2017 (1) TMI 568 - AT - Income Tax

Addition u/s 40A (2)(a) - payments under various heads for goods and services procured from its holding company - Held that - Adhoc disallowance cannot be made on mere suspicion rather the AO should have brought some cogent material in the form of comparables so as to justify that the impugned payments are excessive or unreasonable. Moreover, both entities being in the same tax bracket, hence the transactions are tax neutral and covered by CBDT circular number 6-P dated 06/07/1968 as stated that no disallowance is called for u/s 40A(2) in respect of payments made to relatives/sister concerns where there is no attempt to evade taxes. we are inclined to delete the impugned disallowance of 20% made u/s 40A(2). See Commissioner of Income-tax Versus VS. Dempo and Co. P. Ltd. 2010 (10) TMI 711 - Bombay High Court - Decided in favour of assessee Adhoc 20% disallowance of certain expenditures for want of verification of vouchers on test check basis - Held that - The factual position is that although complete details were made available by the assessee before lower authorities but additions were made for want of verification of vouchers for 3 months on test check basis. There is nothing adverse on record with respect to expenditure in Tax Audit Report. Gujrat High court in CIT Vs. Vallbh Glass Works Ltd. (2013 (9) TMI 806 - GUJARAT HIGH COURT ) has held that where audited accounts were available with regard to the expenses claimed by the assessee and there were no adverse comments by auditor, no disallowance of such expenses should be made unless there are cogent reasons to question the genuineness of such expenditure. Mere failure to file the relevant vouchers as required by the AO cannot be the basis for disallowance unless it is found that the expenditures were not incurred wholly and exclusively for the purpose of business. Therefore, on the facts and circumstances of the case and judicial pronouncements, we are inclined to delete the impugned adhoc disallowance - Decided in favour of assessee

Summary

Issues Involved:
- Delay in filing the appeal
- Disallowance of expenses under Section 40A(2)(a)
- Adhoc disallowance of certain business expenditures

Analysis:

Issue 1: Delay in filing the appeal
The appeal challenged the order of the Commissioner of Income Tax (Appeals) confirming addition u/s 40A(2)(a) and certain business expenditure for Assessment Year 2004-05. The appeal was filed with a delay of 662 days, which the appellant sought condonation for. The delay was attributed to the belief that the name substitution would occur automatically due to a merger. The Tribunal, considering the circumstances and the High Court order sanctioning amalgamation, condoned the delay of 296 days and proceeded to decide the issue on merits.

Issue 2: Disallowance of expenses under Section 40A(2)(a)
The AO disallowed 20% of expenses paid to the holding company under various heads, citing Section 40A(2). The CIT(A) affirmed the disallowance, noting the lack of substantiation by the assessee. The appellant contended that payments were reasonable and fair, supported by market conditions. The Tribunal found the disallowance without a sound basis, as no discrepancies were pointed out by the AO. Considering the tax neutrality of transactions between related entities, the Tribunal deleted the disallowance, citing relevant case law and circulars.

Issue 3: Adhoc disallowance of certain business expenditures
The second issue involved a 20% adhoc disallowance of certain expenditures due to the lack of verification of vouchers. The appellant argued that complete details were available to the AO, and the delay in producing vouchers was due to business discontinuation. The Tribunal, relying on judicial precedents, held that mere failure to produce vouchers cannot be the basis for disallowance unless the genuineness of expenditure is questioned. Consequently, the Tribunal deleted the adhoc disallowance, as the expenses were found to be genuine and for business purposes.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowances made by the lower authorities.