2017 (8) TMI 1252 - AT - Income Tax

Disallowance u/s 40A(2) - payment to specified persons / wives of the directors - Ground Handling Charges is doubtful and unjustified - Held that - Disallowances was made on surmises and conjectures and without considering the relevant information / evidences. The said evidences and letters were not considered by the CIT(A) as well. Therefore, the case laws referred by the Ld. AR are applicable in the present case and the contentions of the assessee are accepted. Though the AO has not referred to section 40A(2) yet it seems that the disallowance was made under this section because his emphasis for disallowance is only on the fact that the recipients are wives of the directors. Section 40A(2) can be invoked only if the amount paid is excessive or unreasonable w.r.t. the fair market value of the services rendered. Since the AO has not given any such finding, he could not make any disallowance u/s 40A(2). Reimbursement of conveyance expenses to its directors as per the Board Resolution - reason-ability of expenses - 3.36 times increase in expense - Held that - The explanation given by the Ld. AR that the assessee company does not own vehicles despite huge turnover, only to avoid various overhead expenses was thereon record before the Assessing Officer. The AO has made the disallowance on the ground that the amounts are not shown as perquisites. The Ld. AR s contention that payments of Conveyance expenses by way of fixed reimbursement cannot be treated as perquisites is just and proper and whether the same is exempt or taxable has to be examined in the case of directors and not the company. Moreover, there is no dispute about the genuineness of payment or its verifiability. Thus, the appeal of the assessee on both the issues is allowed.

Issues Involved:
1. Legality of the appellate order passed by CIT(A).
2. Legality of the assessment order passed by the Assessing Officer (A.O).
3. Disallowance of ?32,65,000 on account of ground handling charges.
4. Disallowance of ?2,20,800 on account of conveyance expenses paid to two directors.

Detailed Analysis:

1. Legality of the appellate order passed by CIT(A):
The appellant argued that the appellate order passed by the CIT(A) was illegal and against the principles of natural justice. The tribunal noted that the CIT(A) confirmed the additions/disallowances made by the Assessing Officer without considering the relevant evidence and submissions provided by the assessee.

2. Legality of the assessment order passed by the Assessing Officer (A.O):
The appellant contended that the assessment order was illegal and against the principles of natural justice as it was passed without providing a proper and effective opportunity of hearing. The tribunal observed that the query regarding ground handling charges was raised by the AO on 17/12/2012 with compliance required by 24/12/2012, and the assessment order was passed on 28/12/2012, within 11 days of raising the query. The AO ignored the written submissions filed by the assessee on 24/12/2012, indicating that proper opportunity of hearing was not provided.

3. Disallowance of ?32,65,000 on account of ground handling charges:
The assessee argued that the disallowance was made because the payments were to the wives of the directors and certain details were not filed. The assessee explained that ground handling services were outsourced to Mrs. Rupam Malik and Mrs. Zinnia Singh due to the complexity and lack of internal infrastructure. The tribunal noted that the AO disallowed the charges on the basis of surmises and conjectures without considering the relevant evidence, such as confirmations from the recipients, their IT returns, and TDS certificates. The tribunal held that the disallowance was not justified as the AO did not provide any finding that the amount paid was excessive or unreasonable concerning the fair market value of the services rendered. The tribunal cited several case laws supporting that the reasonableness of the expenditure should be viewed from the perspective of a prudent businessman and not the revenue authorities.

4. Disallowance of ?2,20,800 on account of conveyance expenses paid to two directors:
The assessee contended that the conveyance expenses were reimbursed to the directors as per the Board Resolution and were not treated as perquisites. The AO disallowed the expenses on the ground that the amounts were not shown as perquisites. The tribunal found that the payments were genuine, verifiable, and made by account payee cheques. The tribunal agreed with the assessee's explanation that the company did not own vehicles to avoid overhead expenses, and the fixed reimbursement of conveyance expenses could not be treated as perquisites. The tribunal held that whether the reimbursement was exempt or taxable should be examined in the case of the directors and not the company.

Conclusion:
The tribunal allowed the appeal of the assessee on both issues, finding that the disallowances made by the AO were based on surmises and conjectures without considering the relevant evidence and submissions provided by the assessee. The tribunal emphasized that the AO failed to discharge the onus of proving that the payments were excessive or unreasonable under Section 40A(2) of the Act.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced in the Open Court on 18th August 2017.

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