2013 (8) TMI 15 - HC - Income Tax

Disallowance of interest u/s 40A(2)(b) - Rejection of books of accounts - CIT deleted estimation of additional profit - Tribunal set aside CIT order and upheld addition - Held that - out of the three persons from whom loan taken, two persons cannot be said to be related to the assessee within the meaning of section 40A(2) (b) - It is required to be noted that as such the aforesaid persons are found to be nephews of the assessee and the finding that money was first diverted by the assessee from his business as a gift to the aforesaid three persons and thereafter the same money was given to the assessee at the rate of 16% per annum and on which the assessee claimed benefit under section 40A(2)(b) and the entire series of transactions were illusory, colourable and not genuinely for the purpose of the business - Decided against Assessee. Disallowance of salary payment u/s 40A(2)(b) - ITAT held that the assessee has devised a colourful mechanism to avoid tax liability in the hands of his proprietary business - Held that - although payment might have been made and there might have been agreement in existence, still it would be open to the Assessing Officer to take into consideration various factors which would go to show whether the payment was made as required by the section 37 of the Act or not. It is required to be noted that as such the Assessing Officer after taking into consideration the relevant factors came to the conclusion that the payment was not made wholly or exclusively for the purpose of the business of the assessee and therefore, the Assessing Officer rightly disallowed the aforesaid deduction which has been rightly restored by the ITAT - Decided against assessee.

Issues Involved:
1. Rejection of books of accounts under Section 145 of the Income Tax Act.
2. Addition of Rs.1,07,39,574/- by way of estimation of gross profit.
3. Disallowance of interest payment amounting to Rs.7,46,965/- under Section 40(A)(2)(b).
4. Change of basis of disallowance from Section 40A(2)(b) to Section 36(1)(iii).
5. Disallowance of salary expenditure amounting to Rs.30,48,715/- under Section 40(A)(2)(b).
6. Change of basis of disallowance from Section 40A(2)(b) to Section 37.
7. Procedural fairness and consideration of evidence by the ITAT.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145:
The assessee's books of accounts were rejected by the Assessing Officer (AO) due to discrepancies in stock and lack of explanation from the assessee. The AO, therefore, made an addition of Rs.1,61,39,361/- towards excessive payment of salary and interest to relatives under Section 40(a)(2)(b). The CIT(A) later found the AO's rejection unjustified and deleted the addition. However, the ITAT remanded the matter back to the AO, observing that the explanation provided by the assessee was not considered by the AO initially. The High Court agreed with the ITAT's decision to remand the matter, emphasizing that sufficient opportunity would be given to the assessee to explain the discrepancies.

2. Addition of Rs.1,07,39,574/- by Estimation of Gross Profit:
The ITAT remanded the issue of addition by estimation of gross profit back to the AO. The High Court upheld this remand, noting that the assessee had failed to provide explanations during the initial assessment and only did so before the CIT(A). The remand allows the AO to consider these explanations afresh.

3. Disallowance of Interest Payment (Rs.7,46,965/-) under Section 40(A)(2)(b):
The AO disallowed the interest payment on loans taken from the assessee's relatives, observing that the transactions were illusory and not for business purposes. The CIT(A) deleted this disallowance, but the ITAT restored the AO's order, concluding that the transactions were colorable devices to claim deductions. The High Court agreed with the ITAT, noting that the transactions lacked genuine business purpose and did not meet the requirements of Section 36(1)(iii).

4. Change of Basis of Disallowance from Section 40A(2)(b) to Section 36(1)(iii):
The ITAT examined the interest disallowance under Section 36(1)(iii) instead of Section 40A(2)(b), concluding that the transactions were not genuine borrowings. The High Court supported this approach, emphasizing that the transactions were illusory and not for business purposes.

5. Disallowance of Salary Expenditure (Rs.30,48,715/-) under Section 40(A)(2)(b):
The AO and ITAT found that the salary payments to the assessee's relatives were excessive and not justified by commercial expediency. The High Court upheld this disallowance, agreeing that the substantial increase in salary was not supported by corresponding business growth or contributions from the relatives.

6. Change of Basis of Disallowance from Section 40A(2)(b) to Section 37:
The ITAT considered the salary disallowance under Section 37, determining that the payments were not wholly and exclusively for business purposes. The High Court concurred, noting that the payments were motivated by extraneous considerations rather than commercial necessity.

7. Procedural Fairness and Consideration of Evidence by the ITAT:
The assessee argued that the ITAT's order was perverse due to lack of proper hearing and consideration of evidence. The High Court dismissed these claims, finding that the ITAT had given adequate reasons for its conclusions and had properly evaluated the evidence.

Conclusion:
The High Court dismissed the appeal, finding no substantial question of law. The ITAT's decisions to remand certain issues to the AO and to restore the AO's disallowances were upheld, as they were based on proper evaluation of the facts and applicable legal principles.

← Previous Next →