2019 (9) TMI 264 - HC - Income Tax

Addition u/s 40A(2)(b) - excessive expenditure - payment sub-contractors who are the relative of the partners - whether it is a case of applicability of Section 37? - HELD THAT - All the three sub-contractors are relatives of the partners of the assessee firm, and assessing authority recorded categorical finding had rightly disallowed the expenditure claimed in view of provisions of Section 40A(2)(b) of the Act. The argument raised by assessee does not have any force that it is a case under Section 37 and not under Section 40A(2)(a) of the Act. As the expenditure claimed by the assessee while computing the income chargeable under the head profit and gain of business or profession was disallowed, as payment has been made to persons referred in clause (b) of Section 40A(2) of the Act. The said finding has been confirmed by the first appellate authority as well as the Tribunal. Assessee could not deny the factum of relation of the sub-contractors with the partners of the assessee firm, nor would justify the payments so made by the firm to the sub-contractors who did not have the means and the source to make expenses for the work contract, as the balance in the saving accounts was negligible in comparison to the alleged work contract executed by them and the payments so made. As Section 37 of the Act envisages for any expenditure made for the purpose of business to be allowed in computing the income, while Section 40A puts a barrier for expenses of payments not deductible in certain circumstances as enumerated in the said section. In the present case, as it was found by the taxing authorities that payment made by the assessee firm to three sub-contractors out of 21 work contracts given by it was to the relatives of the partners of the firm, as such same was disallowed in view of Clause (b) of Section 40A(2) of the Act. Thus, the authority had rightly disallowed the expenditure so claimed by the assessee - Decided against assessee

Summary

Issues:
- Challenge to order of Income Tax Appellate Tribunal for assessment years 2008-09 and 2009-10 under Section 260 A of the Income Tax Act, 1961
- Disallowance of expenditure under Section 40A(2)(a) for work executed through sub-contractors
- Interpretation of provisions of Section 40A(2)(a) and Section 37 of the Act
- Disallowance of payments made to relatives of partners of the firm
- Dispute over disallowed expenditure claimed by the assessee

Analysis:
1. The appeals filed by the assessee challenged the orders of the Income Tax Appellate Tribunal for the assessment years 2008-09 and 2009-10 under Section 260 A of the Income Tax Act, 1961. The primary issue revolved around the disallowance of expenditure under Section 40A(2)(a) for work executed through sub-contractors, specifically focusing on payments made to certain individuals.

2. The assessing authority disallowed the entire expenditure made to three sub-contractors, who were relatives of the partners of the assessee firm, under Section 40A(2)(a) of the Act. The Tribunal partially allowed the appeal, upholding the disallowance of a portion of the expenditure while allowing the rest. The Tribunal found that the work was not carried out by the specified sub-contractors but by other means, leading to the disallowance of 20% of the claimed expenditure.

3. The dispute centered on the interpretation of the provisions of Section 40A(2)(a) and Section 37 of the Act. The assessing authority, as well as the first appellate authority, confirmed the disallowance of payments made to the relatives of the partners of the firm under Section 40A(2)(b) of the Act. The Tribunal upheld this decision, emphasizing that the payments were rightly disallowed due to the relationship between the sub-contractors and the partners.

4. The Court rejected the argument that the case fell under Section 37 of the Act rather than Section 40A(2)(a), emphasizing that the disallowance was justified under the latter provision. The Court upheld the findings of the taxing authorities, stating that the expenditure claimed by the assessee was rightly disallowed considering the circumstances and the relationships involved.

5. Ultimately, the Court dismissed the appeals, affirming the Tribunal's decision to disallow a portion of the expenditure claimed by the assessee. The judgment favored the Revenue, concluding that the disallowance under Section 40A(2)(a) was appropriate given the facts of the case and the relationship between the sub-contractors and the partners of the firm.