TaxTMI 
TaxTMI 
2024 (12) TMI 905
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....by Ld. CIT(A) is illegal, arbitrary and not justified. 2. Without prejudice to above ground, the disallowance made by AO and confirmed by Ld. CIT(A) is illegal & unsustainable inasmuch as the provisions of sec. 92BA have been amended vide Finance Act, 2017 to exclude specified domestic transactions which are contained u/s 92BA(1) r.w.s. 40A(2)(b) of the Act from purview of transfer pricing regulations. 3. Ld. CIT(A) erred in confirming disallowance of Rs. 8,00,000/- on account of payment for purchase of land, invoking sec. 40A(3). The disallowance made by AO and confirmed by Ld. CIT(A) is arbitrary and not justified. 4. Ld. CIT(A) erred in confirming disallowance of Rs. 3,07,311/- out of Rs. 6,14,622/- made by AO, being 5% of various expense such as travelling expenses, business promotion expenses, loading & boarding expenses, pooja expenses etc. The disallowance made by AO and confirmed by Ld. CIT(A) is illegal, arbitrary and not justified. 5. The appellant reserves the right to add, amend or alter any of the ground/s of appeal. 3. The brief facts of the case are that the assessee, a Private Limited Company have filed its E-return in Form ITR....
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.... benchmark the interest @15%. In response, the assessee furnished its reply supporting contention along with facts and figures to substantiate @18% charged by the assessee is at Arm's Length and, therefore, the adjustment of Rs. 80,06,666/- as proposed by the Ld. TPO is unjustifiable. The response of assessee has been considered by the Ld. TPO, however, the same was not found convincing, accordingly, the adjustment of Rs. 80,06,666/- is recommended to be made to the total income of the assessee by revising the same upward. The observation of Ld. TPO in this respect are as under: 7. The assessee's reply has been duly considered but not acceptable. The assessee has, in his reply, relied upon external CUP whereas internal CUP was available. Therefore, the assessee adoption of external CUP is rejected. The OECD guidelines mandate that internal CUP is preferred over external CUP. Therefore, using internal CUP, the rate of interest is benchmarked @15%. In this regard the 3% tolerance limit [15x3/100 = 0.45%] makes the chargeable interest While the interest paid by the assessee [18%] exceeds the maximum [15.45%] of tolerance limit. Therefore, this contention of the assessee i....
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....17 which is reproduced as under- "In response to this show-cause notice, assessee furnished a submission which was found to be not acceptable. The TPO stated that, the assessee has in his reply, relied upon external CUP whereas internal CUP was available. Therefore, the assessee adoption of external CUP is rejected. The OECD guidelines mandate that internal CUP is preferred over external CUP. Therefore, using internal CUP, the rate of interest is benchmarked @ 15%. In this regard the 3% tolerance limit makes the chargeable interest @15.45%. While the interest paid by the assessee [18%] exceeds the maximum [15.45%] of tolerance limit. Therefore, this contention of the assessee is not acceptable. The assessee has paid interest on ICD of Rs. 29 crores to Urban Infrastructure Venture Capital Fund UILT during F.Y. 13-14. During the same financial year, the assessee has paid interest @15%, therefore, there was no reason to pay the interest @18%. Accordingly, it is proposed to benchmark the interest @15%. The interest paid by the assessee is benchmarked @15% and adjustment is worked out as under: Interest paid @ 18% Interest benchmarked @15% Adjustment....
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....ment made to the associated party i.e. M/S. Urban Infrastructure Venture Capital Fund, the appellant used external CUP methods as most appropriate method (MAM). Further, the appellant has selected 6 comparables for benchmarking the interest payment. The appellant failed to submit any cogent explanation as to how the 6 comparables were selected. Therefore, the TPO has issued a show case letter for rejecting the comparables selected by the appellant and proposed to use controlled internal CUP as MAM available in the books of accounts of the appellant for benchmarking the interest payment. It was found by the TPO that the appellant paid interest @ 18% on ICD of Rs. 29 Crores to Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 and to the same lender during the same financial year paid interest @ 15% on ICD of Rs. 16.5 crores. Relying on the TP guidelines issued by OECD which states that traditional transactional method are regarded as preferable to other method and choice of internal CUP is preferred over external CUP and internal CUP gives more accurate results, if found available. Accordingly, the TPO, after considering the reply of the appellant, benchmarked the rate o....
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.... internal CUP method for benchmarking the interest payment made to related party. Further, the instance of loan availed from same party at different rate was not present in A.Y. 2011- 12. In view of above stated facts, I concur with the finding of the TPO/AO and downward adjustment of interest payment of Rs. 80,06,666/- is confirmed. As regard of disallowance of higher rate of interest paid to related party is concern, I rely on the decision of Punjab & Haryana High Court - Remesh Chand (HUF) Vs. CIT Karnal, 35 taxmann.com (2013) which reads as under: "Section 40A(2) of the Income-tax Act, 1961 - Business disallowance - Excessive or unreasonable payments [Interest payments to relative] - Assessment year 2007-08 Addition was made in appellant's account because of higher rate of interest paid by appellant to his mother as against market rate - Whether since transaction in question was not a genuine and bona fide transaction, Tribunal was justified in confirming addition of interest paid on old loan at higher rate of interest by applying provisions of section 40A(2)(b) - Held, yes [Para 9] [In favour of revenue]" 5. The second ground of appeal is with regard to d....
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....ld, yes [Paras 14 and 161 [In favour of revenue] Circulars & Notifications: Circular No. 1 of 2007, dated 27- 4-2007 Further, the decision of Ramesh Chand (HUF) Vs CIT P&H High Court decision - 35 taxmann.com 63 favorable to the department is applicable. In view of above discussion, I do not find any merit in the submission of the appellant and the addition made u/s 40A(3) of the Act of Rs. 80,00,000/- is confirmed. 6. The third ground of appeal relates to disallowance of 10% expenses amounting to Rs. 6,14,622/-. The AO during the assessment proceedings found that the appellant has incurred various expenses of Rs. 61,46,226/- through self-made vouchers and hence the veracity of such expenses cannot be ascertained. Therefore, the AO was of the view that some personal expenses must have been incurred which is not in the nature of expenses Wholly and exclusively incurred for the purposes of business and accordingly, disallowed 10% of such expenses. During the appellate proceedings, the appellant submitted that the AO has disallowed by making a general statement that expenses were partially supported b} bills or debited through self-made vouchers and did not ....
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....Two Wheelers Ltd. vs. DCIT (2022) 219 TTJ 136 (Mumbai), PN 107 to 122 of PB, relevant findings at PN 1 13, 1 14 & 1 15, para no. 11,12 & 17. * IMC Limited vs. PCIT (2023) 226 TTJ 180 (Kol), PN 123 to 131 of PB, relevant findings at PN 13 1, para no. 19. * Ammann India Pvt. Ltd. vs. ACIT (2022) 192 ITT) 680 (Ahd.), PN 132 to 137 of PB, relevant findings at PN 135, para no. 9. * S.B. cotgin Pvt. Ltd. vs. PCIT (2021) 62 CCH 287 (Nag.), PN 138 to 145 of PB, relevant findings at PN 143 to 145, para no. 1 1,17 & 18. * Bhartia-SMSIL (JV) vs. ITO (2020) 59 CCH 135 (Gm.), PN 146 to 169 of PB, relevant findings at PN 169, para no. l l. Ground no. 3 (Disallowance u/s 4QA(3) - Rs. 8,00.000/-) Submission of assessee 1. Payments not claimed as expense/not debited to profit & loss a/c i) Land purchased not debited to profit & loss a/c. Same was part of work-in progress (closing stock). Ledger showing entry of purchase is at PN 99 of PB. Figure of WIP as per balance sheet is at PN 45 of PB, calculation is at PN 102 ofPB. ii) Audited P/L a/c is at PN 35 of PB and relevant schedule of expenses at PN 47 to 49 of PB. Submission ma....
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.... on presumption and estimated basis. 3. Net profit ratio increased from last year, from 2.97% to 6.15%, PN 24 of PB. 4. Reliance on: * ITO vs. Adhunik Khanan Va Parivahan Theka Sahkari Samiti Ltd. (2014) 41 CCH 86 (Jodh.) * Order of Hon'ble Raipur Bench in M/S Porwal Industries v/s ITO in ITA no. in No. 258/RPR/2017 dt. 05.04.2022. 10. Ld. AR also furnished before us a summary of case laws comprising of citation and relevant observations qua the issue that, where genuineness of party and payment is not doubted, disallowance u/s 40A(3) of the Act, cannot be made. The summary is culled out as under: Goldbricks Infrastructure P. Ltd. AY 2014/15 IT(TP) A 1/RPR/2024 In the following cases, it was held that where genuineness of party & payment is not doubted, disallowance u/s 40A(3) cannot be made: - SN Particulars of case Relevant observations 1. ACIT vs R. P. Real Estate Pvt. Ltd (2015) 44 CCH 699 (RPR) Hon'ble ITAT observed in para no. 7 of its order that there is considerable force in the assessee's submission that there was reasonable cause for making payment in cash. On the basis of above observa....
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.... vs M/S Bukhari Enterprises in ITA 11 of 2004 dt. 11.08.2011 and held that since genuineness of transaction is not in doubt, the tribunal was justified in deleting the disallowance. 5. DCIT vs Amisha-in Sky Creations in ITAno. 354/RPR/2014 cit. 16.4.2018 It was held in para no. 20 that where genuineness of payment nor identity of payee is doubted, sec. 40A(3) is not applicable, relying on Anupam Tele Services 366 ITR 122 (Guj.) 6. Geo Connent Ltd. Vs DCIT (2022) 65 CCH 589 (Del.Trib.) in ITA No.2896 & 2958/De1./2018 dt. 29.08.2022 Hon'ble Tribunal considered the provisions of sec. 40A(3) and Rule 6DD(j) which existed from 01.04.1970 to 27.07.1995 and observed vide para 10 that a reading of 1 st proviso to sec. 40A(3) read with Rule 6DD(j) shows no disallowance u/s 40A(3) can be made if transaction is genuine and the payment is made due to business expediency and other compelling factors. Hon'ble Tribunal for this proposition noted the ratio laid down in the case of Attar Singh Gurmukh Singh vs ITO 191 ITR 667 (SC). Vide para 10, Hon'ble Tribunal observed that Hon'ble Supreme Court observed that provisions are not intended to restrict business ac....
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....er held that business expediency and other relevant factors continue to be relevant which needs to be considered while determining the exception. v) Vide para no. 32, it was held that the genuineness of transaction and it being free from evasion of tax is relevant consideration which should be examined before invoking sec. 40A(3). 9. M. K. Agrotech P. Ltd. Vs Addl. CIT (2019) 412 ITR 351 (Karn.) The AO made disallowance u/s 40A(3). The ground for disallowance was that the drafts were not crossed. Vide page 355, it was held by Hon'ble High Court that the judgement of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh reported in 191 ITR 667 (SC) is squarely applicable to the facts of the case. It noted the observations of Hon'ble Supreme Court made vide page no. 672 of the reports wherein it was held by Hon'ble Supreme Court that sec. 40A(3) must be read along with Rule 6DD and if genuineness of the transaction is proved, the transaction is out of the purview of Sec. 4()A(3). Following the decision of Hon'ble Supreme Court, it was held by Hon'ble High Court that the disallowance is not justified. 10. Anupam Tele Services vs ITO (....
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.... We have considered the rival submissions, perused the material available on record and case laws relied upon. After a thoughtful consideration to the facts, circumstances and the mandate of law applicable in the present case, our adjudication to the grounds of appeal would be as under: 14. Ground No. 1 & 2: Assailing the upward adjustment made by the Transfer Pricing Officer u/s 92CA(3), thereby disallowance made by the Ld. AO and confirmed by the Ld. CIT(A). 14.1 At the outset, it was argued by Ld. AR that clause(i) of section 92BA has been omitted by the Finance Act, 2017 w.e.f. 01.04.2017, accordingly, the revenue was not empowered make any adjustment qua the impugned transaction carried out by appellant with related parties, as such transactions would no more qualify to be brought within the definition of "Specified Domestic Transactions" after the aforesaid amendment in section 92BA, therefore, no adjustment can be made under the said section. Ld. AR, to substantiate the aforesaid claim, placed his reliance on the judgment by Hon'ble Karnataka High Court in the case of PCIT vs M/s Taxport Overseas Pvt. Ltd. (2020) 271 taxman 170 (Kar), wherein Hon'ble High Court has hel....
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.... also been taken note of by the tribunal while repelling the contention raised by revenue with regard to retrospectivity of Section 92BA(i) of the Act. Thus, when clause (i) of Section 92BA having been omitted by the Finance Act, 2017, with effect from 01.04.2017 from the Statute the resultant effect is that it had never been passed and to be considered as a law never been existed. Hence, decision taken by the Assessing Officer under the effect of Section 92BI and reference made to the order of Transfer Pricing Officer- TOP under Section 92CA could be invalid and bad in law. 7. It is for this precise reason, tribunal has rightly held that order passed by the TPO and DRP is unsustainable in the eyes of law. The said finding is based on the authoritative principles enunciated by the Hon'ble Supreme Court in Kolhapur Canesugar Works Ltd referred to herein supra which has been followed by Coordinate Bench of this Court in the matter of M/s. GE Thermometrias India Private Ltd., stated supra. As such we are of the considered view that first substantial question of law raised in the appeal by the revenue in respective appeal memorandum could not arise for consideration partic....
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....g judgments: PCIT VS Prosperous Buildcon Pvt. Ltd. (2024) 463 ITR 132 (Del.) 12. It is this order of the PCIT which, as noticed above, has been reversed by the Tribunal. What is not in dispute is that the respondent/assessee had not claimed any expenditure with regard to the cash that was withdrawn. The reason for this was that the said money was utilised for the purchase of a parcel of land, which in the books of accounts of the respondent/assessee was shown as stock-in-trade, which in essence got neutralised being reflected in the closing stock. 12.1 Therefore, clearly the provisions of Section 4()A(3) of the Act were not applicable. Thus, the order passed under Section 263 of the Act wrongly took recourse to Section 40A(3) of the Act and therefore, in our view, correctly set aside by the Tribunal. Vikrant Happy Homes Pvt. Ltd. Vs DCIT (2022) 218 TTJ 1 (Pune) 4. Before us, the Id. AR, Shri Sanket Joshi submits that the assessee purchased certain lands/plots and made cash payments aggregating to Rs. 3,50,000/- under exceptional circumstances exceeding Rs. 20,000/-. He submits that all these lands are appearing under the closing stock as....
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....se of land in its P&L A/c as an expenditure. To substantiate this fact, Ld. AR drew our attention to page no. 99 to 102 of the APB showing ledger account of land, Basant Bharti (advance for purchase of land), Naresh Bharti (advance for purchase of land) and calculation or work in progress for FY 2013-14. On perusal of all such evidence, it is evident that cash payment of Rs. 4,00,000/- each to Mr. Basant Bharti and Naresh Bharti were made on 06.12.2013 and this amount is added as cost of land purchase while computing the amount of closing work in progress (WIP) for Rs. 4,06,57,33,852/-, which is matching amount of WIP in the audited balance sheet of the assessee, placed before us at page no. 45 of the APB under the head "Inventories" in note no. 14 attached with notes on financial statements for the year ended 31.03.2014. It was, therefore, the prayer that the amount of purchase of land, which was treated as working in progress (closing stock), also not claimed as expenditure therefore, provisions of section 40A(3) are not attracted. 15.5 Per contra, Ld. CIT DR placed his reliance on the impugned orders of revenue authorities. 15.6 We have considered the rival submissions, pe....
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....suade myself to subscribe to the same. As the specific instance where the applicability of Section 40A(3) of the Act would stand suspended, has specifically been carved out by the legislature in all its wisdom in Rule 6DD of the Income Tax Appellate Tribunal Rules, 1962, therefore, the claim of the Ld. AR that in case the genuineness of the expenditure has not been doubted, then no disallowance u/s. 40A(3) of the Act was called for in the hands of the assessee does not merit acceptance. 12. In so far, the judgment of the Hon'ble High Court of Chhattisgarh in the case of ACIT Vs. M/s. R.P Real Estate Pvt. Ltd (supra) as has been pressed into service by the Ld. AR is concerned; the same supports my aforesaid view. On a careful perusal of the aforesaid judgment of the Hon'ble High Court, it transpires that the Hon'ble High Court had observed that as payment made by the assessee before them was to the villagers who had no bank account and, therefore, had insisted on cash payments, was covered by the Rule 6DD(g), therefore, disallowance u/s.40A(3) of the Act was not called for in its case. The claim of the Ld. AR that the Hon'ble High Court had observed that in case the genuine....
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....nouncement would by no means assist the case of the assessee before me. In fact, the aforesaid judgment of the hon'ble High Court in the case of Gurdas Garg Vs. Commissioner of Income Tax (supra) supports my aforesaid conviction that Section 40A(3) of the Act would only not be applicable in a case/situation as has been explicitly carved out in Rule 6DD and not otherwise. 15. Thus, in terms of my aforesaid observations, I am unable to persuade myself to concur with the contention of the Ld. AR that as the genuineness of both the aforesaid expenses, viz. (i) payment of godown rent and (ii) payment of electricity expenses, had not been doubted by the lower authorities, therefore, the same could not have been disallowed u/s. 40A(3) of the Act. 15.8 Respectfully following the aforesaid view adopted by the SMC Bench of ITAT, Raipur, wherein the case laws referred to by the Ld. AR are discussed in detail, we are of the considered opinion that the applicability of section 40A(3) would only exclude the cases which are exclusively covered under Rule 6DD. Under such circumstances, we cannot concur with the contentions of the Ld. AR based on the contention that the genuineness of t....
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....mounting to Rs. 6,14,622/-. The AO during the assessment proceedings found that the appellant has incurred various expenses of Rs. 61,46,226/- through self-made vouchers and hence the veracity of such expenses cannot be ascertained. Therefore, the AO was of the view that some personal expenses must have been incurred which is not in the nature of expenses wholly and exclusively incurred for the purposes of business and accordingly, disallowed 10% of such expenses. During the appellate proceedings, the appellant submitted that the AO has disallowed by making a general statement that expenses were partially supported by bills or debited through self-made vouchers and did not point out any instance of defect in expenses claimed by the assessee. Accordingly, the appellant requested to the delete the adhoc disallowance. I have considered the submission of the appellant and the AO's argument. The finding of the AO is correct, keeping in view the nature of expenses incurred by the appellant through self-made vouchers and an element of personal expenses claimed cannot be ruled out. Therefore, j uphold addition to the extent of 5% of various expenses claimed by the appellant as against ....