2017 (10) TMI 536 - AT - Income Tax

Disallowance of interest to beneficiaries - Held that - There is some error in presenting the account, and therefore, the ld.AO instead of strictly going through the entries shown in the books, ought to have verified the contentions of the assessee with other details. In the grounds, the assessee has specifically pointed out as to how the benefit meant for the beneficiaries have been accumulated and not paid to them over a period of time. These undistributed benefits have been treated as capital of the beneficiaries in the trust, which has been used for the purpose of business. There are various other aspects also namely, the ld.DR pointed out that the assessee has been using PAN of a firm, whereas it should have a separate account number. All these aspects have confused the ld.AO. There may be certain short coming in maintaining the accounts or availing PAN but these are not so major which can persuade the AO to disallow the claim. Therefore, taking into consideration other details, we are of the view that the assessee has undistributed benefit of the beneficiaries which has been construed as capital balance, and as per the decision taken by the trust, interest has been provided on such capital balance of the beneficiaries. Therefore, the deduction ought to be allowed to them. - Decided in favour of assessee. Disallowance of the commission payment - assessee failed to demonstrate nature of services rendered by these concerns - addition u/s 40A - Held that - We find that in the Asstt.Year 2007-08, the Tribunal has followed order of the ITAT in the Asstt.Year 2008-09 in deleting the addition as observing Trust has availed the services of these persons, therefore the commission was legitimately paid on the business brought by them. Resultantly ground raised by the assessee is allowed - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest to beneficiaries.
2. Disallowance of commission payments.

Detailed Analysis:

Disallowance of Interest to Beneficiaries:
The assessee, a trust running a proprietorship business named "Modern Tubes," appealed against the disallowance of interest payments to beneficiaries amounting to ?7,09,397/- for AY 2009-10 and ?2,78,158/- for AY 2010-11. The Assessing Officer (AO) disallowed the interest claim, arguing that the balance sheet did not show loans from beneficiaries but only from Vora Finance. The assessee contended that the capital balance of beneficiaries was treated as a loan, and interest was paid on this loan as per a resolution passed in 1992. The AO's disallowance was based on the provisions of section 40(ba) of the Income Tax Act, which the assessee argued was not applicable as it pertains to AOP/BOI and not to the trust.

Upon appeal, the CIT(A) upheld the AO's decision, leading the assessee to appeal to the Tribunal. The Tribunal noted that the assessee admitted to an error in presenting accounts and demonstrated that the beneficiaries' capital balances were used for business purposes. The Tribunal concluded that the interest should be allowed as a deduction since the funds were utilized for business purposes and the trust had provided interest on the capital balance of the beneficiaries.

Disallowance of Commission Payments:
The assessee challenged the disallowance of commission payments amounting to ?6,00,050/- for AY 2009-10 and ?5,25,764/- for AY 2010-11. The AO disallowed these payments, arguing that the assessee failed to demonstrate the nature of services rendered by the recipients, who fell within the ambit of section 40A(2)(b) of the Act. The CIT(A) upheld the AO's decision.

The assessee argued that similar commission payments were made in AY 2007-08 and 2008-09, which were disallowed by the AO but subsequently allowed by the Tribunal. The Tribunal, upon reviewing the record, found that the commission was paid at 1% of sales, and the details, including TDS, were provided. The Tribunal noted that the payments were made to promote sales and ensure recovery, thus were wholly and exclusively for business purposes. Citing previous Tribunal decisions and relevant case laws, the Tribunal allowed the appeal and deleted the disallowance for both years.

Conclusion:
The Tribunal allowed the appeal partly, permitting the deduction of interest paid to beneficiaries and deleting the disallowance of commission payments. The Tribunal emphasized the need to consider the substance over form in accounting presentations and upheld the business necessity of the disputed payments. The appeals were disposed of with these findings, and the order was pronounced on October 9, 2017.