rs. 44.12 crores.

In the light of the above observation of AO, the assessee also responded that the payment was made to RIL for the implementation of Ferro Alloys Plant consisting of designing, engineering supply election supervision and installation testing commissioning of the entire system. RIL raised the invoices to the assessee including the amount of service tax which was paid Government Exchequer. Similarly the assessee made the payment to RIL after deducting the TDS. However the AO observed that no engineering services were provided by RIL and the purpose of making the payment is to reduce the profit of the assessee. Moreover, the amount of payment is excessive & unreasonable as per the provisions of section 40A(2) of the Act. Accordingly, the AO disallowed the sum of Rs. 40 crores and added to the total income of the assessee. 4. Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld. CIT(A) submitted that the impugned payment was made for the execution of the work awarded to RIL. There was no relation between the assessee and RIL as envisaged under section 40A(2) of the Act. Thus there is question of invoking the provisions of section 40A(2) of the Act. The entire transaction was made after complying the provisions of service tax and TDS. The ld. CIT(A) after considering the submission of the assessee has deleted the addition made by the AO by observing as under:- “ …In my opinion, there is a contradiction in the A.O's stand. While noting his arguments he is seen to argue that the said expenditure is bogus whereas the disallowance had been made on the grounds that it is excessive or unreasonable keeping in view the fair market value of goods and services. However, the entire amount of commission charged in the appellant's P&L Ale. is seen to have been disallowed. The A.O. has also mentioned that it has been established that no fabrication and engineering services have been provided. However, in the assessment order [ do not find any facts brought on record by the A.O. which can be said to have established this proposition. No facts are on record to hold that transaction in question is a sham transaction entered into by the appellant to reduce his profit. In my opinion, suspicion cannot be a substitute for facts. The assessment order is silent on any

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 4 enquiries made with the principal who had awarded the contract to the appellant. No mention of any further correspondence with ACIT, Central Circle-2, who had given the initial information, is on record. The A.O. appears to have acted in isolation. Rather the A.O. appears to be arguing that the provision of fabrication and engineering services do not find any place in the agreement between the appellant's proprietary concern and M/s. Raunaq Infrastructure Ltd. and therefore, by implication the payment could not have been made for such services. What the principal contract was or what it entailed does appear to have been gone into by the A.O. As discussed in the assessment order, the agreement called for specific duties to be conducted by the consultant. There are no findings of fact in the order to the effect that such duties were not performed by the said consultant. I also find that ultimately the A.O. has not doubted that certain services were indeed provided to the appellant by M/s.Raunaq Infrastructure Ltd. This is clear from his invocation of section 40A(2) which calls for a disallowance of such expenditure which is found to be unreasonable or excessive given the nature of services provided. Section 40A(2)(b) further identifies the persons the payments to whom would come under the ambit of section 40A(2). In the case of an individual, it would be any relative of such individual or any individual who has a substantial interest in the business or profession of the assessee or any other relative of such individual. In this case the appellant has claimed that he has no family relationship with the directors of M/s.Raunaq Infrastructure Ltd. nor does he have any financial interest in its business or vice versa. It is seen that the A.O's order is silent on these aspects. It is presumed therefore that no such relationship as is envisaged in the provisions of section 40A(2)(b) exists between the appellant and M/s. Raunaq Infrastructure Ltd. This in my view is the major impediment to the invocation of section 40A(2) which the A.O. appears to have overlooked. Furthermore, I find no enquiry in the order to establish what could be the all market value of the goods and services provided. This becomes important because by the A.O's own admission certain services have undeniably been provided to the appellant by M/s. Raunaq Infrastructure Ltd. What appears to have been called into question by the A.O. is the reasonableness of payment made for such services. As already discussed no yardstick for deciding such reasonableness has been deliberated upon by the A.O. in his order much less any facts or evidence being brought on record to show that the payment has been excessive or unreasonable. In view of the discussion above, it is held that the relations between M/s. Raunaq Infrastructure and the appellant do not come within the prohibited boundaries as discussed in section 40A(2)(b). It is further held that no evidence has been brought on record to hold that the payment made has been excessive. In view of that the disallowance made is directed to be deleted. This ground of appeal is allowed.”

Being aggrieved by the order of ld CIT(A) the Revenue is in appeal before us.

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 5 party to the assessee. The ld. DR relied on the order of AO whereas the ld AR reiterated the arguments that were made before the ld CIT(A) and he relied on the order of ld CIT(A). 6. We have heard the rival contentions and gone through the submissions made by both the sides and orders of the lower authorities. Put shortly, the facts necessary for adjudication of the present appeal as narrated therein are that the AO has treated the impugned payment as unreasonable and excessive. Thus, the AO observed that the impugned payment was to reduce the amount of profit of the assessee under section 40A(2) of the Act. However, the ld CIT(A) found that the provisions of section 40A(2) to the instant transaction are not applicable. There was no defect in the expenses claimed by the assessee for the impugned payment. The expenses were duly disclosed by the payee and the payer in its books of accounts.

In the light of above discussions, we, at the outset find that the provisions of section 40A(2) are not applicable to the instant transaction. The provisions of section 40A(2) of the Act can be invoked in the specified facts and circumstances, if a particular transaction does not meet the conditions laid down under the provisions of section 40A(2) of the Act then the same provisions cannot be applied. The relevant extract of the provisions of section 40A(2) of the Act reads as under : [Expenses or payments not deductible in certain circumstances. 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (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 [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 there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.'

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 6 [Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the air market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm’s length price as defined in clause (ii) of section 92F.] A plain look at the above statutory provision makes it clear that the AO has to justify that the expenditure is excessive or unreasonable having regard to the fair market value. Besides the payment should be to the persons as specified under section 40A(2)(b) of the Act. In the instant case the AO has not brought anything on record by which the said provisions can be attracted to the instant transactions of commission payment. Besides the above, we also find the payment has been made by the assessee to RIL which has been disclosed by the assessee and the party. RIL has also confirmed the said transactions in response to the notice issued u/s 133(6) of the Act. Considering the facts in totality, we are of the view that the AO has made the disallowance on his surmise and conjecture. The AO also failed to bring anything on record to justify the said payment as excessive and unreasonable. To claim any payment as unreasonable or excessive, there has to be some basis for framing such allegation. In view of above reasoning, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. We hold accordingly. Hence, this issue of Revenue’s appeal is dismissed. 7. Next issue raised by Revenue in ground No. 4 & 5 is that Ld. CIT(A) erred in deleting the addition made by AO for ₹1,20,975/- on account of non- deduction of Tax Deducted at Source (TDS for short). 8. The assessee in the year under consideration has incurred expense under the head “transport charges” detailed as under:- “on 13.01.2010 Nirmal Kanti A/c Rs. 25,000/- On 15.03.2010 Sivam Transport A/c Rs. 47,339/- On 31.03.2010 Biswas Transport Rs. 48,636/- Total Rs.1,20,975/-

During the course of assessment proceedings, the AO observed that the payments in each case has been made exceeding ₹ 20,000/- and therefore

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 7 such expenses are subject to the deduction of TDS. Accordingly, AO disallowed the same on account of non-deduction of TDS and added the amount of ₹ 1,20,975/- to the total income of assessee. 9. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- “In this ground the appellant‘s action in disallowing u/s. 40(a)(ia) transportation charges paid by him. The Assessing Officer's case is that no TDS has been made on these payments incurred by the appellant and consequently he had disallowed the payments made. The appellant has not denied that TDS was not made. His contention is that no contract existed between him and the persons to whom the payments were made. The appellant had cited the case of M/s Rakshit transport (261/Kol/2009 dated 11.09.2009) decided by Hon'ble ITAT Kolkata, in support of its stand. Perusal of the facts of the case revealed that it is not the Assessing Officer's case that there existed any contract between the persons to whom the payments had been made and the appellant. In view of that, in my opinion, the decision of the Hon'ble ITAT, Kolkata, in the case of M/s Rakshit Transport applies squarely to the acts of the present case. Respectfully following the said decision the disallowance made is directed to be deleted. This ground of appeal is allowed.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us on the following grounds:- “4. That the Ld. CIT(A) was not justified in allowing relief against addition made to the score of Rs.1,20,975/- pursuant to provision of Sec. 40(a)(ia) without appreciating the fact that verbal contract is also a contract. 5. That the relief allowed by Ld. CIT(A) against addition made for violation of Sec. 40(a)(ia) challenges the basic statute of the concerned provision as enacted in IT Act, 1961.”

ITA No.2196/Kol/2013 A.Y. 2010-11 ACIT, Cir-2,DGP Vs. Sh P.Rajan Babu Page 8 circumstances of the case, the Hon'ble jurisdictional High Court has decided this issue in favour of assessee in the case of CIT vs. M/s Stumm India in ITA No. 127 of 2009 and relevant extract is reproduced below:- “It is urged before us that the learned Tribunal ought not to have accepted the judgment and order of the CIT (Appeal) who has quashed the disallowance of deduction of Rs.41,33,710/- and on account of tax deduction at source. The learned Tribunal has recorded the fact that the department has not been able to bring any material on record to show that the assessee has made the payment to the transporters in pursuance of contract for carriage of goods of the assessee and the question of deduction at source under section 194C does not and cannot arise.”

In view of above, we find that the facts of assessee’s case are equally applicable to the facts of the case of M/s Stumm India (supra). Considering the facts and circumstances and cited case law, we do not find any reason to interfere in the order of ld. CIT(A). The ground raised by Revenue is dismissed. 12. In the result, Revenue’s appeal stands dismissed. Order pronounced in the open court 26/04/2017

Sd/- Sd/- (Aby. T. Varkey) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata,

*Dkp �दनांकः- 26/04/2017 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-ACIT, Circle-2, Durgapur, Aayakar Bhawan, Aannexe, City Centre, Durgapur-16 2. ��यथ�/Respondent-Sri P.Rajan Babu, GN-43, Grissom Street Bidhan Nagar, Durgapur-12 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।