2019 (3) TMI 1166 - HC - Income Tax

Disallowance u/s 40(A) - related party transaction - sum paid to its sister concern as advisory fees - there are no documentary evidence produced when in the nature of trade such documentary evidence is not possible to be maintained as all institutions are conveyed by telephonic messages - Finding of facts - perversity - substantial questions of law - HELD THAT - It cannot be contended that merely because there was an Agreement between the Assessee Company and the related party or the partnership firm, the Research and Advisory fees made by the Company to the partnership firm, in which one of the Directors Mr.Amarnath had a substantial interest, ought to be allowed wholly or partly as a business expenditure. The mere fact that the same person, Mr.M.Amarnath who had substantial interest in the partnership firm, was the person to whom Research and Advisory fees was paid by the Assessee Company was also the Director in the Assessee Company itself and could have rendered such advisory services to the Assessee Company in the best business interest of Assessee Company even pro bono in which he himself was the Director. Therefore, naturally a doubt could arise in the minds of the Assessing Authority about the genuineness of the payment made to the partnership firm, a related party in which the same person had substantial interest. Tribunal on the basis of materials available before it, cannot be said to have committed any perversity in making such disallowance even though resulting in the reversal of the order passed by the First Appellate Authority viz., CIT (Appeals). The Tribunal being the second and higher tier of the Appellate Forums viz., higher than the CIT (Appeal), naturally has the same and wider powers of the lower Appellate Authority and therefore reversal by the final fact find body ie., the Tribunal in all such cases need not be and cannot be declared to be perverse. The scope of Section 260-A of the Act is limited and only the substantial questions of law can be entertained and answered by the High Court u/s 260-A of the Act - DECIDED against the Assessee and in favour of the Revenue.

Summary

Issues:
1. Disallowance of advisory fees paid to sister concern under Section 40A(2)(b)(v)
2. Competency of recipient of advisory fees
3. Assessment of the right person for disallowance
4. Genuineness of transaction for disallowance

Analysis:

Issue 1: Disallowance of advisory fees paid to sister concern under Section 40A(2)(b)(v)
The case involved the disallowance of ?9 lakhs paid by the Assessee Company to its sister concern as advisory fees. The Assessing Officer disallowed the amount under Section 37, stating it was not made for the purpose of business and was paid to a person covered under Section 40A(2)(b)(v). The Commissioner of Income Tax (Appeals) disagreed, highlighting the sister concern's competence and experience, and deleted the addition. However, the High Court held that the lack of evidence to establish services rendered by the sister concern was crucial. The Court emphasized that oral provision of services without proper documentation was insufficient to support the claim. Ultimately, the Court set aside the Commissioner's order and restored that of the Assessing Officer, emphasizing the importance of assessing the right person.

Issue 2: Competency of recipient of advisory fees
The Court considered the competence of the payee irrelevant in establishing the actual extent of services rendered. Despite the sister concern's experience, the lack of evidence to prove the services provided was a significant factor in the decision. The Court emphasized that self-serving statements about orally provided services were insufficient without concrete evidence. The payment's allowability was not based on the payee's tax compliance but on the lack of substantiation regarding the services rendered.

Issue 3: Assessment of the right person for disallowance
Referring to the duty of the Assessing Officer to assess the right person, the Court emphasized the importance of correctly attributing the disallowance. In this case, the Court set aside the Commissioner's order and reinstated that of the Assessing Officer, highlighting the need to establish the genuineness of the transaction and the services provided by the sister concern.

Issue 4: Genuineness of transaction for disallowance
The Court analyzed the nature of the business, emphasizing the competitive stock broking industry's need for advisors and sub-brokers. While acknowledging the sister concern's expertise, the Court stressed the importance of maintaining records to substantiate the payments made. The lack of proper documentation and the involvement of a related party raised doubts about the genuineness of the transaction, leading to the disallowance under Section 40A(2)(b)(v).

In conclusion, the High Court dismissed the Assessee's appeal, stating that no substantial questions of law arose. The Court upheld the Tribunal's decision to disallow the advisory fees paid to the sister concern, emphasizing the need for proper documentation and substantiation of services rendered in such transactions.