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2014 (1) TMI 760 - HC - Income TaxDisallowance u/s 40A(2)(b) - unreasonable and excessive expenditure - Held that - The genuineness of the expenditure has not been doubted by the A.O. - The only reason for the impugned addition was that the payments was excessive in nature - No such comparable instance was quoted by the AO to prove that the payment was excessive as compared to market rate - There was no motive to divert the income because the assessee is entitled for the claim of 100% deduction on the income u/s 80IA(4) - The totality of the circumstances demonstrates that there was no justification on the part of the AO to make such an adhoc addition - The Assessing Officer was not justified in adopting disallowance to the extent of 10% payment under Section 40A(2)(b) of the Act solely on the ground that M/s. Pollucon Engineers to whom the payment was made was run by the wife of the Director of the assessee company - Decided against Revenue.
Issues:
1. Common question of law and facts arising in tax appeals for different assessment years. 2. Disallowance of payments made under Section 40A(2)(b) of the IT Act. 3. Justification for disallowance based on relationship between payee and assessee. 4. Admissibility of appeals challenging the deletion of disallowance by CIT(A) and ITAT. Issue 1: Common question of law and facts arising in tax appeals for different assessment years The judgment addresses multiple tax appeals concerning the same assessee but for different assessment years, arising from a common impugned judgment by the ITAT. The appeals were consolidated and decided together due to the commonality of issues across the cases. Issue 2: Disallowance of payments made under Section 40A(2)(b) of the IT Act The core issue in the appeals was the disallowance of payments made under Section 40A(2)(b) of the IT Act. The Assessing Officer disallowed a percentage of payments made to a specified person, M/s. Pollucon Engineers, due to perceived excessive payment without proper justification. The CIT(A) and ITAT subsequently deleted the disallowance, emphasizing the lack of evidence supporting excessive payments and the genuineness of the transactions. Issue 3: Justification for disallowance based on relationship between payee and assessee The Assessing Officer based the disallowance on the relationship between M/s. Pollucon Engineers and the assessee company, highlighting that the former was a sister concern run by the wife of the director of the assessee. However, the judgment emphasized that mere familial relationship was insufficient grounds for disallowance without evidence of excessive payments or lack of business justification. The CIT(A) and ITAT both found the disallowance to be ad hoc and lacking a valid basis. Issue 4: Admissibility of appeals challenging the deletion of disallowance by CIT(A) and ITAT The revenue, dissatisfied with the decisions of the CIT(A) and ITAT in deleting the disallowance, filed the present tax appeals. The revenue argued that the ITAT erred in rejecting the findings of the Assessing Officer and emphasized the alleged excessive payment to M/s. Pollucon Engineers. However, the judgment upheld the decisions of the lower authorities, noting the absence of material supporting excessive payments and the business necessity of the transactions. Ultimately, the appeals were dismissed as no substantial question of law was found to arise. This detailed analysis of the judgment highlights the key legal issues, arguments presented, and the rationale behind the decisions made by the authorities, providing a comprehensive understanding of the case.
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