2017 (2) TMI 988 - HC - Income Tax

Addition u/s 40A(2) - Held that - Section 40A(2) empowers the assessing officer to effect a disallowance of payments that are, in his opinion excessive or unreasonable giving regard to 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 him or accruing to him. Such opinion has to be based on tangible material and not assumptions and suspicions. The provisions of section 40A(2) are not automatic and can be called into play only if the assessing officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the assessing officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax. The Supreme Court in the case of Vodafone International Vodafone International Holdings BV. Vs. Union of India and another (2012 (1) TMI 52 - SUPREME COURT OF INDIA) points out the difference between looking through a transaction and looking at a transaction settling the position that a conclusion of colourable /sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bonafide and acceptable. Nothing is placed before us to indicate that the findings are perverse. We are thus not inclined to interfere with the concurrent findings of the authorities. - Decided in favour of the assessee.

Summary

Issues involved:
1. Deductibility of commission paid to a sister concern.
2. Treatment of additional price paid to sister concerns as revenue expenditure.

Analysis:

Issue 1: Deductibility of commission paid to a sister concern
The case involves multiple appeals challenging the disallowance of commission payments made to a sister concern. The assessing officer alleged that the payments were non-genuine and colorable exercises. However, the assessees contended that the sister concern was appointed as the sole selling agent for the group, supported by agreements and communications. The Commissioner of Income Tax (Appeals) reversed the disallowance, noting the commercial rationale behind appointing the sister concern as the selling agent. The Income Tax Appellate Tribunal upheld this decision, emphasizing that the arrangement was not contrary to commercial principles and aimed at enhancing commercial operations' efficiency and profitability. The Tribunal also highlighted that suspicions alone cannot justify disallowances without concrete evidence. The Tribunal's findings were supported by the Supreme Court's stance on viewing transactions holistically to determine colorable or sham nature. The Tribunal's decision was upheld, rejecting the revenue's challenge.

Issue 2: Treatment of additional price paid to sister concerns
The Tribunal held that the additional price paid to sister concerns could not be disallowed as sham transactions or under Section 40(A) of the IT Act. The Tribunal clarified that the Assessing Officers did not invoke Section 40(A)(2) in this regard. However, the Tribunal's treatment of price differences as equivalent to sales commission was deemed incorrect. Consequently, the issue of price differences was remanded back to the Tribunal for fresh consideration, providing both the assessee and the income tax department with an opportunity to present their case within a specified timeframe. The appeals were partly allowed on this issue.

Additional Judgment:
In a separate appeal, Tax Case (Appeal) No.831 of 2004, the Court remanded the matter back to the Tribunal for considering all grounds raised in the appeal, as the Tribunal had not addressed the grounds initially. The appeal was disposed of with this direction, emphasizing a fair consideration of all raised grounds.