2016 (7) TMI 175 - HC - Income Tax

High Court rules in favor of assessee in payment dispute, deeming it justified and reasonable for business purposes.

RUSHABH N. PATEL Versus THE DEPUTY COMMISSIONER OF INCOME TAX

The High Court ruled in favor of the assessee, finding that the payment of Rs. 10,00,000 to M/s. Araham Developers Pvt. Ltd. was justified and reasonable ... Disallowance u/s 40A (2)(b) - payment for consultancy services provided by group companies - unreasonable and excessive expenditure - Held that:- From the record, it is clear that the technical people of Araham Developer Pvt. Ltd. have rendered the services for helping the appellant (assessee) in rendering the consultancy services to Bakeri Group. Without the help of the employees of M/s. Araham Developer Pvt. Ltd. it would not have been possible for the appellant (assessee) to render the services to various associations of Bakeri Group. The entire payment of ₹ 10 lakhs to Araham Developer Pvt. Ltd. can be considered as reasonable, looking to the services rendered by them. Therefore, we find that the Tribunal has committed an error while passing the impugned order. Payment of R.10 lakhs to M/s. Araham Developer Pvt. Ltd. was wholly and exclusively for the business purpose and the same could not be disallowed simply by invoking the provisions of Section 40A(2)(b). Provisions of section 40A (2) (b) couldn't be invoked mechanically and simply for the reasons that the payment was made to a group concern - Decided in favour of assessee Issues Involved:1. Disallowance of payment under Section 40A(2)(b) of the Income Tax Act, 1961.2. Determination of fair market value of services rendered.3. Justification of expenses as wholly and exclusively for business purposes.Issue-wise Detailed Analysis:1. Disallowance of Payment under Section 40A(2)(b):The primary issue in this case revolves around the disallowance of Rs. 5,00,000 out of Rs. 10,00,000 paid by the assessee to M/s. Araham Developers Pvt. Ltd. under Section 40A(2)(b) of the Income Tax Act, 1961. The Tribunal confirmed the Assessing Officer's (AO) order, which reversed the decision of the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal held that the payment was excessive and disallowed Rs. 5,00,000, asserting that the payment was made to a related party and lacked sufficient justification.2. Determination of Fair Market Value of Services Rendered:The CIT(A) had initially observed that M/s. Araham Developers Pvt. Ltd. provided necessary technical personnel to the assessee, enabling them to carry out project work for various associations. The CIT(A) found that the payment of Rs. 10,00,000 was reasonable and exclusively for business purposes, and could not be disallowed merely because it was made to a group concern. The CIT(A) emphasized that the AO must consider commercial expediency and necessity before invoking Section 40A(2)(b).Conversely, the Tribunal noted that the salary paid to the employees by Araham Developers Pvt. Ltd. was Rs. 6,95,250, and the consultancy charges received by Araham Developers Pvt. Ltd. during the year were Rs. 20,00,000. The Tribunal concluded that the fair market value of the services rendered did not exceed 50% of Rs. 6,95,250, justifying the AO's disallowance of Rs. 5,00,000.3. Justification of Expenses as Wholly and Exclusively for Business Purposes:The assessee argued that the payment of Rs. 10,00,000 was wholly and exclusively for business purposes, a stance supported by the CIT(A) who found the expenses reasonable given the services rendered. The Tribunal, however, disagreed, stating that without the necessary technical expertise and infrastructure, the payment appeared excessive.The High Court, upon reviewing the case, sided with the CIT(A), stating that the payment was indeed for business purposes and could not be disallowed merely because it was made to a related party. The Court referenced previous judgments, emphasizing that the AO must provide comparative instances and ascertain fair market value before making disallowances under Section 40A(2)(b).Conclusion:The High Court concluded that the Tribunal erred in its judgment. The payment of Rs. 10,00,000 to M/s. Araham Developers Pvt. Ltd. was justified and reasonable, considering the services rendered. The disallowance of Rs. 5,00,000 was unwarranted as the provisions of Section 40A(2)(b) could not be invoked mechanically without substantial evidence. The appeal was allowed, and the question of law was answered in favor of the assessee, restoring the CIT(A)'s decision and setting aside the Tribunal's order.