2019 (10) TMI 1162 - AT - Income Tax

Addition u/s 40A(2)(b) - related party transactions - services rendered towards transportation and handling of cargo - HELD THAT - Transaction is being between the related parties, hence, section 40A(2)(b) squarely applies. In the assessment order, the AO has observed that insofar as payments made by the assessee towards related party on hourly basis and to other parties are either tonnage basis or trip basis, therefore, he disallowed 1/3 payments made by the assessee as excessive and accordingly added the disallowed amount of ₹ 81,37,032/- to the total income of the assessee, which was restricted to 15% by the ld. CIT(A) and directed the Assessing Officer to adopt ₹ 36,98,651/- as expenditure incurred by the assessee. We find that the AO ought to have been quantified what is the excess payment made by the assessee to the related party instead of simply making adhoc disallowance. Even ld. CIT(A) also simply restricted the disallowance to the extent of 15%. Under the above facts and circumstances of the case, we are of the opinion that it would be reasonable to restrict the addition to 10% from 15% made by the ld. CIT(A). Appeal filed by the assessee is partly allowed.

Summary

Issues:
Assessment under section 143(3) - Application of section 40A(2)(b) - Adhoc disallowance - Quantum of disallowance - Appeal against CIT(A) order - Reasonableness of disallowance percentage.

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2013-14. The Assessing Officer found that the assessee had paid a significant amount to a related party for services rendered, leading to the application of section 40A(2)(b) of the Income Tax Act. The Assessing Officer disallowed 1/3rd of the total expenditure as excessive, amounting to ?81,37,032. On appeal, the CIT(A) reduced the disallowance to 15%, totaling ?36,98,651. The Tribunal noted that the Assessing Officer should have quantified the excess payment instead of making an adhoc disallowance. The Tribunal considered a further reduction and decided to restrict the addition to 10% of the disallowed amount, resulting in a final expenditure of ?36,98,651. The appeal by the assessee was partly allowed based on these considerations.

This case involved the interpretation and application of section 40A(2)(b) concerning payments made to related parties for services rendered. The Assessing Officer's adhoc disallowance of a portion of the expenditure was challenged, leading to a reduction by the CIT(A) and further adjustment by the Tribunal. The Tribunal emphasized the importance of quantifying excess payments and deemed a 10% disallowance more appropriate than the 15% determined by the CIT(A). The decision highlighted the need for a reasonable and justified approach in determining disallowances under the relevant tax provisions.

In conclusion, the Tribunal's decision in this case addressed the issues of adhoc disallowance under section 40A(2)(b) and the quantification of excess payments to related parties. The Tribunal's adjustment of the disallowance percentage from 15% to 10% showcased a balanced and reasonable approach to determining allowable expenditures. The judgment underscored the significance of a thorough assessment and quantification of excess payments in such cases to ensure fair and accurate tax treatment.