2014 (1) TMI 912 - AT - Income Tax

Disallowance u/s 40A(2)(b) of the Act Excess payment of job charges Held that - The AO has not done any exercise to determine as to whether the amount paid by the Assessee to its sister concern were excessive or unreasonable by comparing the prevalent market rates - He has not arrived at an exact figure of excessive payment by comparing the amount paid by the assessee with the market rates for similar goods and services but he has rather considered the disallowance by comparing the cost of production to the Assessee with that the job work charges paid by assessee. This fact has not been controverted by Revenue by brining any material on record - The decision in Mahavir Dyeing & Print Mills Pvt. Ltd. Versus Income Tax Officer 2010 (4) TMI 968 - ITAT AHMEDABAD followed Where an assessee incur any expenditure in respect of which payment has been made to any of a person referred then in the opinion of the Assessing Officer such expenditure is excessive or unreasonable, having regard to the fair market value of the goods or services or facilities for which the payment is made, then so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable shall not be allowed as a deduction. On careful readings of this Section 40, it is worth to mention that before applying the provision it is required that the Assessing Officer should form an opinion having regard to fair market value of the service rendered. In the present case this exercise is lacking and the Assessing Officer need not make any attempt to find out the prevailing market rate - no case has been made out for disallowance u/s 40A(2)(b) and therefore no disallowance can be made - the disallowance made by the AO deleted Decided in favour of Assessee

Summary

Issues:
Appeal against CIT(A)'s order for assessment year 1997-98 - Disallowance of excess payment of job charges u/s. 40A(2)(b) of the I.T. Act 1961.

Analysis:
1. The appeal was filed against the CIT(A)'s order regarding the disallowance of Rs. 8,70,358 as alleged excess payment of job charges u/s. 40A(2)(b) for assessment year 1997-98.
2. The Assessee initially declared a loss in the return of income, and the assessment was framed by the AO, making an addition of Rs. 26,84,109. The CIT(A) deleted this addition, but the Tribunal set aside the issue of disallowance of Rs. 870,358 for fresh adjudication.
3. The AO, pursuant to the Tribunal's direction, made the addition u/s 40A(2)(b) of Rs. 870,358. The Assessee contended that the payments made to certain companies were not to relatives and hence not covered under 40A(2)(b).
4. The CIT(A) confirmed the addition, noting the lack of comparative instances to prove the prevailing market rates. The Assessee appealed against this decision.
5. During the appeal, the Assessee argued that the job charges were not excessive or unreasonable, providing details of payments made and asserting no interest in the recipient companies. The Assessee also disputed the cost calculation by the AO.
6. The Tribunal analyzed the provisions of s. 40A(2)(b) and noted the AO's failure to compare the payments with prevailing market rates. The Assessee's argument regarding the cost of production and lack of evidence from the Revenue was considered.
7. Referring to a previous case, the Tribunal emphasized the need for the AO to determine excessive payment based on fair market value, which was lacking in the present case. The Tribunal found no grounds for disallowance u/s 40A(2)(b) and deleted the addition made by the AO.
8. The Tribunal allowed the Assessee's appeal, concluding that no disallowance under 40A(2)(b) was warranted based on the lack of proper assessment by the AO.

This detailed analysis covers the issues involved in the legal judgment comprehensively, highlighting the arguments presented by the parties and the Tribunal's reasoning in reaching its decision.