2022 (11) TMI 1204 - AT - Income Tax

Addition u/s 40A - addition on account of payment of management fee paid to M/s ATS Infrastructure Ltd - HELD THAT - CBDT in its Circular No.6P dated 06.07.1968 clarified on the issue stating that the provisions of Section 40A(2) are meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bonafide cases. The assessee company had filed all the requisite documents before A.O. as called for, but, however, the A.O. without considering the fact that there is no loss to the revenue since assessee company as well as ATS are not claiming any exemption, disallowed the impugned expenditure and added back the same to the returned loss of assessee company in an arbitrary manner without considering the judicial precedence on this issue as well as the Circular of CBDT No.6P Dated 06.07.1968. A.O. flouted the CBDT Circular as well as judicial precedence on the matter in issue. We may note that in the instant case the A.O. judged the merits or otherwise of a commercial transaction by sitting in the chair of assessee which is not sustainable under law as per Judgment of Hon ble Delhi High Court in the case of Pr. CIT vs., M/s. Second Leasing Pvt. Ltd. 2017 (11) TMI 269 - DELHI HIGH COURT We find that the A.O. failed to bring any cogent material on record to suggest that the entire expense is excessive without bringing any comparable that the expenditure claimed by the assessee company is much higher than that of prevailing market rate. We, therefore, find no force in the arguments of Ld. D.R. on this issue. D.R. also did not brought anything on record to sustain the addition made by the A.O. In this view of the matter and the settled position of law on this issue by the Hon ble Supreme Court in the case of S.A. Builders Limited 2006 (12) TMI 82 - SUPREME COURT and the Judgment of Hon ble Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. 1954 (10) TMI 12 - SUPREME COURT relied upon by the CIT(A), we find no reason to interfere with the order of the Ld. CIT(A) in deleting the disallowance made by the A.O.- Thus, we dismiss the ground of Revenue.

Summary

Issues Involved:
1. Disallowance of management fees under Section 40A(2)(b) of the I.T. Act, 1961 for A.Y. 2013-14.
2. Disallowance of management fees under Section 40A(2)(b) of the I.T. Act, 1961 for A.Y. 2014-15.

Detailed Analysis:

1. Disallowance of Management Fees for A.Y. 2013-14:
The assessee company, engaged in the development of group housing projects, filed its return declaring a loss of Rs. 3,12,21,967/-. During scrutiny, the A.O. noted payments of Rs. 3,37,08,000/- to ATS Infrastructure Limited for management fees and questioned its reasonableness under Section 40A(2)(b). Despite the assessee providing extensive documentation, the A.O. disallowed the expense, converting the declared loss into a positive income.

The CIT(A) deleted the disallowance, observing that the A.O. had not appreciated the services provided by ATS and had not brought any evidence to justify the disallowance. The CIT(A) emphasized that the assessee required professional services for executing large housing projects and provided sufficient documentation to justify the payments. The CIT(A) also noted that both the assessee and ATS were subject to the same tax rate, resulting in no revenue loss.

The Tribunal upheld the CIT(A)'s decision, agreeing that the A.O. had acted arbitrarily and without considering the judicial precedents and CBDT Circular No. 6P dated 06.07.1968, which advises against causing hardship in bona fide cases. The Tribunal emphasized that the A.O. failed to provide any comparable evidence to suggest the expenses were excessive and noted that the A.O. improperly judged the commercial transaction from the revenue's perspective rather than that of a prudent businessman.

2. Disallowance of Management Fees for A.Y. 2014-15:
For the A.Y. 2014-15, the assessee declared a loss of Rs. 1,37,96,162/-. Similar to the previous year, the A.O. disallowed payments of Rs. 6,74,16,000/- to ATS Infrastructure Limited, deeming them excessive and unreasonable under Section 40A(2)(b).

The CIT(A) again deleted the disallowance, and the Tribunal, following its reasoning for A.Y. 2013-14, upheld the CIT(A)'s decision. The Tribunal reiterated that the A.O. had not provided any cogent material or comparable evidence to justify the disallowance and noted that both the assessee and ATS were subject to the same tax rate, resulting in no revenue loss.

Conclusion:
The Tribunal dismissed both appeals of the Revenue, confirming that the disallowances made by the A.O. were unjustified and unsupported by evidence. The Tribunal emphasized the importance of reasonable and fair judgment by the A.O., as outlined in judicial precedents and CBDT Circulars, and highlighted the lack of any material evidence to support the A.O.'s disallowances.