2021 (12) TMI 1202 - AT - Income Tax

Addition u/s.40A(2)(b) - disallowance of computer and other equipments - hire charges paid by the assessee is unreasonable and excessive when compared to market rates - HELD THAT - As gone through orders of the authorities below. In order to invoke provisions of section 40A(2)(b) AO has to bring on record some comparable cases of similar nature to allege that hire charges paid by the assessee is unreasonable and excessive, when compared to market rates - on perusal of details filed by the assessee, third party service providers rate is more than rate charged by service provider to the assessee - cost incurred by the lessor of the asset does not relevant to decide whether hire charges fixed for said equipment is excessive or unreasonable. The only way to compare rate paid by the assessee is with reference to third party service providers. In this case, rate charged by third party service providers is more than rate paid by the assessee and thus, we are of the considered view that the AO as well as learned CIT(A) were erred in disallowing computer and other equipments hire charges u/s.40A(2)(b) - Hence, we direct the Assessing Officer to delete additions made towards disallowance of system hire charges u/s.40A(2)(b). Ad-hoc disallowance of consultancy charges paid to Mr. V.C.Kartik, Director of the assessee company u/s.40A(2)(b) - . Admittedly, except board resolution passed by the company authorizing its Board of Directors to pay consultancy charges to Mr. V.C.Kartik, no other credible evidence has been placed on record before the AO or CIT(A), including before us to justify payment of consultancy charges to Mr.V.C.Kartik. The board resolution copy filed by the assessee may be an evidence which suggest availing need based services from consultant. But what is required to support case of the assessee is evidences which suggest actual rendering of services. In this case, the assessee has neither furnished necessary evidence to prove rendering of services by service provider nor placed on record any evidence to prove kind of service obtained from Mr. V.C.Kartik. CIT(A) after considering relevant facts and has also taken note of association of Mr. V.C.Kartik with the assessee company has allowed 50% relief and directed the AO to restrict disallowance of consultancy charges to 50% of total claim. The assessee has failed to controvert findings of fact recorded by the learned CIT(A) with any evidence, hence, we are inclined to uphold findings of the learned CIT(A) and reject grounds taken by the assessee.

Summary

Issues:
1. Disallowance of computer and other equipment hire charges under section 40A(2)(b) of the Income Tax Act.
2. Disallowance of consultancy charges paid to a director under section 40A(2)(b) of the Income Tax Act.

Issue 1: Disallowance of computer and other equipment hire charges under section 40A(2)(b) of the Income Tax Act:
The appeals were filed against a common order pertaining to assessment years 2014-15 & 2015-16. The Assessing Officer disallowed a portion of the computer and other equipment hire charges under section 40A(2)(b) of the Act, deeming them excessive and unreasonable compared to market rates. The CIT(A) partially sustained the disallowance, directing restrictions on disallowances for desktop computers and laptops while upholding disallowances for other equipment. The AR for the assessee argued that ad-hoc disallowances were inappropriate as comparable cases showed third-party service providers charging more. The Tribunal found that no comparable cases were presented by the Assessing Officer, and the rates charged by third-party providers were higher than those paid by the assessee. Consequently, the disallowance of hire charges was deemed incorrect, and the additions were directed to be deleted.

Issue 2: Disallowance of consultancy charges paid to a director under section 40A(2)(b) of the Income Tax Act:
The Assessing Officer disallowed consultancy charges paid to a director due to lack of evidence justifying the payments. The assessee claimed the director provided services related to corporate strategy and acquisitions. However, the Assessing Officer found the evidence insufficient. The CIT(A) allowed 50% relief, directing the Assessing Officer to restrict the disallowance accordingly. The Tribunal noted that apart from a board resolution authorizing the payments, no credible evidence was provided to justify the consultancy charges. The lack of evidence supporting the actual services rendered or the nature of services obtained led the Tribunal to uphold the CIT(A)'s findings and reject the grounds taken by the assessee.

In conclusion, the appeals for both assessment years were partly allowed, with the Tribunal directing the deletion of disallowances made towards system hire charges and upholding the findings on consultancy charges.