TaxTMI 
TaxTMI 
2024 (12) TMI 905
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....d. 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-6 on 28.11.2014, declaring a total income of Rs. 3,78,47,420/-. Subsequently, the....
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.... 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 is not acceptable. The assessee has paid interest @18% on ICD of Rs. 29 crores to Urban Infrastructure Venture Capital Fund UILT durin....
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....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 proposed 1/4/13 to 30/6/2013 11198375 9331979.17 1866395.83 1/7/2013 to 30/09/2013 11829452 9857876.67 1971575.33 1/10/2013 to 31/12/2013 12366099 10305082.50 2061016.50 1/1/2014 to 31/3/....
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.... 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 of interest @ 15% on ICD of Rs. 29 Crores availed from Urban Infrastructure Venture Capital Funds during F.Y. 2013-14 and made an adjustment of Rs. 80,06,666/-. I have considered the appellant's submission made on this ground of appeal and not found convincing....
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....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 disallowance of expenses of Rs. 8,00,000/- u/s 40A(3) of the Act. The appellant has purchased agricultural land of 0.235 hector at a price of Rs. 8 lac and the payment was made in cash against the provisions of section 40A(3) of the Act. The AO made the addition for violation o....
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....on, 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 point out any instance of defect in expenses claimed by the assessee. Accordingly, the appellant requested to; 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 th....
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....* 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 made before CIT(A), para no. 19, PN 7 of PB. Since no expenditure claimed, no disallowance u/s 40A(3) could be made. Reliance on:- * PCIT vs. Prosperous Buildcon Pvt. Ltd. (2024) 463 ITR 132 (Del.), PN 170 to 176 of PB, relevant findings in PN 174, para no. 12 & 12.1. * Vikrant Happy Homes Pvt. Ltd. vs DCIT(2022) 218 TTJ 1 (Pune), PN 177 to 180 of PB, relevant findings in PN 178 & 179, para no. 4 & 6. 2. Genuine payments outside th....
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....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 observations & relying upon the decision in Saraswati Housing & Developers vs Addl. CIT 142 ITD 198 (Del.), Hon'ble jurisdictional ITAT held that since the payees are illiterate villagers who demanded some of the payment in cash; there is no dispute regarding identity of payees and genuineness of transaction, the disallowance made by AO was rightly deleted by CIT(A). This decision has been affirmed by Hon'ble Chhattisgarh High Court in Tax Case (Income tax appeal) no. 13 of 2016 order dt. 01.03.2016, (2016) 95 CCH 86 (Chhattisgarh). 2. ACIT vs R. P. Real Estate P. Ltd. (2016) 95 CCH 86 (Chhattisgar....
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....ch 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 activity and while interpreting the provisions, Hon'ble Supreme Court had held that the terms of sec. 40A(3) are not absolute and that consideration of business expediency and other relevant factors are not excluded. Hon'ble Tribunal thereafter considered the decision in the case of Anupam Tele Services and other decisions on the subject, including that in the case of A. Daga Royal Arts and noted vide para 14 that the ratio laid down in the judicial decisions is that genuineness of payment, if not doubted and if recipient made a pre-condition of payment of cash and the payment was made due to business expediency, amount can....
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.... 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 (2014) 366 ITR 122 (Guj.) Assessee made cash payments to Tata Tele services Ltd. Cash a ent was made due to direction iven b a ee, non-observance whereof would have adversely affected the business of assessee. The High Court noted the observations of Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh 191 1TR 667 (SC), wherein it was held that section 40A(3) is not intended to restrict the business activities. The terms of section 40A(3) are not absolute. Considerations of business expediency and other relevant factors are not excluded. Genuine and bonafide transactions are not taken out and it is open to the assessee to establish to the satis....
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....n 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 held as under: 5. Having heard learned Advocates appearing for parties and on perusal of records in general and order passed by tribunal in particular * is clearly noticeable at Clause (i) of Section 92BA of the Act came to be omitted w.e.f. 01.04.2017 by Finance Act, 2017. As to whether omission would save the acts is an issue which is no more res-intigra in the light of authoritative pronouncement of Hon'ble Apex Court in the matter of KOHL4PUR CANESUGAR WORKS LTD. v. UNION OF INDIA reported in AIR 2000 SC 811 whereunder Apex Court has examined the effect of repeal of a statute visa-vis deletion/addition of a provision in an enactment and its effect thereof. The import of Section 6 o....
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....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 particularly when the said issue being no more res integra. 14.2 Considering the aforesaid judgment of Hon'ble Karnataka High Court which is followed by various coordinate benches of this Tribunal refer to by the Ld. AR in his synopsis (supra), coming to the facts of present case that the order of TPO was passed on 31.10.2017 and the assessment order by the Ld. AO on 29.12.2017, being both the date falls after 01.04.2017, therefore, the issue in present case is expressly covered by the ratio of judgment rendered by the Hon'ble Karnataka High Court in the case of M/s Taxport (supra), hence the addition made on the basis of omitted provision of the law is unsustainable and have no standing in the eyes of law. Consequently,....
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....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 on 31-03- 2012 and no deduction is claimed in respect of purchases for which cash payments are made. He contends vehemently that the provisions u/s. 40A(3) of the Act is not attracted towards expenses/purchases when there is no deduction claimed and argued that it is settled law that section 40A(3) of the Act only restricts the deductions which are otherwise allowable. He submits that the cash payments are genuine and the provisions u/s. 40A(3) is not attracted towards the genuine cash payments which were identified and acknowledged by payee. Further, the said cash payments were made keeping in view the business exigency to finalize the deal and to avoid the competitors in snatching the deal. 6. Heard both the parties and perused the material available on r....
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....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, perused the material available on record and the case laws referred to supra. Going through the judgment of Hon'ble Delhi High Court in the case of PCIT vs Prosperous Buildcon Pvt. Ltd. (surpa), wherein, it is Laid down that if the assessee had not claimed any expenditure with regard to cash withdrawn and utilized for the purchase of a parcel of land which is treated as stock in trade in the books of assessee, the provisions of section 40A(3) are not applicable. Adverting to the facts of present case, as per the copies of books of accounts furnished before us, the assessee have not claimed such expenditure in its P&L A/c, therefore, in principle the provisions of section 40A(3) are not triggered, however, since such contention has been raised first time before the tribunal, ....
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....ourt, 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 genuineness of the expenditure is not doubted, then no disallowance u/s. 40A(3) of the Act could be made, is not discernible from the order of the Hon'ble High Court. 13. Apropos the judgment of the Hon'ble Supreme Court in the case of Attar Singh Gurmukh Singh Vs. ITO (supra) would not assist the case of the assessee before me. Addressing the concern of the assessee before them, i.e., draconian provision of Section 40A(3) would restrict the business activities, and thus, for the said reason, the said statutory provision was in itself ultra-vires, the Hon'ble Apex Court had observed that the provisions of Section 40A(3) were to be read along with the exceptions carved out in Rule 6DD. Accordingly, the Hon'ble Apex Court had observed that a conjoint reading of the provisions of Section 40A(3) a....
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....e 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 the parties or payments which though was not doubted by the Ld. AO, thus provisions of section 40A(3) cannot be invoked. 15.9 In result, Ground No. 3 of the present appeal is partly allowed for statistical purposes. 16. Ground No. 4: Regarding adhoc disallowance of 10% from various expenses such as travelling, business promotions lodging and boarding, pooja expenses, confirmed by Ld. CIT(A) at 5% for Rs. 3,07,311/-. 16.1 On this issue, the observations of Ld. AO are as under: 7. During the course of scrutiny, bills, vouchers were produced in respect of expenses claimed in trading and profit and loss account. Following expenses have been claimed which are partially supported by bills. Further, some of the expenses are debited through self-made vouchers hence the veracity of such expenses are ascertainable in....