2010 (9) TMI 587 - AT - Income Tax

Disallowance - Assessing Officer held that the assessee ought to have paid the sister concern only a portion of the amount billed by the assessee after retaining its normal profit share as reflected by average profit rate of 23.5% and not the entire amount - It is only elementary that disallowance under section 40A(2)(b) can only be made when market value of the services rendered are less than amount paid to sister concern for such services - Coordinate bench in the case of Batlivala & Karnani Vs ACIT (2 SOT 379) - Accordingly the assessee gets relief on this issue During the course of proceedings the assesse has filed certain additional evidences which could not be filed before the authorities below - In the result the appeal is partly allowed for statistical purpose

Summary

Issues:
1. Disallowance under section 40A(2)(b) for payment to associate concern.
2. Disallowance of amounts due from employees written off.
3. Disallowance of sundry balances and advances written off.

Analysis:

Issue 1: Disallowance under section 40A(2)(b) for payment to associate concern
The appeal was against the CIT(A)'s decision to uphold the disallowance of a certain amount under section 40A(2)(b) concerning payment to an associate concern for consultancy services. The Assessing Officer disallowed the amount as he believed the appellant should have retained a profit share before making the payment. However, the ITAT disagreed with this decision. They found that the disallowance can only be made if the market value of services is less than the amount paid, which was not the case here. Referring to a previous case, the ITAT directed the Assessing Officer to delete the disallowance, providing relief to the assessee.

Issue 2: Disallowance of amounts due from employees written off
The Assessing Officer disallowed an amount due from employees that was written off, as the conditions of Section 36(2) were not satisfied. The CIT(A) upheld this decision, stating that the commercial justification for advancing the amount remains unexplained. However, during the appeal, the assessee submitted additional evidence not presented before. The ITAT admitted these evidences and remitted the matter back to the CIT(A) for fresh adjudication, considering the new evidence and providing an opportunity for the assessee to explain the commercial justification.

Issue 3: Disallowance of sundry balances and advances written off
Similar to the previous issue, the disallowance of sundry balances and advances written off was also challenged by the assessee. The disallowance was mainly due to lack of suitable explanations and failure to provide requisitioned evidences. The ITAT allowed this ground for statistical purposes and remitted the matter back to the CIT(A) for fresh adjudication, considering the additional evidences filed by the assessee.

In conclusion, the appeal was partly allowed, providing relief to the assessee on the issues discussed above. The ITAT emphasized the importance of proper justification and evidence in such cases, ensuring a fair adjudication process.