2019 (11) TMI 502 - AT - Income Tax

Addition u/s 40A(2)(b) - disallowance of milk transportation charges paid to specified persons - HELD THAT - The provisions of section 40A(2)(a) of the Act are attracted where a person makes payment to the related parties as defined in section 40A(2)(b) at a price which is higher than the market price. In this regard, the Revenue authorities have to come to a finding after the onus is discharged by the assessee to establish that it has not paid any price higher than the market price to the related parties. AO in the present case while working the disallowance had considered total transactions of assessee company for transportation of milk, whereas the same should be restricted only to the transaction of milk through the directors. In this regard, the CIT(A) has re-worked the disallowance in the hands of assessee. We find merit in the working of CIT(A) to this extent. However, while working out the cost of milk transportation per litre, CIT(A) by an error has adopted the figures after taking the ratio of milk transported in litres per rupee, in fact the ratio to be applied is rupees/per litres transported. The assessee has filed the tabulation in this regard and the payment to related parties works out to 62 paise per litre as against 69 paise per litre paid to unrelated parties. In such circumstances, there is no merit in making any disallowance under section 40A(2)(b). For this limited purpose, the Assessing Officer is directed to verify the working of assessee and delete the addition made in the hands of assessee. Appeal of assessee is allowed.

Summary

Issues Involved:
Disallowance of milk transportation charges under section 40A(2)(b) of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Milk Transportation Charges:
The issue in this case pertains to the disallowance of milk transportation charges paid to persons covered under section 40A(2)(b) of the Income-tax Act, 1961. The Assessing Officer noted that a substantial amount was paid to directors and family members for transportation charges without proper supporting evidence. The Assessing Officer raised concerns regarding the genuineness of the payments and the lack of proper documentation. It was observed that no TDS was deducted on advance payments made to transport contractors. The Assessing Officer calculated an excess payment based on comparisons with similar businesses, leading to a disallowance under section 40A(2)(b) of the Act.

2. CIT(A) Decision:
The CIT(A) analyzed the case and compared the transportation expenses incurred by the assessee with those of another dairy farm. The CIT(A) observed discrepancies in the rates paid to directors and family members compared to other transporters. After detailed scrutiny, the CIT(A) calculated the excess payment made to related parties and restricted the disallowance to transactions through directors and family members only. The CIT(A) corrected the error in the calculation method and directed the Assessing Officer to verify the payment details and delete the addition made in the hands of the assessee.

3. ITAT Decision:
Upon hearing both parties, the ITAT focused on the application of section 40A(2)(a) of the Act concerning payments to related parties at prices higher than market rates. The ITAT acknowledged the CIT(A)'s reworking of the disallowance to consider only transactions through directors. However, the ITAT identified an error in the calculation method used by the CIT(A) and directed the Assessing Officer to verify the payment details accurately. The ITAT concluded that there was no merit in making any disallowance under section 40A(2)(b) of the Act based on the corrected calculations.

In conclusion, the ITAT allowed the appeal of the assessee, directing the Assessing Officer to verify the payment details and delete the addition made under section 40A(2)(b) of the Act.