2015 (4) TMI 268 - HC - Income Tax

Disallowance under Section 40A(2)(b) - commission up to 5% aggregating to ₹ 16 lacs to his son, daughter and daughters-in-law - Held that - Assessing Officer s finding that the alleged commission was not an expenditure incurred by the appellant wholly and exclusively for the purposes of the business as per the provisions of Section 37 of the Act cannot be faulted. It is an inference which can reasonably and legitimately be drawn. The Assessing Officer accordingly justifiably disallowed the expenditure of ₹ 16 lacs and added the same to the assessed income. He also initiated penalty proceedings under Section 271(1)(c) of the Act.In the present case, it has been held that the appellant had not established that the payments by him to the said persons were by way of commission. The appellant s case in this regard has been disbelieved. As we mentioned earlier, this was purely an issue of fact and raised no question of law. In the circumstances, the fact that the recipients of the alleged commission in the present case had paid tax at the highest level is irrelevant to the question whether the appellant was entitled to deduct the amounts paid to them as commission. - Decided in favour of the Revenue. Disallowance on account of rent paid - appellant claimed a deduction of a sum of ₹ 10,50,806/- as rent paid to three persons who also fall within the ambit of Section 40A(2)(b) of the Act - Held that - C.I.T. (Appeals) upheld the disallowance of deduction for the same reasons, namely, that there was no evidence to support/justify the deduction. The view that the payment of TDS on the said amount is irrelevant is correct. he Tribunal observed that the appellant had paid ₹ 14,40,000/-towards rent which was approximately 370% more than the rent paid in the preceding year namely ₹ 3,89,194/-. This is purely a question of appreciation of facts which in the facts of this case cannot be held to be perverse. No question of law arises in respect thereof. - Decided against assessee.

Summary

Issues:
1. Disallowance of commission paid under Section 40A(2)(b)
2. Disallowance of rent paid under Section 40A(2)(b)

Issue 1: Disallowance of Commission Paid under Section 40A(2)(b)

The appellant appealed against the Income Tax Appellate Tribunal's orders regarding the disallowance of commission paid to close relatives under Section 40A(2)(b) for Assessment Year 2007-08. The Tribunal dismissed the appeal and a subsequent miscellaneous application due to revised grounds of appeal not being considered. The appellant raised questions of law regarding the disallowance of commission and rent paid. The Assessing Officer found the commission payment not wholly for business purposes, justifying disallowance. The CIT (Appeals) and Tribunal upheld this decision, citing lack of evidence for services rendered and business justification. The Tribunal noted the commission as a tax-saving device and lack of credible evidence for the payments. The Tribunal's findings were deemed reasonable, and the appellant's tax bracket was irrelevant in determining the deduction eligibility.

Issue 2: Disallowance of Rent Paid under Section 40A(2)(b)

The appellant claimed a deduction for rent paid to relatives under Section 40A(2)(b), which was disallowed by the Assessing Officer due to lack of justification and supporting evidence. The CIT (Appeals) and Tribunal upheld this disallowance, emphasizing the absence of evidence and the significant increase in rent without proper explanation. The Tribunal found the rent increase substantial and unsupported by necessary facts for apportionment. The appellant's failure to establish the reasons for the rent increase led to the dismissal of the appeal. The disallowance of rent deduction was considered reasonable and not based on perverse reasoning. No legal question arose from this issue, and the appeal was ultimately dismissed.

In conclusion, the High Court upheld the disallowance of both the commission and rent payments under Section 40A(2)(b) for lack of business justification, supporting evidence, and proper explanation for the significant increase in payments. The judgments of the Assessing Officer, CIT (Appeals), and Tribunal were considered reasonable and not legally flawed, resulting in the dismissal of the appeal.