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Income Tax Appellate Tribunal, AHMEDABAD ‘D’ BENCH, AHMEDABAD
Per Pramod Kumar, AM:
By way of this appeal, the assessee appellant has challenged correctness of the order dated 05.11.2014, passed by the learned CIT(A)-V, Baroda, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act hereinafter’), for the Assessment Year 2011-12.
Grievances raised by the appellant are as follows :-
“1. The order passed by the Hon’ble CIT(A) is bad in law, contrary to legal pronouncements and same be quashed. The disallowances/additions are unwarranted and same be deleted now. 2. The Hon’ble CIT(A)-V, Baroda has erred in confirming the disallowance of Rs.5,70,000/- out of salary paid to persons covered under section 40A(2)(b) of the Act without any base for estimation of salary
ITA No.52/Ahd/2015 Assessment Year : 2011-12 Page 2 of 3 payable to the employees. It is submitted that the disallowance made is unjust and uncalled for since the provisions of section 40A(2)(b) of the Act are not applicable in this case. It be held so now and addition made by the AO be deleted. Without prejudice to the above it is submitted that there is no provision in the Income Tax Act to disallow such expenses without any cogent reason assigned thereof and without any base for such disallowance. It be held so now and the AO be directed to delete the addition.”
To adjudicate on this appeal, only a few material facts need to be taken note of. During the course of scrutiny assessment proceedings, the Assessing Officer noted that the assessee has paid salaries, aggregating to Rs.11,10,000/-, to the persons specified under section 40A(2)(b) of the Act. He called for the details of these salaries, and disallowed Rs.1,50,000/- each, so far as salaries of Rs.2,70,000/- p.a. paid to J.H. Parikh, M.H. Parikh and C.H. Parikh was concerned, and Rs.60,000/- each, so far as salaries of Rs.90,000/- p.a. paid to N.J. Parikh and H.J. Parikh, was concerned. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) also observed that genuineness of the expenses itself is in doubt, though he did not even really deal with quantification part of the disallowance. He confirmed the disallowance nevertheless, aggrieved by which assessee is in appeal before us. 3. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
In our considered view, for invocation of disallowance under section 40A(2)(b) in the present case, one of the conditions precedent is unreasonableness of the amount paid. Section 40A(2) provides that where the A.O. is of the view that expenditure incurred by the assessee, in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods, services or facilities for which the payment is made, or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as deduction. The emphasis is on the market value of the goods or services. The CIT(A) has also dealt with the matter at a superficial level without giving any cogent finding about the conditions of applicability of section 40A(2) being satisfied. Unless there is a
ITA No.52/Ahd/2015 Assessment Year : 2011-12 Page 3 of 3 clear finding that the market value of the services taken from the sister-concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of section 40A(2), for partial disallowance of the expenses incurred. This exercise, therefore, necessitates a finding about the fair market value of such services. There is no finding whatsoever as to what were the nature of services rendered and as to what, on some cogent basis, will be fair consideration for the same. Merely questioning the need of this expenditure cannot justify a partial disallowance of the expenses. For this reason alone, the disallowance under section 40A(2) is inherently unsustainable in law on the facts of this case. We are, therefore, of the considered view that it was not a fit case for invoking the provisions of section 40A(2) on the facts of the case. The CIT(A) should have deleted the entire disallowance. We, therefore, allow this appeal and delete the disallowance. 5. In the result, the appeal is allowed. Pronounced in the open court today on the 21st day of September, 2017.
Sd/- Sd/- Mahavir Prasad Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, the 21st day of September, 2017 PBN/* Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order TRUE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad