2006 (9) TMI 303 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by applying the provisions of section 40A(2) of the Income-tax Act, 1961.
2. Deletion of disallowance made on expenses by the Assessing Officer.
3. Applicability of CBDT Circular on tax effect for filing appeals.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 40A(2):
The revenue challenged the CIT (Appeals)'s decision to delete the addition made by the Assessing Officer under section 40A(2) on the grounds that payments were excessive and unreasonable. The CIT (Appeals) found that the payments made to the relatives of the partners, who were technically qualified and experienced, were justified and not excessive. The CIT (Appeals) observed that the payments were in line with the services rendered and the qualifications of the employees. The Tribunal upheld this view, emphasizing that the reasonableness of the expenditure should be judged from the perspective of a businessman and not the revenue officer. The Tribunal noted that the payments were recorded in the tax audit report, and the family members were assessed to tax individually, with some in the highest tax bracket. The Tribunal also highlighted the significant increase in sales and profits of the assessee-firm, justifying the payments made.

2. Deletion of Disallowance on Expenses:
The Assessing Officer had disallowed part of the salary and incentives paid to certain relatives of the partners, considering them excessive. The CIT (Appeals) deleted these disallowances, finding that the payments were reasonable based on the qualifications and contributions of the employees. The Tribunal agreed with the CIT (Appeals), noting that the Assessing Officer did not provide any substantial evidence to prove that the payments were excessive. The Tribunal found that the payments were in line with the market rates and the services rendered, and the increase in sales and profits further justified the expenses.

3. Applicability of CBDT Circular on Tax Effect:
The Tribunal noted that the tax effect in the appeal was less than Rs. 2 lakhs, and as per CBDT Instruction No. 2 dated 24-10-2005, the department should not have filed the appeal. The Tribunal referred to various judicial precedents, including the decision of the Hon'ble Bombay High Court in the case of CIT v. Pithwa Engg. Works, which held that the CBDT's circulars are binding on the revenue authorities. The Tribunal emphasized that these instructions aim to reduce unnecessary litigation and the burden on the judiciary. The Tribunal concluded that the appeal should be dismissed on the grounds of low tax effect as per the CBDT circular.

Conclusion:
The Tribunal dismissed the revenue's appeal both on merits and on the grounds of low tax effect. The Tribunal upheld the CIT (Appeals)'s decision to delete the additions and disallowances made by the Assessing Officer, finding that the payments were reasonable and justified based on the qualifications and contributions of the employees. The Tribunal also emphasized the binding nature of the CBDT circular on tax effect for filing appeals, aiming to reduce unnecessary litigation.