2017 (8) TMI 271 - AT - Income Tax

Addition u/s 40A(2) - addition treating commission payment as unreasonable and excessive - Held that - Commission was not outside the scope of the transaction agreement as well as the documents produced before the lower authorities. Section 40A (2) (b) set out the circumstances in which certain expenses or payments are not deductable. In the present case there were no circumstances for invoking the same. Though Shri Manish Patodia is brother of the assessee, he has actually worked for the assessee. Therefore, the CIT(A) as well as the Assessing Officer was not justified for invoking provisions of Section 40A (2) (b). The incentive of ₹ 5,27,602/- to Shri Manish Patodia was paid on the basis fixed percentage of the total turnover of sulpher at 0.2% on total turnover of sulpher of ₹ 26,38,01,114/-. This commission was paid as services, both administrative and managerial rendered by Mr. Manish Patodia for their sales. Merely because the commission was paid to Shri Manish Patodia was computed on turnover basis as fixed percentage thereof and the commission paid to others were on the basis of quantity sold cannot be the basis to hold that the payment as excessive and unreasonable. Merely because a person is not an employee but rendered the professional services cannot be the basis to hold that the payment made to such person is excessive and unreasonable. The 0.2 % commission for the turnover of ₹ 26,38,01,114/- cannot be held as excessive or unreasonable payment - Decided in favour of assessee Addition of notional interest income observing that appellant has charged lesser rate of interest - accrual of income - Held that - The borrowed funds were mainly availed during the previous assessment years and brought forward to the year under assessment. During the year under consideration loans were given to Smt. Jaya Patodia and Mr. Manish Patodia (HUF) from the funds available in personal capacity and not out of the funds borrowed which is evident from the personal statement of affairs. When the assessee has both interest free funds and interest bearing funds, the presumption is that interest free funds are utilized for interest free loans. Hence, there is no justification for making the proportionate disallowance. The Assessing Officer failed to establish the nexus between the interest bearing borrowed funds and their utilization for loan given at a lesser rate of interest. The addition was made purely on notional interest income which neither was charged nor the same accrued to the assessee.- Decided in favour of assessee Allowable business expenditure - expenses incurred under the head vehicle repair and maintain, telephone expenses and business promotion - Held that - The expenses incurred by the assessee are properly justified by the Assessee through vouchers. Neither the assessee was confronted nor any show cause notice was issued to the assessee before making the addition of ₹ 56,052/- for disallowance on ad-hoc basis being 20% expenses incurred under the head vehicle repair and maintainance, telephone expenses and business promotion while holding the same as personal in nature by the Ld. A.O. The Assessing Officer has not pointed out any specific expenses which as per him are personal expenses. The expenses were fully vouched and duly recorded in the regular books of accounts maintained by the assessee separately for his proprietary concern namely M/s Atul International. The books of accounts were duly audited u/s 44AB of the Act and nothing adverse was reported by the tax auditor regarding personal use of the business assets. All expenses were supported by the bills and vouchers. The same were before the Assessing Officer. The disallowance on Ad-hoc basis cannot be sustained - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance of commission expenses under Section 40A(2)(b).
2. Addition of notional interest income.
3. Disallowance of personal expenses under the head vehicle repair and maintenance, telephone expenses, and business promotion.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Expenses under Section 40A(2)(b):

The assessee claimed commission expenses amounting to ?27,04,623/- in the business of trading sulphur, including ?5,27,602/- paid to his brother, Sh. Manoj Patodia. The Assessing Officer disallowed 50% of the commission paid to Sh. Manoj Patodia, amounting to ?2,63,801/-, under Section 40A(2)(b), treating it as unreasonable and excessive. The CIT(A) upheld this disallowance. However, the Tribunal found that the commission was paid on a fixed percentage of the total turnover of sulphur (0.2% on ?26,38,01,114/-) for administrative and managerial services rendered by Sh. Manoj Patodia. The Tribunal noted that TDS was duly deducted, and the payment was genuine and not excessive. Hence, the disallowance was unjustified, and Ground No. 2 was allowed.

2. Addition of Notional Interest Income:

The Assessing Officer added ?37,644/- as notional interest, observing that the assessee charged a lesser rate of interest from related parties. The CIT(A) upheld this addition. The Tribunal noted that the borrowed funds were mainly from previous assessment years and were cross-verifiable from the audited balance sheet. The loans given to related parties were from personal funds, not borrowed funds. The Tribunal emphasized that there was no provision for charging notional interest under the Income Tax Act, 1961, and the nexus between borrowed funds and loans given at a lesser rate was not established. Hence, the addition was purely on notional income, and Ground No. 3 was allowed.

3. Disallowance of Personal Expenses:

The Assessing Officer disallowed 20% of expenses under vehicle repair and maintenance, telephone expenses, and business promotion, considering them personal in nature. The CIT(A) reduced this disallowance to 10%. The Tribunal found that the expenses were fully vouched, recorded in regular books of accounts, and supported by bills and vouchers. The Assessing Officer did not point out any specific personal expenses. The disallowance on an ad-hoc basis was deemed unsustainable. Therefore, Ground No. 4 was allowed.

Conclusion:

The Tribunal allowed the appeal of the assessee, finding that the disallowances and additions made by the Assessing Officer and upheld by the CIT(A) were unjustified. The order was pronounced in the open court on 08th December 2016.