2016 (5) TMI 44 - AT - Income Tax

Addition u/s 40A(2)(b) - excessive and unreasonable payments to the directors - Held that - No cogent materials was brought on record by the AO or by the CIT(A) to prove that the payment was excessive and unreasonable to the directors of the assessee to whom the payments were made equal to 30% total advisory fee received by the assessee of ₹ 73,66,218 from Yatra Art Fund. The provision of section 40A (2) are very clear that the disallowance could only be made if expenditure incurred by the assessee by making payment to specified persons including the directors by the company is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, then so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as deduction. In the instant case the AO has failed to prove that the payment made to the directors was excessive having regard to the fair market value of the said goods or services as no comparable case was brought on record to substantiate the disallowance made by the AO. The AO also did not bring any cogent evidence to prove that the assessee has not received any services and paid the mony. In view of this fact the order of CIT(A) confirming the addition made by the AO u/s 40A(2)(b) cannot be sustained and therefore, the addition to be deleted by deciding issue in favour of the assessee. Penalty u/s 271AAA - Held that - We find from the additional grounds raised by the assessee vide application dated 02.07.2015 qua ignoring the statutory construction of section 271(AAA) of the Act and other issues of sustaining the penalty u/s 271(1)(c) when the statutory explanation to the said section does not apply to the assessee s case. It is also a fact that this issue was not raised before First Appellate Authority. In the present circumstances and facts we are of the view that this issue should go back to the file of CIT(A) for fresh adjudication. We, therefore, without going into the merits of the case restore this issue to the file of the ld. CIT(A) to examine the issue raised by the assessee regarding section 271AAA of the Act and decide the same in accordance with law after affording the opportunity of being heard to the assessee. - Decided in favour of the assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of 25% of traveling expenses.
2. Disallowance of advisory fees paid to directors under Section 40A(2).
3. Penalty under Section 271(1)(c) for alleged concealment of income.

Issue-wise Detailed Analysis:

1. Disallowance of 25% of Traveling Expenses:
The assessee challenged the confirmation of an ad-hoc disallowance of 25% of traveling expenses amounting to ?16,17,742/- by the CIT(A). The CIT(A) upheld the disallowance on the grounds that the assessee did not provide sufficient evidence to prove the nexus of the expenses to genuine business requirements, suggesting that the expenses could be attributed to personal travel. The Tribunal found the disallowance of 25% to be excessive and unreasonable. It restricted the disallowance to 10% of the total traveling expenses, amounting to ?6,47,097/-, and deleted the remaining ?9,70,645/-. This issue was thus partly allowed in favor of the assessee.

2. Disallowance of Advisory Fees Paid to Directors under Section 40A(2):
The assessee contested the disallowance of ?11,14,272/- paid to directors as advisory fees. The CIT(A) upheld the disallowance, stating that the business exigencies and needs for such payments were not proven. The Tribunal noted that the AO and CIT(A) failed to provide cogent evidence that the payments were excessive or unreasonable. The Tribunal highlighted that the provisions of Section 40A(2) require the AO to prove that the payments were excessive in comparison to the fair market value or the legitimate needs of the business. Since no such evidence was provided, the Tribunal concluded that the disallowance could not be sustained and ordered the deletion of ?11,14,272/-. This issue was decided in favor of the assessee.

3. Penalty under Section 271(1)(c) for Alleged Concealment of Income:
For the assessment year 2007-08, the assessee challenged the penalty of ?7,40,520/- levied under Section 271(1)(c) for alleged concealment of income amounting to ?22 lakhs. The CIT(A) confirmed the penalty, stating that the additional income was disclosed only after the search action and was not recorded in the books of account. The Tribunal noted that the assessee raised additional grounds regarding the applicability of Section 271AAA and the statutory explanations under Section 271(1)(c). The Tribunal decided to restore the issue to the file of the CIT(A) for fresh adjudication, considering the new grounds raised by the assessee. The CIT(A) was directed to examine the issues and decide in accordance with the law after providing an opportunity for a hearing to the assessee. This issue was thus allowed for statistical purposes.

Conclusion:
The Tribunal partly allowed the appeal regarding the disallowance of traveling expenses, fully allowed the appeal concerning the disallowance of advisory fees to directors, and restored the penalty issue to the CIT(A) for fresh adjudication. The overall result was that the assessee's appeals were partly allowed.