2020 (11) TMI 868 - AT - Income Tax

Addition at the rate 20% of expenses incurred by the assessee for services rendered to M/s Cigna TTK during the year - Whether CIT(A) was justified in accepting the claim of the assessee that there was no profit element involved in a transaction wherein the assessee had provided a highly technical and professional services to the other party, that too by utilizing its own funds? - HELD THAT - Giving that the assessee received development cost for developing and transferring the initial infrastructure to Cigna TTK, the transaction is not expenditure in the hands of the assessee. For the assessee (the recipient of the amount) the provisions of specified domestic transaction would not be applicable. We find that (i) the vendor agreement between the assessee and Cigna TTK has been entered at cost and no income has been earned by the assessee, (ii) there is neither any evidence nor allegation that assessee has received any consideration over and above to what is mentioned in the aforesaid agreement. In the absence of any evidence to show either that the sales were sham transactions or that the market prices were in fact paid by the purchasers, the mere fact that the goods were sold at a concessional rate to benefit the purchasers at the expense of the company would not entitle the income-tax department to assess the difference between the market price and the price paid by the purchasers, as profit of the company. We affirm the order of the Ld. CIT(A) deleting the addition - Decided against revenue.

Summary

Issues Involved:
1. Enhancement of income by disallowing expenditure and adding mismatch amounts.
2. Violation of principles of natural justice.
3. Disallowance of specific expenditures.
4. Addition due to mismatch in Employee Benefit Expenses.
5. Statutory audit observation.
6. Addition based on tax audit report.
7. Initiation of penalty proceedings.
8. Deletion of addition related to service charges.

Detailed Analysis:

1. Enhancement of Income by Disallowing Expenditure and Adding Mismatch Amounts:
The Commissioner of Income Tax (Appeals) [CIT(A)] enhanced the income of the assessee by ?2,53,95,925, disallowing ?54,65,476 as expenditure and adding ?1,99,30,449 due to mismatch in details. The CIT(A) found discrepancies in the financial statements and concluded that the actual expenditure under "Employee Benefit Expense" was ?6,88,10,325 instead of ?8,87,40,774, leading to the disallowance.

2. Violation of Principles of Natural Justice:
The assessee argued that the CIT(A) violated natural justice principles by not providing an opportunity to be heard before making the enhancement under section 251 of the Income Tax Act. The notice for enhancement was sent to an old address, causing the assessee to miss the opportunity to respond.

3. Disallowance of Specific Expenditures:
The CIT(A) restricted allowable expenditure to the revenue from operations, disallowing excess expenditure of ?54,65,476. The assessee contended that the details of the expenditure were provided during the assessment proceedings and that the revenue from operations was erroneously stated.

4. Addition Due to Mismatch in Employee Benefit Expenses:
The CIT(A) added ?1,99,30,449 due to inconsistency in Employee Benefit Expenses between financial statements of two years. The assessee explained that the inconsistency was due to restatement/reclassification with no impact on the profit and loss account.

5. Statutory Audit Observation:
The CIT(A) observed that the expenses were not subject to statutory audit, which the assessee claimed was factually incorrect.

6. Addition Based on Tax Audit Report:
An addition of ?18,545 was made based on the tax audit report submitted during appellate proceedings, which the CIT(A) rejected as inadmissible under Rule 46A of the Income Tax Rules, 1962.

7. Initiation of Penalty Proceedings:
The CIT(A) initiated penalty proceedings under section 271(1)(c) of the Act for the above additions.

8. Deletion of Addition Related to Service Charges:
The Assessing Officer (AO) added ?3,68,97,011 as service charges for services rendered to Cigna TTK, estimating service charges at 20% of ?18,44,85,058. The CIT(A) deleted this addition, stating there is no provision for including notional income in the total income of the assessee. The tribunal affirmed the CIT(A)'s order, referencing Supreme Court decisions that notional income cannot be added to the assessee's return unless there is evidence of actual profits.

Conclusion:
The tribunal set aside the CIT(A)’s order on enhancement and restored the matter for fresh consideration, ensuring the assessee is given a reasonable opportunity to be heard. The appeal by the assessee was allowed for statistical purposes, while the appeal by the Revenue was dismissed. The tribunal emphasized the need for proper notice and the inadmissibility of notional income without concrete evidence.