2015 (8) TMI 1088 - AT - Income Tax

Disallowance under section 40A(2)(b) - According to AO salary paid to Shri Amandeep Kumar was excessive as was only 10th pass and not technically qualified - Held that - Both the sons of the assessee are doing same job for the assessee and merely because Shri Amandeep Kumar was not technically qualified would not give occasion for the Assessing Officer to disallow the salary substantially. It is not in dispute that the total receipts of the assessee were substantially higher in assessment year under appeal as compared to the preceding year and it is also not in dispute that the salary/wages paid was comparably lower in percentage as was paid in the earlier years. These facts would clearly support the case of the assessee that both the sons of the assessee have been working whole heartedly for the business of the assessee and through their efforts total receipts of the assessee have increased. Therefore, the Assessing Officer has failed to make out a case of any unreasonable payment to the sons of the assessee. However, considering the fact that Shri Amandeep Kumar was not qualified as against the qualification of other son Shri Daniel, it would be reasonable and appropriate to restrict the salary paid to Shri Amandeep Kumar slightly lesser as was given to Shri Daniel because both of them were doing the same job for the assessee. Thus it would be appropriate to allow salary paid to Shri Amandeep Kumar in a sum of ₹ 1,50,000 as against the payment of salary of ₹ 2,25,000, thereby the addition is restricted to ₹ 75,000 only. - Decided in favour of assessee in part. Disallowance of depreciation on crane - Held that - If the Assessing Officer was having any doubt in his mind regarding the purchase of the crane by the assessee from M/s. Indo Construction, the Assessing Officer should have verified any fact from the seller. The Assessing Officer has failed to note that all the transactions have been done through banking channel and as such, it is unbelievable that the assessee has not purchased the crane in question. The authorities below have also failed to note that after purchase of the crane in question in assessment year under appeal, the total receipts of the assessee from crane business have substantially increased. Therefore, without purchase of the crane in question the receipts of the assessee would not have substantially increased. The Assessing Officer has not doubted the payments by means of account payee cheques and all transactions carried out through banking channels. Therefore, there was no material available with the Assessing Officer to doubt the purchase of crane by the assessee. Thus the assessee has been able to prove that the crane in question was purchased in the year under consideration and was used for the purpose of business. Therefore, the depreciation was allowable. Considering the above discussion, the orders of the authorities below are set aside and the addition is deleted. The Assessing Officer is directed to grant depreciation to the assessee as is claimed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40A(2)(b) of the Income-tax Act, 1961.
2. Disallowance of depreciation on crane.

Issue-wise Detailed Analysis:

1. Disallowance under section 40A(2)(b) of the Income-tax Act, 1961:
The assessee challenged the addition of Rs. 1,53,000 made on account of disallowance under section 40A(2)(b). The facts reveal that the assessee claimed Rs. 11,76,000 under "Salary and wages," including Rs. 2,25,000 paid to his son, Shri Amandeep Kumar, and Rs. 1,59,000 to another son, Shri Daniel. The Assessing Officer (AO) noted that the maximum salary paid to other employees was Rs. 84,000 per annum and considered the salary to Shri Amandeep Kumar, who was only 10th pass and not technically qualified, as excessive, disallowing Rs. 1,53,000.

The assessee contended that the nature of the business required young and energetic persons to operate cranes, which could not be done by every laborer. The assessee argued that hiring external services would be costlier and that his sons were better suited to handle the cranes, making the salary paid to them genuine and reasonable. The Commissioner of Income-tax (Appeals) did not accept this contention, as the salary paid to other employees was lesser and Shri Amandeep Kumar was not technically qualified, leading to the dismissal of this ground.

Upon review, the tribunal found the addition excessive. It was noted that both sons were working for the assessee, and despite Shri Amandeep Kumar not being technically qualified, the total receipts for the year were substantially higher, and the salary/wages paid were comparably lower in percentage than in previous years. The tribunal concluded that the AO failed to prove any unreasonable payment to the sons. However, considering the qualification difference, it was deemed reasonable to restrict the salary paid to Shri Amandeep Kumar to Rs. 1,50,000, reducing the disallowance to Rs. 75,000. Thus, this ground of appeal was partly allowed.

2. Disallowance of depreciation on crane:
The assessee also challenged the addition of Rs. 1,74,000 on account of disallowance of depreciation on a crane. The AO noted the crane, purchased on April 1, 2007, for Rs. 11,60,000 from M/s. Indo Construction, was described as old, used, and unserviceable. The AO disallowed the depreciation due to the lack of documentary evidence proving ownership and business use.

The assessee explained that Rs. 15 lakhs was paid to M/s. Indo Construction, with Rs. 3,40,000 returned after negotiation. The crane, though unserviceable as per the bill, was used for business, evidenced by increased receipts. The Commissioner of Income-tax (Appeals) dismissed this ground, citing contradictions in the appellant's submission regarding the purchase date and cost.

The tribunal reviewed the submissions and found no contradiction in the assessee's explanation. The advance of Rs. 15 lakhs was given in the preceding year, with the purchase and transportation bills dated March 24, 2007, accounted for in the assessment year under appeal. The tribunal noted that all transactions were through banking channels, and the AO failed to verify facts from the seller. The substantial increase in receipts from crane business further supported the purchase claim. The tribunal concluded that the crane was purchased and used for business, allowing the depreciation claim. Consequently, this ground of appeal was allowed.

Conclusion:
The appeal of the assessee was partly allowed, with the disallowance under section 40A(2)(b) restricted to Rs. 75,000 and the disallowance of depreciation on the crane deleted. The order was pronounced in open court on May 25, 2015.