2012 (6) TMI 257 - HC - Income Tax

Disallowance of expenses - Assessing Officer was of the opinion that the agreement did not contain any clause as per which the aircraft was to be utilized by the assessee for its guests and premier clients to avail of these facilities. Therefore, there was no commercial expediency in the said agreement. He was also of the opinion that the taxi operator was the subsidiary of the assessee and, therefore, this agreement was merely a device to make payment to the said taxi operator to reduce its tax liability Held that - disallowance under section 40A(2) could only be made if the revenue had discharged its burden of proving that the expenditure so incurred was excessive or unreasonable having regard to the fair market value of the goods, services or the facilities for which the payment was made. Officer to show that similar facilities were available to the assessee at a lower price or that the assessee had made excessive payments. Consequently, in the absence of the such findings the Tribunal concluded that the provision of section 40A(2) could not be invoked for disallowing the said expenditure. under the same agreement the payments made earlier have been held to be genuine accepting the genuineness of the agreement and treating the same as incurred in connection of the business. provisions of Section 40A(2)(b) of the Income tax Act are not attracted in the present case. appeal dismissed

Summary

Issues:
Disallowance of expenditure under Section 40A(2)(b) of the Income Tax Act for payment made to an air taxi operator for flying hours utilization.

Analysis:
The case involves the appellant, engaged in the business of running five-star hotels, specifically focusing on the Ambassador Hotel in New Delhi. The issue pertains to the disallowance of expenditure amounting to Rs. 91,70,962/- incurred by the appellant for payments to an air taxi operator, now known as Taj Airlines Ltd., during the Assessment Year 2006-2007. The Assessing Officer disallowed the expenditure, citing lack of commercial expediency in the agreement between the appellant and the air taxi operator, and alleging the agreement was a device to reduce tax liability. The appellant contended that the payment was made under a legitimate agreement for utilizing aircraft hours at discounted charges for guests and premier clients. The CIT(A) and ITAT both ruled in favor of the appellant, holding that the expenditure was incurred for business purposes and not liable under Section 40A(2)(b) of the Income Tax Act.

In a similar scenario for the Assessment Year 2001-2002, the Assessing Officer had also disallowed similar payments made by the appellant to the air taxi operator. However, the ITAT set aside the order, emphasizing that the expenditure was in the interest of the appellant's business, negotiated at a concessional price, and not excessive or unreasonable. The Revenue's appeal against the ITAT decision was dismissed by the High Court, affirming that the expenditure was incurred wholly and exclusively for business purposes, and the provisions of Section 40A(2) were not applicable.

Despite the Revenue's attempt to challenge the High Court's decision through an SLP, subsequent events, including corrective orders passed by the Assessing Officer and the CIT(A) setting aside such orders, led to the dismissal of the SLP. The High Court reiterated the genuineness of the agreement, the business purpose behind the expenditure, and the inapplicability of Section 40A(2)(b) in the case. Consequently, the High Court deemed the appeal as frivolous and a misuse of the legal process, dismissing it with costs imposed on the appellant.