2018 (3) TMI 1752 - AT - Income Tax

Addition u/s 40A(2)(b) - Addition on account of alleged excessive rent paid on machineries hire for hospital - unreasonable or excessive - CIT(A) observed that the machinery were very old obsolete and had outlived their use and utility and the payment of rent was only to reduce the liability of the assessee - absence of inquiry by the AO - HELD THAT - AO observed that the payments were made to the persons covered u/s 40A(2)(b). But that is why section 40A(2)(a) has been invoked. The issue is whether the AO s opinion that the expenditure was excessive is correct. As per section 40A(2)(a) such opinion of the AO is to be formed having regard to the fair market value of the goods in which the payment is made. AO has to place on record material showing the fair market value of the goods. In the present case the AO did not conduct any inquiry or verification into the reasonableness of the expenditure with reference to fair market charges payable under similar conditions. In CIT vs. Superior Crafts 2012 (4) TMI 476 - DELHI HIGH COURT has approved the action of the Tribunal in deleting the similar addition/disallowance dismissing the appeal filed by the Department. In ITO vs. Mayur Agarwal 2010 (4) TMI 1061 - ITAT AGRA it was held that u/s 40A(2)(b) the AO is bound to show as to how the rent paid to a relative is excessive. In ACIT vs. Bombay Real Estate Development Company (P) Ltd 2011 (6) TMI 796 - ITAT MUMBAI it was held that since the AO had not brought on record anything to show that the payment made was unreasonable or excessive having regard to the fair market value of the services for which the payment was made or the benefit derived from such services the conditions of section 40A(2) were not satisfied. Also see S.K. Engineering vs. JCIT 2005 (8) TMI 285 - ITAT BANGALORE-A held inter alia that for invoking the provisions of section 40A(2) the onus lies on the AO that the payment is excessive or unreasonable having regard to the fair market value of the goods; and that the Revenue has to place on record evidence as regards excessiveness or unreasonableness. In Jagdamba Rollers Flour Mill Ltd. Vs. ACIT 2008 (10) TMI 282 - ITAT NAGPUR held that disallowance u/s 40A(2) can be made only if payment is made to a person specified in section 40A(2)(b) and it is found to be excessive or unreasonable having regard to the market value of the goods services or facilities for which the payment is made; and that in the absence of inquiry by the AO as contemplated by the provisions of section 40A(2)(a) no disallowance can be made. - Decided in favour of assessee.

Summary

Issues:
1. Addition of income for alleged suppression
2. Disallowance of excessive rent paid on machineries
3. Principles of natural justice in assessment

Analysis:
1. The appeal for Assessment Year 2011-12 raised grounds regarding the addition of income for alleged suppression. The CIT(A) sustained the addition partially, leading to an appeal. Grounds 1 and 2 were not pressed and were rejected. Grounds 3 and 4 challenged the disallowance of excessive rent paid on machineries, which the CIT(A) partially upheld. The AO and CIT(A) considered the machinery as old and obsolete, justifying the rent payment as a liability reduction. The Counsel argued that the AO failed to prove the expenditure as excessive under section 40A(2)(a) of the IT Act, emphasizing the lack of evidence consideration by the CIT(A).

2. Regarding the excessive rent disallowance, the AO observed payments made to individuals covered under section 40A(2)(b) of the Act. However, the Tribunal noted that section 40A(2)(a) should be applied to determine if the expenditure was excessive, requiring the AO to establish the fair market value of the goods. The AO's opinion on excessiveness should be based on fair market charges under similar conditions, which was not done in this case. Citing relevant case laws, the Tribunal emphasized the AO's burden to prove excessiveness and unreasonableness under section 40A(2).

3. The Tribunal referred to precedents like 'CIT vs. Superior Crafts' and 'ITO vs. Mayur Agarwal' to support the requirement for the AO to demonstrate excessive payments to relatives under section 40A(2)(b). In the absence of evidence showing unreasonableness or excessiveness, disallowances under section 40A(2) were deemed unsustainable. Upholding the principles of natural justice and fair market value assessment, the Tribunal allowed the appeal, deleting the disallowances. The judgment emphasized the importance of proper inquiry and evidence presentation by the AO to support disallowances under section 40A(2).

This detailed analysis of the judgment provides insights into the issues raised, the arguments presented, and the legal principles applied, resulting in the allowance of the appeal based on the lack of proper assessment and evidence for the disallowances made by the AO.