2017 (7) TMI 365 - HC - Income Tax

Disallowing the charter hire charges of Barges as being excessive under Section 40A(ii)(a) - Held that - The records reveal that there is no undue advantage by the Directors by the arrangement and there is no loss to the Revenue as the subject amount has already been taxed in the hands of the HUF. It is further noted that the case of the HUFs has not been reopened and there is no reopening of the assessment of the individual Directors. It is also pointed out that the records reveal that the barges were taken on payment of time charter charges of income earned from the transportation of iron ore on the basis of per tonne rate as prescribed by the Goa Barge Owners Association. Thus the factual findings are that there is no excessive payment or that the arrangement has in any way enriched the respondents which cannot be faulted as they are based on the appreciation of evidence by the learned Tribunal and no perversity has been shown to such findings by the appellant. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was right in deleting the addition made by the Assessing Officer (A.O.), disallowing the charter hire charges of Barges as being excessive under Section 40A(2)(a) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition by the Income Tax Appellate Tribunal:

The primary issue in these appeals was whether the Income Tax Appellate Tribunal was correct in deleting the addition made by the Assessing Officer, who had disallowed the charter hire charges of barges as being excessive under Section 40A(2)(a) of the Income Tax Act. The appellant's counsel argued that the hire charges assessed in the hands of the Hindu Undivided Family (HUF) were actually received by individual members of the HUF, thus warranting the disallowance of these charges as excessive. The counsel contended that the amounts paid were excessive in terms of Section 40A(2)(a) and that the appellate authority erred in deleting the addition made by the Assessing Officer.

On the contrary, the respondent's Senior Counsel argued that the question of whether the amounts were received by the HUF or individual members was irrelevant. He emphasized that the fact-finding authorities had consistently found that the amounts charged were not excessive, as they were based on the rates quoted by the Barge Owners Association. The Senior Counsel further asserted that the findings of the fact-finding authorities were based on material evidence on record, and this Court, in an appeal under Section 260A, could not reappreciate the evidence to arrive at contrary findings. He supported his arguments by referring to judgments in the cases of CIT vs. V. S. Dempo and Co. (P) Ltd., and CIT vs. Indo Saudi Service Travel (P) Ltd.

2. Examination of Section 40A(2)(a) of the Income Tax Act:

The Court examined the provisions of Section 40A(2)(a) of the Income Tax Act, which states that if the Assessing Officer is of the opinion that the expenditure incurred is excessive or unreasonable, having regard to the fair market value of the goods, services, or facilities for which the payment is made, such excessive or unreasonable expenditure shall not be allowed as a deduction. The Court noted that the authorities below had found that the charges claimed were not excessive, as they were based on the rates fixed by the Barge Owners Association. These findings were based on documentary evidence whose authenticity was not disputed by the appellant. The Court concluded that such findings could not be deemed perverse, and the appellant failed to demonstrate any misreading of evidence or oversight of relevant documents by the authorities.

3. Reference to Precedent Cases:

The Court referred to the judgment in the case of V. S. Dempo & Co. (P) Ltd., where it was observed that in business, consistency and quality of supply are crucial, and paying a slightly higher rate to ensure these factors does not necessarily amount to excessive or unreasonable expenditure. The Court also highlighted that the object of Section 40A(2) is to prevent the diversion of income to related persons to reduce tax liability. It was noted that the related persons, as defined in clause (b) of Section 40A(2), did not include subsidiary companies, and the payments made in the present case did not fall under the category of related persons.

4. Tribunal's Findings and Conclusion:

The Tribunal, in its order dated 18.02.2009 for the Assessment Years 2003-2004, found no evidence to show that the payments were excessive or that the arrangement enriched the individual Directors. It was noted that the payments were based on the rates prescribed by the Goa Barge Owners Association, and there was no undue advantage to the Directors or loss to the Revenue, as the amounts were taxed in the hands of the HUF. The Tribunal also considered a Circular dated 06.07.1968 and concluded that there was no reduction in the tax due by the Assessee due to the arrangement. Consequently, the Tribunal allowed the appeal filed by the respondents.

Final Judgment:

The Court found that the factual findings of the Tribunal, which indicated no excessive payment or enrichment of the respondents, were based on the appreciation of evidence and could not be faulted. The appellant failed to show any perversity in these findings. Therefore, the substantial question of law was answered against the Revenue/appellant, and both appeals were rejected.