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Issues involved: Whether service charges paid by assessee-company to a partnership firm can be allowed as a deduction u/s 40A(2)(b) of the Income-tax Act for the assessment year 1992-93.
Summary: The assessee-company engaged in the business of manufacturing and trading returned an income of Rs. 11,25,466 for the assessment year 1992-93. The company paid service charges to a consultant firm M/s. Team Paarel for consultancy in various areas. The Assessing Officer disallowed the service charges deduction based on the involvement of company directors and lack of business increase due to the consultancy services. The Commissioner of Income-tax (Appeals) and the Tribunal allowed the deduction, but the revenue appealed to the High Court. The revenue contended that the service charges were excessive and unreasonable, considering the commonality of partners between the company and the consulting firm. They argued that the increase in sales was due to higher discounts, not the consultancy services. They relied on the Supreme Court decision in McDowell & Co. Ltd. v. CTO [1985] to support their position. The assessee argued that the consultancy services led to business improvement and increased turnover. They maintained that the service charges were legitimate and necessary for the company's operations. The High Court analyzed the provisions of section 40A(2)(a) and (b) and the facts of the case. They found that the service charges were not justified as they were essentially payments to company directors for services already rendered. The High Court concluded that the service charges were a device to avoid tax and not a genuine business expense. They overturned the decisions of the Commissioner of Income-tax (Appeals) and the Tribunal, ruling in favor of the revenue. The High Court set aside the previous orders and restored the Assessing Officer's decision to disallow the service charges deduction.
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