2023 (10) TMI 711 - HC - Income Tax

Court Supports Salary Evidence Review; Upholds Interest Disallowance on Non-Business Loans.

The court ruled in favor of the appellant/assessee on the issue of salary disallowance under Section 40A(2)(b) of the Income Tax Act, remanding the matter ... Disallowance of salary u/s 40A(2)(b) - Payment of salary and interest to specified persons - appellant/assessee could not substantiate the nature of work done by concerned people mentioned - HELD THAT:- As examined the explanations advanced on behalf of the appellant/assessee at different stages of the proceedings, whereby the appellant/assessee tried to justify payment of salaries to the persons concerned. But we find the same no better than mere curriculum vitae. No evidence at all was adduced before any of the authorities by the appellant/assessee as regards the educational qualification, experience and work profile of any of the persons concerned, which could be taken as their contribution in the growth of business of the appellant/assessee. The provision u/s 40A(2)(a) clearly shows that before recording disallowance, AO has to form an opinion; and that opinion has to be having regard to inter alia legitimate needs of the business or benefit derived or even what would be the fair payment outgo for services rendered. Such an opinion cannot be arrived at without adducing necessary evidence. That being so, AO was duty bound to provide an opportunity to the appellant/assessee to place on record the requisite evidence to justify its claim. But all that the Assessing Officer did was to ask the appellant/assessee to justify the salaries paid, and without seeking relevant evidence, simply rejected claim. To our mind, therefore, the best way forward would be to grant an opportunity to the appellant/assessee to adduce appropriate evidence – documentary or otherwise before the AO in order to establish its claim regarding educational qualification, experience, the work profile and in particular the duties discharged by the concerned persons to justify claim of the appellant/assessee qua payment of salary to the persons concerned. The orders impugned in the present appeals are set aside and matters are remanded to the Assessing Officer with liberty to the appellant/assessee to adduce evidence on the lines indicated above Issues Involved:1. Disallowance of salary by the Assessing Officer under Section 40A(2)(b) of the Income Tax Act.2. Disallowance of interest concerning interest-free loans and advances.Summary:Issue 1: Disallowance of Salary under Section 40A(2)(b)The primary issue was whether the Income Tax Appellate Tribunal (Tribunal) had rightly upheld the disallowance of salary by the Assessing Officer (AO) under Section 40A(2)(b) of the Income Tax Act. The appellant/assessee contended that the Tribunal erred in not appreciating that the AO should have given an opportunity to the appellant/assessee to produce relevant evidence before taking recourse to Section 40A(2)(b). The court noted that the said persons, namely Shri Charanjeet Lal Mehra, Smt Lata Rani Mehra, Smt Namita Mehra, and Smt Sakshi Mehra, are covered under Section 40A(2)(b) of the Act. It was observed that the appellant/assessee was not granted a fair opportunity to lead evidence to justify the payment of salaries to these persons. The court held that the AO was duty-bound to provide an opportunity to the appellant/assessee to place on record the requisite evidence to justify its claim. The orders impugned were set aside, and the matter was remanded to the AO with liberty to the appellant/assessee to adduce evidence regarding the educational qualification, experience, work profile, and duties discharged by the concerned persons to justify the salary payments.Issue 2: Disallowance of Interest on Interest-Free Loans and AdvancesThe second issue pertained to the disallowance of interest concerning interest-free loans and advances given to certain persons. The AO found that the advances were given for medical expenses and children's education, which were not related to the business of the appellant/assessee. The CIT(A) and the Tribunal upheld the disallowance of interest on advances to Mr. C.L. Mehra, Mr. Chand Mehra, and Mr. Vinay Mehra, as the appellant/assessee failed to prove that these advances were for business purposes. The Tribunal noted that the appellant/assessee could not substantiate with evidence the services rendered by Mr. Chand Mehra and Mr. Vinay Mehra or prove that Mr. C.L. Mehra owned the trademark 'Mehrasons.' The court found no material on record to reach a different conclusion and held that the disallowance of interest was justified as the amounts were provided for non-business purposes.Conclusion:The court decided in favor of the appellant/assessee on the first issue, allowing them to produce evidence to justify the salary payments, and remanded the matter to the AO for fresh proceedings. On the second issue, the court upheld the disallowance of interest on the grounds that the advances were not for business purposes.