2021 (2) TMI 730 - AT - Income Tax

Addition u/s 40A(2)(B) - selecting the case for limited scrutiny is the payment to related person mismatch - HELD THAT - In the Annexure 3CD to Form 3CB of the Act read with section 44AD of the Act one of the point to be examined by the auditor is with regard to the payment made to related parties and in case excessive amount is paid the same needs to be reported. Post audit u/s 44AB of the Act when the assessee files the return there is a specific column in the Income Tax Return form, where the assessee has to report any such disallowance u/s 40A(2)(b) of the Act. Before us neither the audit report is placed nor copy of Income Tax Return form is produced. Even in the assessment order the Ld. A.O has not made any observation in this regard. There are no specific guidelines before us which could show that under limited scrutiny what needs to be examined by Ld. A.O for the reasons payment to related persons mismatch . In absence of these details which have not been provided by either the parties, the legal ground raised by the assessee deserves to be dismissed. Salary to wives of the partners of the firm - Disallowance of expenses paid to the relatives can be made by the Ld. A.O if he is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market of the goods, services or facilities for which the payment is made or the legitimate needs of the business or professional of the assessee or the benefit derived by accruing there from are considered to be excessive or unreasonable. A.O failed to bring on record the fair market value of the alleged services to be provided by the employees and also failed to show the basis of computing ₹ 1,00,000/- as the legitimate salary for the work to be performed. Ld. A.O has not made any efforts in this regard and without making any enquiry about the fair market value of the services or the experience of the employees or the comparison of similar type of salary paid for the work performed by other employees of the concern has just resorted to make disallowance which in our view is uncalled for. Ld. Departmental Representative could not show that whether the alleged payments were not paid through account payee cheque or they were not disclosed in the regular return of income of the payee. We find no justification in the order of Ld. A.O for making the adhoc disallowance - delete the disallowance made by the Ld. A.O u/s 40A(2)(b) - Decided in favour of assessee.

Summary

Issues involved:
Jurisdiction of Assessing Officer in limited scrutiny case; Disallowance of excessive salary paid to relatives under section 40A(2)(b) of the Income Tax Act.

Jurisdiction of Assessing Officer:
The appeal pertains to the Assessment Year 2015-16 and challenges the orders of the Ld. Commissioner of Income Tax-I, Indore, which were based on the assessment completed by the ACIT-1(1), Indore under section 143(3) of the Income Tax Act 1961. The appellant raised concerns regarding the jurisdiction of the Assessing Officer (AO) in a limited scrutiny case. The case was selected for limited scrutiny through the Computer Aided Scrutiny Selection System (CASS) based on reasons including payment to relative persons mismatch. The AO made an addition of ?6,80,000 as excessive salary paid to relatives under section 40A(2)(b) of the Act. The appellant contended that the AO exceeded the limited scrutiny scope by making this addition without proper authorization. However, the Commissioner upheld the AO's actions. The Tribunal observed that the AO did not provide specific guidelines on what needed to be examined under limited scrutiny for the reason of "payment to related persons mismatch." As a result, the legal ground challenging the AO's jurisdiction was dismissed.

Disallowance of Excessive Salary:
The AO disallowed ?6,80,000 as excessive salary paid to two individuals who were wives of the partners of the firm. The AO restricted the salary claim to ?1,00,000 each, citing legitimate business needs. The Tribunal noted that the AO's disallowance was adhoc, as both individuals were educated and capable of performing their duties. The disallowance was made under section 40A(2)(a) of the Act, which allows for disallowance if the expenditure is considered excessive or unreasonable. However, the AO failed to establish the fair market value of the services provided or the basis for determining the legitimate salary. The AO did not investigate the fair market value, experience of the employees, or compare salaries with similar positions in other companies. The Tribunal found the AO's disallowance unjustified and lacking proper inquiry. The Tribunal set aside the Commissioner's decision and deleted the disallowance of ?6,80,000 under section 40A(2)(b) of the Act.

In conclusion, the Tribunal partly allowed the appellant's appeal, ruling in favor of the appellant on the issue of disallowance of excessive salary paid to relatives. The Tribunal found that the AO's actions were unjustified and lacked proper investigation, leading to the deletion of the disallowance.