2018 (12) TMI 104 - AT - Income Tax

Disallowance of payment made to relatives of the Directors under section 40A(2)(b) - payment of salary paid has been treated as excessive by ₹ 6 lakhs - Held that - AO has not pointed out any defect in the submission of the assessee. In our considered view the AO before comparing the salary with other directors, should have also considered experience, qualification and technical competency, which has not been done in the instant case. It is also the fact on record that the salary paid to Shri Shivendra Singh was taxed at the maximum marginal rate, meaning thereby both the assessee and Shri Shivendra Singh were being taxed at the same rate. Therefore, it can be concluded that there is no evasion of tax liability. We find that under similar circumstances in the case of PCIT Vs. Gujarat Gas Financial services limited 2015 (7) TMI 743 - GUJARAT HIGH COURT has held that if salary paid to the specified persons mentioned in section 40A(2)(b) of the Act and same is charged to tax at the maximum marginal rate, then no disallowance can be made. - decided in favour of assessee. Addition in part on account of sales commission expenses - Held that - From the preceding discussion, we note that the assessee has created the provisions for commission expense in the earlier years as evident from the copy of ledger available on page no.16 of the paper book. However, the accounts were settled with the party at ₹ 1,40,000/- during the year under consideration. Therefore the excess sum of ₹ 5,000/- was claimed as commission expenses for the year under consideration. On perusal of the ledger account of the commission, there remains no ambiguity that the provision for commission expenses of ₹ 1,35,000/- was not claimed as a deduction in the year under consideration as alleged by the ld.CIT(A). Once the expenses of ₹ 1,35,000/- has not claimed in the books of accounts, then there is no question making disallowance of such expenses. Therefore, we hold that the ld.CIT(A) has misunderstood the facts of the case and made disallowance of ₹ 1,35,000/- treating the same as provision for commission expenses. - decided in favour of assessee. Ad hoc disallowance at the rate of 25% of the total traveling expenses - Held that- it is clear that the AO has not pointed out any specific defects in the expenses claimed by the assessee. In these circumstances, we are of the view that the estimated disallowance is not sustainable in the eyes of the law. In this connection, we also rely on the order of Coordinate Bench of ITAT Kolkata in the case of Animesh Sadhu Vs. ACIT 2014 (11) TMI 1170 - ITAT KOLKATA . Hence we delete the addition made by the lower authorities. Hence, this ground of appeal of the assessee is allowed.

Summary

Issues Involved:

1. Disallowance of ?6,00,000/- salary payment to a relative of the director under section 40A(2)(b) of the Act.
2. Partial disallowance of ?1,35,000/- as sales commission expense.
3. Ad hoc disallowance of ?3,19,797/- (25% of total traveling expenses).

Detailed Analysis:

1. Disallowance of ?6,00,000/- salary payment to a relative of the director under section 40A(2)(b) of the Act:

The assessee, a private limited company engaged in trading water tanks, paid ?11,00,000/- as salary to Mr. Shivendra Singh Chawla, a relative of a director, which was deemed excessive by ?6,00,000/- compared to other directors' salaries of ?5,00,000/- each. The AO disallowed this amount under section 40A(2)(b), and the CIT(A) confirmed this disallowance, noting that Mr. Chawla was also employed elsewhere and involved in other businesses, thus not justifying a higher salary.

The Tribunal, however, found that the AO did not compare the salary with the market rate but only with other directors' salaries. Given Mr. Chawla's extensive qualifications and experience, and the fact that both the assessee and Mr. Chawla were taxed at the maximum marginal rate, indicating no tax evasion, the Tribunal ruled in favor of the assessee. The Tribunal referenced the Gujarat High Court's decision in PCIT Vs. Gujarat Gas Financial Services Ltd., which supports no disallowance if both parties are taxed at the maximum rate. Consequently, the Tribunal directed the AO to delete the ?6,00,000/- addition.

2. Partial disallowance of ?1,35,000/- as sales commission expense:

The assessee claimed sales commission expenses of ?12,33,454/-, but the AO disallowed 50% due to lack of documentary evidence. The CIT(A) partially upheld the disallowance, confirming ?1,35,000/- as a provision not supported by actual services rendered.

The Tribunal found that the provision for ?1,35,000/- was created in the preceding year and settled at ?1,40,000/- in the current year, with only the excess ?5,000/- claimed in the current year. The Tribunal concluded that the CIT(A) misunderstood the facts and directed the AO to delete the ?1,35,000/- disallowance.

3. Ad hoc disallowance of ?3,19,797/- (25% of total traveling expenses):

The assessee incurred ?12,79,189/- in traveling expenses, partly in cash. The AO disallowed 25% due to lack of third-party evidence and supporting internal vouchers, which the CIT(A) confirmed.

The Tribunal noted that the expenses were reasonable given the nature of the business and the turnover. The accounts were audited, and no defects were pointed out. The Tribunal cited the ITAT Kolkata's decision in Animesh Sadhu Vs. ACIT, which held that estimated disallowance without specific unverifiable expenses is unsustainable. The Tribunal thus deleted the ?3,19,797/- disallowance.

Conclusion:

The Tribunal allowed the appeal, directing the deletion of the disallowances of ?6,00,000/- for salary, ?1,35,000/- for sales commission, and ?3,19,797/- for traveling expenses.