2021 (11) TMI 44 - AT - Income Tax

Disallowance of salary to specified person u/s. 40A(2)(b) - excessive or unreasonable payments - mandation of recording satisfaction - HELD THAT - No addition is allowed without placing on record any material which could prove to the hilt that the payments were excessive or unreasonable, having regard to the fair market value of the services for which the same were made or keeping in view the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee therefrom. Be that as it may, we are of the considered view that in the absence of satisfaction of the basic condition for invoking of Sec. 40A(2)(a) by both of the lower authorities, the disallowance of the related party expenses made under Se. 40A(2)(a) cannot be sustained - Decided in favour of assessee. Gain on sale of shares - LTCG or Business income - assessee has not shown the sold share in the balance sheet as investment and treated the same as business income - HELD THAT - As assessee has specifically submitted in his submission that he has invested in the shares of Infosys in 1990 - Infosys declared bonus shares and capital gain was earned on the sale of bonus shares. In this regard, the assessee has also placed copies of contract note, demat statement, statement of holding of Infosys shares in the paper book. After perusal of the detail filed by the assessee, it is clear that Assessing Officer has not taken into consideration the relevant submission along with copies of document filed by the assessee in support of his claim of long term capital gain on the sale of impugned shares. Therefore, we restore this issue to the file of the Assessing Officer for deciding de-novo after verification of the detail filed - Decided in favour of assessee for statistical purposes. Disallowance of bad debt - since the assessee has not offered the corresponding income in its books, therefore, claim of bad debt is not allowable - HELD THAT - As per the agreement in case of non-recovery from such parties, the same will be recovered from the sub-broker. In this regard, the assessee has placed copy of debit not of Motilal Investment Services, statement of bad debt written off, copy of customer account from books of the assessee etc. After perusal of the aforesaid facts and material filed by the assessee, we are of the view that the issue of trading loss instead of bad debt as claimed by the assessee is required to be examined from the submission made by the assessee, therefore, we restore this issue to the file of Assessing Officer for deciding de-novo after examination/verification of the details to be furnished by the assessee in the set aside proceedings upon affording adequate opportunity to the assessee. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes. Addition of unexplained capital - assessee has claimed that the source of addition to the capital account was out of withdrawal made in the past three years - HELD THAT - As assessee has not furnished any relevant supporting evidences before the lower authorities. On this issue, we find that even during the course of appellate proceedings before us, the assessee has only furnished the copy of balance sheet of the assessee without any relevant supporting evidences to demonstrate that the source of addition to the capital accoun was actually out of the explained withdrawal. Therefore, we do not find any infirmity in the decision of ld. CIT(A) on this issue. Accordingly, this ground of appeal of the assessee is dismissed.

Issues Involved:
1. Disallowance of Salary to Specified Persons
2. Disallowance of Payment of Rent to Specified Persons
3. Treatment of Long-Term Capital Gain
4. Disallowance of Bad Debt
5. Addition of Unexplained Capital

Detailed Analysis:

1. Disallowance of Salary to Specified Persons:
During the assessment, the Assessing Officer (AO) asked the assessee to justify the salary paid to specified persons under Section 40A(2)(b) of the Income Tax Act. The AO did not accept the assessee's justification and restricted the salary amounts based on disallowances made in the previous year, resulting in an addition of ?2,69,749 to the total income. The ITAT referenced a previous decision in the assessee's own case, noting that the AO had not made any comparison with the fair market value of the services. The AO's disallowance was based on conjecture without tangible material. Consequently, ITAT allowed the appeal, directing the AO to delete the addition.

2. Disallowance of Payment of Rent to Specified Persons:
The AO noticed that the assessee had paid rent to related persons specified under Section 40A(2)(b) and disallowed part of the rent payments based on previous year’s findings. The ITAT found that the AO did not provide any basis for accepting part of the rent as genuine and part as excessive. The AO failed to compare the rent paid with the prevailing market rates. Citing a precedent, ITAT directed the AO to delete the addition, allowing the appeal.

3. Treatment of Long-Term Capital Gain:
The AO treated the long-term capital gain claimed by the assessee as business income, stating that the sold shares were not shown as investments in the balance sheet. The ITAT noted that the AO did not verify the details submitted by the assessee, which included evidence that the shares were bonus shares not reflected in the balance sheet. The issue was restored to the AO for de novo verification, allowing the appeal for statistical purposes.

4. Disallowance of Bad Debt:
The AO disallowed the claim of bad debt, arguing that the assessee had not offered the corresponding income in its books. The assessee contended that it was a trading loss recovered by the principal from the assessee as per their agreement. The ITAT found that the issue needed examination of the details provided by the assessee and restored it to the AO for de novo verification, allowing the appeal for statistical purposes.

5. Addition of Unexplained Capital:
The AO added ?1,40,000 to the assessee's total income as unexplained capital, as the assessee failed to substantiate the claim that it was out of withdrawals made in the past three years. The ITAT upheld the AO’s decision, noting that the assessee did not provide relevant supporting evidence. The appeal on this ground was dismissed.

Conclusion:
The ITAT allowed the appeals regarding the disallowance of salary and rent payments to specified persons, directing the AO to delete the additions. The issues of long-term capital gain and bad debt were restored to the AO for fresh verification. The addition of unexplained capital was upheld, dismissing the appeal on this ground. The overall judgment resulted in ITA 1758/Ahd/2018 being allowed and ITA 1759/Ahd/2018 being partly allowed for statistical purposes.

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