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2018 (5) TMI 1684 - AT - Income TaxDisallowance made u/s 40A(2)(b) - unbalanced payment to doctors i.e. 84% of salaries being paid to four doctors, and 16% salaries being paid to the remaining seven doctors - whether the four doctors are specified persons - Held that - No finding by the Assessing Officer about as to what constitutes fair market price of the services rendered by the promoter directors and that he has simply proceeded to make an adhoc disallowance @ 15% out of the payments made to these persons. Remuneration of doctors must depend on their market worth, and determination of such market worth is uninfluenced by what other professionals in their area of expertise earn - in view of the case CIT v. Ashok J. Patel (2013 (12) TMI 1480 - GUJARAT HIGH COURT) adhoc disallowances u/s 40A(2) are not permissible - simply because a payment is high , it need not be excessive too, but then the Assessing Officer has used the expressions high and excessive rather interchangeably. - Decided in favor of assessee.
Issues Involved:
1. Disallowance under Section 40A(2)(b) of the Income Tax Act. 2. Determination of fair market value for professional services. 3. Comparison of payments to promoter directors and other doctors. 4. Revenue neutrality and tax evasion considerations. 5. Permissibility of adhoc disallowances under Section 40A(2). Issue-wise Detailed Analysis: 1. Disallowance under Section 40A(2)(b) of the Income Tax Act: The primary issue in this appeal is the disallowance of ?52,57,032/- made under Section 40A(2)(b) of the Income Tax Act. The Assessing Officer (AO) disallowed 15% of the payments made to four promoter directors of the assessee company, deeming them excessive and unreasonable. The CIT(A) deleted this disallowance, stating that the AO failed to properly justify the application of Section 40A(2)(b). 2. Determination of Fair Market Value for Professional Services: The CIT(A) observed that the AO did not establish what constituted the fair market value of the services rendered by the promoter directors. The AO's comparison of payments to promoter directors with those made to other doctors was deemed inappropriate, as the services of highly reputed specialists cannot be compared with those of junior doctors. The CIT(A) noted that the promoter directors had significant experience and skills, justifying their higher remuneration. 3. Comparison of Payments to Promoter Directors and Other Doctors: The CIT(A) highlighted that the AO's comparison was flawed as it did not consider the substantial increase in professional fees paid to other doctors, which was higher than the increase for promoter directors. The CIT(A) also noted that in previous years, the ratio of fees paid to promoter directors vis-a-vis other doctors was higher, yet no disallowance was made by the AO in those years. 4. Revenue Neutrality and Tax Evasion Considerations: The CIT(A) pointed out that the promoter directors included the professional fees in their income and paid taxes at the maximum marginal rate, indicating no tax evasion. The CIT(A) cited the judgment of the Hon'ble Supreme Court in CIT, Delhi Vs. Glaxmo Smithkline Pvt. Ltd., which supports the view that when taxes are paid at the same rate, there is no reason to suspect tax evasion. 5. Permissibility of Adhoc Disallowances under Section 40A(2): The Tribunal noted that adhoc disallowances under Section 40A(2) are not permissible. The AO must ascertain the fair market value of the services and provide comparative instances. In this case, the AO failed to do so and made an arbitrary disallowance. The Tribunal cited the judgment in CIT vs. Ashok J. Patel, which emphasized that disallowances under Section 40A(2) require a clear finding on the fair market value of services. Conclusion: The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?52,57,032/- under Section 40A(2)(b), agreeing that the AO's approach was flawed and unsupported by evidence. The Tribunal emphasized that payments to seasoned professionals should be based on their market worth and not compared to other professionals' earnings. The appeal was dismissed, and the CIT(A)'s relief was upheld. Result: The appeal is dismissed. Pronounced in the open court on 24th April 2018.
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