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2009 (3) TMI 219 - AT - Income TaxDisallowance of staff salary and allied expenses pertaining to sister concern - AO held that the payments made by the assessee-company to M/s M. Bhaskar Kini Co. (P) Ltd. was excessive in terms of laws stated in s. 40A(2)(a) - disallowed the sum out of the total claim - CIT(A) deleted the disallowance made AO. HELD THAT - AO has no case that no such payments were made by the assessee-company to M/s M. Bhaskar Kini Co. (P) Ltd. There is also no case that the services of the employees of M/s M. Bhaskar Kini Co. (P) Ltd. were not utilized by the assessee-company. The legal requirements of claiming the expenditure have been established by the assessee-company. AO has not brought anything on record to show that the payments made by the assessee-company to M/s M. Bhaskar Kini Co. (P) Ltd. were excessive when compared to the remuneration attributable to the services rendered by the employees. AO also has no case that the extent of services utilized by the assessee-company from the employees of M/s M. Bhaskar Kini Co. (P) Ltd. was not necessary to carry on the business of the assessee. Therefore we find that the disallowance was not justified and CIT(A) has rightly deleted the same. This issue is decided against the Revenue. Non-deduction of tax for payment of ship charter hire charges - Royalty u/s 9(1)(vi) - Whether the payment made by the assessee is a royalty and whether it is taxable in India - AO has erred in invoking s. 40(a)(i) to disallow the expenses - - Ejusdem generis - CIT(A) has erred in not confirming the disallowance made by the AO - HELD THAT - The assessing authority has treated. the payments made by the assessee-company under the category of royalty. The expression royalty further means the use of any patent invention model design secret formula or process or trade mark or similar property. The meaning of the word property should be read in the company of the words like patent invention model etc. The principle of interpretation of ejusdem generis applies here. The assessee has not made the payments for the purpose of any such property. Therefore it is very clear that the payments made by the assessee-company were in the nature of simple payments for chartering ships on hire for doing the business outside India. Therefore the payments do not satisfy the test laid down in s. 9. When s. 9 is not satisfied there cannot be a case that income is deemed to accrue or arise in India as a result of hire payments made by the assessee-company to foreign ships. The liability u/s. 195 is cast on the assessee only when the payment is made to a non-resident which is chargeable under the provisions of the IT Act. Here the payments made by the assessee do not fall under s. 9 and the payments do not take the character of any sum chargeable to tax under this Act. Therefore s. 195 docs not come into operation. When s. 195 does not apply to the present case there is no violation of that section and consequently invoking of s. 40 (a)(i) does not arise. Therefore we find that CIT(A) is justified in deleting the disallowance made by the AO. This issue is decided against the Revenue. Claim of expenses made by the assessee for want of proper evidence - AO disallowed u/s. 37- payments made in cash for engaging of labour - AO was of the opinion that the assessee on his own has prepared the vouchers and hence the payments should be disallowed - CIT(A) deleted the same. HELD THAT - The claim of expenses cannot be disallowed only on the ground that the mode of evidence produced by the assessee is not sufficient. The deductibility of the expenditure has to be examined in the light of the facts and circumstances of the case. The AO has made comparison of the expenditure for earlier assessment years. But it is to be seen that in all the cases considered for the earlier assessment years only those payments which were in excess were taken note of. AO has to compare the entire cash payments of those assessment years. The comparison made by the AO is not on a level ground. As a matter of consistency we find that the assessee has claimed similar expenses in the past assessments as well and the AO has allowed such expenses. The quantum of expenditure claimed by the assessee for the impugned assessment year is comparable to the total turnover and income returned by the assessee. Therefore in the facts and circumstances of the case we find that the disallowance is not called for and the CIT(A) has rightly deleted the same.
Issues Involved:
1. Disallowance of staff salary and allied expenses. 2. Disallowance of charter hire payments made to foreign companies. 3. Disallowance of cash payments for engaging labor. Issue-wise Detailed Analysis: 1. Disallowance of Staff Salary and Allied Expenses: The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 8,50,000, which was part of the staff salary and allied expenses claimed by the assessee. The assessee, a company engaged in shipping and related activities, utilized the services of its sister concern's employees, M/s M. Bhaskar Kini & Co. (P) Ltd., and paid for these services. The AO disallowed Rs. 8,50,000 of the total Rs. 24 lakhs claimed, citing s. 40A(2)(a) of the IT Act, 1961, arguing the payments were excessive. The CIT(A) found no justification to invoke s. 40A, as the AO did not establish that the payments were excessive or unreasonable. The Tribunal upheld the CIT(A)'s decision, noting that the payments were necessary for the assessee's business and not excessive compared to the services rendered. 2. Disallowance of Charter Hire Payments Made to Foreign Companies: The Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 1,57,28,744, which the AO treated as royalties taxable under s. 9(1)(vi) of the IT Act, 1961, and subject to TDS under s. 195. The AO disallowed the amount under s. 40(a)(i) for non-deduction of tax at source. The CIT(A) disagreed, stating that the payments were not royalties but simple hire charges for ships, which do not fall under the definition of royalties in s. 9(1). The Tribunal concurred, noting that the payments were for chartering ships and did not involve any transfer of rights or intellectual property. Consequently, s. 195 did not apply, and the disallowance under s. 40(a)(i) was unjustified. 3. Disallowance of Cash Payments for Engaging Labor: The Revenue argued that the CIT(A) failed to consider the AO's findings and the lack of proper evidence for the expenses claimed by the assessee. The AO disallowed Rs. 28,01,698 under s. 37, citing insufficient evidence for cash payments made to labor leaders. The CIT(A) found the disallowance unwarranted and directed the AO to restrict disallowance under s. 40A(3). The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were inherent to the assessee's business operations in ports and that self-made vouchers were acceptable given the circumstances. The Tribunal noted that the assessee had claimed similar expenses in past assessments, which were allowed, and the quantum of expenses was consistent with the assessee's turnover and income. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all three issues. The disallowances made by the AO were found to be unjustified, and the expenses claimed by the assessee were necessary and reasonable for its business operations.
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