2010 (1) TMI 885 - AT - Income Tax

Disallowance out of the purchases made from an associate company on the ground that the price paid by the assessee was unreasonable and excessive within the meaning of section 40A(2)(a) of the Act - no disallowance was made under section 40A(2)(a), price charged for the improved quality of the material it cannot be considered to be unreasonable or excessive, It cannot therefore be suggested that the assessee was indulging in unfair means to shift its profits to another entity, no merit in the disallowance which is hereby deleted. Disallowance of foreign travel expenses - no bill or voucher in support of the assessee s claim that it had reimbursed total expenses to the above extent to the local parties who had made the payments to the hotels on behalf of the assessee - Held that - Even if the assessee had reimbursed the hotel expenses to the local parties who had made the bookings and effected the payments after obtaining a handsome discount there should have been no difficulty in the assessee obtaining a confirmation from those parties in support of the claim, no evidence in support of the hotel expenses disallowance upheld.

Summary

Issues: Disallowance of purchases from an associate company under section 40A(2)(a), Disallowance of foreign travel expenses, Levy of interest under section 234B

Issue 1: Disallowance of purchases from an associate company under section 40A(2)(a)
The appeal dealt with the disallowance of Rs.3,68,000 out of purchases made from an associate company, based on the argument that the price paid was unreasonable and excessive under section 40A(2)(a) of the Income Tax Act. The Assessing Officer contended that the price increase from Rs.21 to Rs.25 per litre was unjustified, as other concerns continued to pay the lower price. The assessee explained that the higher price was due to upgraded material quality. However, this explanation was rejected for lack of evidence. The CIT(A) upheld the disallowance, emphasizing the need for evidence. In the further appeal, the assessee presented a letter from the supplier confirming the quality upgrade and consistent pricing for all customers. Detailed evidence was provided, showing price increases in finished products post-upgrade. Referring to CBDT circulars, it was argued that the price was justifiable. Considering the evidence and tax bracket of both parties, the disallowance was deemed unjustified, and ground no.1 was allowed.

Issue 2: Disallowance of foreign travel expenses
The second ground concerned the disallowance of foreign travel expenses amounting to Rs.1,54,168. The Assessing Officer disallowed the expenses due to lack of documentary evidence supporting the reimbursement claim made to local parties. The CIT(A) confirmed the disallowance. In the appeal, the assessee argued that the expenses were legitimate reimbursements for stays arranged by local parties. However, no evidence was provided for the hotel expenses. Despite acknowledging the necessity of payments for stays, the lack of evidence led to upholding the disallowance. The Tribunal dismissed the second ground, emphasizing the absence of supporting documentation for the claimed expenses.

Issue 3: Levy of interest under section 234B
The last ground challenged the levy of interest of Rs.4,13,819 under section 234B, citing a calculation error. The Tribunal directed the Assessing Officer to review and rectify any miscalculations. Consequently, the appeal was partly allowed, with the order pronounced on 18.1.2010.