2016 (11) TMI 1642 - AT - Income Tax

Addition u/s 40A(2)(b) - payment to the persons specified - HELD THAT - It is clear that the disallowance under this section is made in respect of the expenses incurred or payments made which are not deductible. This section has no application to income aspect of the assessee. AO has made disallowance u/s 40A(2)(b) in respect of income which the assessee in his opinion ought to have earned rather than certain expenses incurred, the provisions of this section are not attracted. Therefore, uphold the impugned order on this score deleting the disallowance. - Decided against revenue.

Summary

Issues:
Appeal against deletion of addition under section 40A(2)(b) of the Income-tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi pertained to the assessment year 2011-12 and challenged the deletion of an addition of ?48,20,118 made by the Assessing Officer under section 40A(2)(b) of the Income-tax Act. The facts revealed that the assessee, a joint venture with three partners, received a contract from Rail Vikas Nigam Limited and sub-contracted it to one of the partners. The AO contended that the assessee should have earned income from this subcontracting and made an addition. However, the CIT(A) relied on a judgment of the Delhi High Court and deleted the addition. The Revenue appealed against this deletion.

During the proceedings, the Revenue did not attend, and the appeal was disposed of ex parte. The key issue was whether the disallowance under section 40A(2)(b) was justified. Section 40A(2)(a) deals with disallowance of excessive or unreasonable expenditure, not income aspects. The Tribunal noted that the disallowance was related to income that the assessee should have earned, not expenses incurred. Therefore, it was held that the provisions of this section were not applicable in this case, and the deletion of the addition was upheld.

In conclusion, the Appellate Tribunal dismissed the appeal of the Revenue, emphasizing that the disallowance under section 40A(2)(b) was not warranted as it pertained to income rather than expenses. The judgment highlighted the distinction between disallowance of expenses and the income aspect, leading to the decision in favor of the assessee.