2010 (1) TMI 812 - AT - Income Tax

Disallowances made by the Assessing Officer invoking section 40A(2)(b) of the Income-tax Act 1961 - commission and incentive and consultancy charges. According to the Revenue the assessee had not produced any evidence for services rendered by the recipients of the above amounts who fell within the purview of section 40A(2)(b) of the Act nor could it substantiate the business expediency for such payments - Held that - For invoking clause (b) of sub-section (2) of section 40A of the Act the first requirement is that the Assessing Officer has to have an opinion that the expenditure incurred in relation to the related parties was excessive or unreasonable having regard to the fair market value of the services or the payments made were not for the legitimate needs of the business of the assessee. Here the Assessing Officer has not at any point of time considered the fair market value of the services rendered by the above three persons. There is no comparative study of similar payments made by the assessee to other persons before coming to a conclusion that such payments were excessive or unreasonable. The learned Commissioner of Income-tax (Appeals) after noting that the assessee was paying higher or comparable amounts to persons who were having less experience was of the opinion that section 40A(2)(b) of the Act is not applicable. Assessing Officer being unable to establish the excessiveness or unreasonableness of the payments made by the assessee when compared with the fair market value of the services rendered by them the disallowances made were not warranted. appeal filed by the Revenue dismissed.

Summary

Issues:
- Disallowances made under section 40A(2)(b) of the Income-tax Act, 1961.
- Whether payments for commission, incentives, and consultancy charges were justified.
- Application of fair market value for related party payments.

Analysis:
1. The appeal dealt with disallowances made by the Assessing Officer under section 40A(2)(b) of the Income-tax Act, 1961, which were subsequently deleted by the Commissioner of Income-tax (Appeals).

2. The disallowances included payments for commission, incentives, and consultancy charges, totaling Rs. 8,98,000 and Rs. 2,29,000 respectively. The Revenue contended that the assessee failed to provide evidence for services rendered by the recipients falling under section 40A(2)(b) or demonstrate the business necessity for such payments.

3. The Assessing Officer highlighted payments made to specific individuals falling under section 40A(2)(b), such as Shri Sidharth Lulla, Shri Manohar Lulla, and Smt. Padmini Lulla, totaling Rs. 12,86,042. The assessee's explanations regarding the commercial necessity of these payments were scrutinized.

4. The Assessing Officer disallowed the payments as the assessee could not produce agreements or clarify the services rendered by the individuals, invoking section 40A(2)(b) of the Act. Similar disallowances were made for consultancy charges, citing lack of evidence for services rendered.

5. The Commissioner of Income-tax (Appeals) considered the service profiles and roles of the individuals in question. The assessee argued that payments were competitive and provided details of payments to non-related parties. The Commissioner noted larger payments to less experienced individuals and concluded that section 40A(2)(b) did not apply, deleting the disallowances.

6. The Tribunal analyzed the Assessing Officer's failure to establish the excessiveness or unreasonableness of payments compared to fair market value. Without comparative studies or evidence of excessive payments, the disallowances were deemed unwarranted. Consequently, the Tribunal upheld the Commissioner's decision, dismissing the Revenue's appeal.

7. The Tribunal pronounced the order on January 8, 2010, dismissing the Revenue's appeal regarding the disallowances made under section 40A(2)(b) of the Income-tax Act, 1961.