2015 (6) TMI 128 - AT - Income Tax

Disallowance u/s 40A(2) - 25 per cent of the total increase in the salary of the managing director - Held that - A plain reading of the provisions of sec. 40A(2) of the Act, suggest that for making the disallowance under the provisions, the Assessing Officer is required to form an opinion that the claimed expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate need of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. In the present case before us, when the Assessing Officer had asked for explanation of the assessee to justify the payment in dispute in view of the provisions under sec. 40A(2) of the Act, it was duty of the assessee to cooperate the Assessing Officer to arrive at a just conclusion by furnishing the required explanation to the Assessing Officer. Even before the Learned CIT(Appeals), it does not appear that the assessee had furnished the required explanation to justify the payment. In such a situation, the only option left with Assessing Officer was to estimate the disallowance taking note of some comparable instances. No such effort has been made by the Assessing Officer. Thus set aside the matter to the file of the Assessing Officer to decide the issue afresh - Decided in favour of assesse for statistical purposes. Disallowance of management support expenses of - as per CIT(A) such expenses falls within the definition of fee for technical services and accordingly tax is required to be deducted on the same - application for allowing the additional evidence - Held that - As relying on CIT v/s TEXT HUNDRED INDIA PVT. LTD. 2013 (6) TMI 72 - DELHI HIGH COURT wherein the Hon ble High Court has been pleased to approve the order of the Tribunal to allow such documents to be produced for substantial cause. In the present case before us, it has not been seriously disputed that the additional evidence for which the assessee seeking permission for consideration are relevant to decide the issue raised in Grounds No. 2 and 3 to ascertain the nature of the services rendered for which payment was made and there is no reason to disbelieve the explanation of the assessee that these documents could not be filed before the authorities below due to technical problem i.e. non retrieval of these additional evidence in the shape of emails in the form of correspondences in furtherance to the agreement between the parties, showing nature of the services rendered to the assessee by the other parts of the agreement. Thus set aside the matter to the file of the AO to decide the issue afresh as per law, after affording opportunity of being heard to the assessee and considering the documents available on record - Decided in favour of assesse for statistical purposes. Computing the book profit under section 115JB - whether the claim of additional depreciation arisen as a result of change in the method of depreciation from Straight Line method to Written Down Value, is not justified - Held that - As relying on case CIT vs. Hindustan Pipe Udyog Ltd. (2013 (12) TMI 866 - ALLAHABAD HIGH COURT) answered the issue as to whether it is opened to the Assessing Officer to make adjustment to the book profits beyond what is authorized by the definition given in Explanation to section 115J of the Income-tax Act, 1961, if the accounts are prepared and certified to be in accordance with Parts-II and III of Schedule-VI to the Companies Act, 1956 in favour of the assessee as discussing the decision of Kinetic Motor Co. Ltd. (2003 (1) TMI 47 - BOMBAY High Court ) and followed the decision of Hon ble Supreme Court in the case of Apollo Tyre Ltd. (2002 (5) TMI 5 - SUPREME Court) holding that while computing the income under sec. 115J of the Act, the Assessing Officer has only power to examine whether the books of account were certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. Assessing Officer thereafter has limited powers of making increases and reductions as provided for in the Explanation to the said section and does not have the jurisdiction to go beyond the net profits shown in the profit and loss account, except to the extent provided in the Explanation to sec. 115J of the Income-tax Act, 1961. It is not in dispute that under the Companies Act, 1956, both straight line method and written down method are recognized, therefore, once the amount of depreciation actually debited to the profit and loss account is certified by the auditors, then, the issue has to be answered in favour of the assessee. Thus set aside the matter to the file of the Assessing Officer to decide the issue afresh - Decided in favour of assesse for statistical purposes

Summary

Issues Involved:
1. Disallowance of 25% of the total increase in the salary of the managing director under section 40A(2).
2. Disallowance of management support expenses of Rs. 43,32,025/- as "fee for technical services" requiring tax deduction at source.
3. Justification of management support expenses of Rs. 43,32,025/- as wholly and exclusively for business purposes.
4. Computation of book profit under section 115JB concerning additional depreciation of Rs. 12,84,985/- due to a change in the method of depreciation.

Issue-wise Detailed Analysis:

1. Disallowance of 25% of the Total Increase in the Salary of the Managing Director under Section 40A(2):
The assessee questioned the disallowance of 25% of the increase in the salary of the managing director, arguing that the Assessing Officer (AO) did not provide comparable instances to justify that the salary and perks were excessive. The AO disallowed 50% of the increase in salary due to lack of justification from the assessee. The CIT(A) upheld this disallowance. The Tribunal noted that the AO must form an opinion that the claimed expenditure is excessive or unreasonable by considering fair market value, business needs, or benefits derived. The Tribunal found that the AO did not attempt to find comparable instances and set aside the matter to the AO for fresh consideration, allowing the ground for statistical purposes.

2. Disallowance of Management Support Expenses of Rs. 43,32,025/- as "Fee for Technical Services" Requiring Tax Deduction at Source:
The assessee argued that the expenses were for services rendered under a Management Support Agreement with Air Liquide Asia Pvt. Ltd., Singapore (ALAP), and did not constitute "fee for technical services." The Tribunal considered additional evidence in the form of emails, which the assessee could not produce earlier due to technical difficulties. The Tribunal referred to the Delhi High Court's decision in CIT Vs. Text Hundred India P. Ltd., which allowed additional evidence under similar circumstances. The Tribunal set aside the matter to the AO for fresh consideration, allowing the ground for statistical purposes.

3. Justification of Management Support Expenses of Rs. 43,32,025/- as Wholly and Exclusively for Business Purposes:
The Tribunal considered the same additional evidence for this issue as in the previous ground. The Tribunal found that the additional evidence was relevant to decide the nature of services rendered and the justification of the expenses. The Tribunal set aside the matter to the AO for fresh consideration, allowing the ground for statistical purposes.

4. Computation of Book Profit under Section 115JB Concerning Additional Depreciation of Rs. 12,84,985/- Due to a Change in the Method of Depreciation:
The AO disallowed the additional depreciation claimed due to a change from the Straight Line Method to the Written Down Value method, based on the statutory auditor's observations. The Tribunal referred to various High Court decisions, including Apollo Tyres vs. CIT and CIT vs. Hindustan Pipe Udyog Ltd., which held that the AO could not make adjustments to book profits beyond those authorized by the definition in Explanation to section 115J. The Tribunal noted that the change in the method of depreciation is allowed under accounting standards and set aside the matter to the AO for fresh consideration, following the favorable High Court decisions. The ground was allowed for statistical purposes.

Conclusion:
The appeal was allowed for statistical purposes, with all issues set aside to the AO for fresh consideration after affording an opportunity of being heard to the assessee. The Tribunal emphasized the importance of proper justification and evidence in making disallowances and adjustments. The order was pronounced in the open court on 29th May, 2015.