2024 (2) TMI 528 - AT - Income Tax

Disallowance u/s. 40A(2) - addition being 50% of the total back office charges paid to group consultant - as per AO payment made by the assessee is in excess of fair market value HELD THAT - As the assessee has entered into agreement with to group consultant to the agreement states the services offered and the schedule of fees @ 0.5% of total income. AO has not brought any material on record to show that the payment made to group consultant is unreasonable and excessive and has made disallowance on adhoc basis, merely stating that the order of the ITAT in group case has not been accepted by the revenue. AO has observed that the assessee may have benefitted from the bulk or centralized purchasing done though to group consultant but it does not justify the entire payment. Once it is accepted by the AO that the assessee is benefited through to group consultant , no adhoc disallowance is called for - we delete the disallowance u/s. 40A(2) of the Act. Decided in favour of assessee.

Summary

Issues:
The only issue raised in this appeal is regarding the disallowance of Rs. 17,05,381 u/s. 40A(2) of the Act being 50% of the total back office charges of Rs. 34,10,763 paid to group consultant MEMGIIPL.

Delay Condonation:
The appeal was time-barred by 660 days. The assessee filed a petition for condonation of delay, citing reasons such as the official in charge being irregular in office due to confinement, and the appellate order not being downloaded from the ITBA portal. The delay was deemed unintentional, bonafide, and for reasonable cause. The Tribunal noted the sufficient cause for the delay and condoned it.

Background and Disallowance:
The assessee, a private limited company running hospitals, entered into a service agreement with MEMG International India Pvt. Ltd. for various services and paid back-office charges. The AO disallowed 50% of the amount under section 40A(2) of the Act, stating that the payment was not justified as the assessee had its own set up for legal, audit, and financial works. The AO rejected the assessee's submission regarding a similar disallowance in a group concern's case pending before the High Court.

Arguments and Tribunal's Decision:
The CIT(Appeals) upheld the disallowance, stating that the payment was made to a group concern without substantiated evidence of services rendered. The assessee argued that the payment was reasonable as per the service agreement terms and that the disallowance was unjustified. The Tribunal referred to a similar case involving the assessee's group concern, where the disallowance was deleted by the ITAT and upheld by the High Court. The Tribunal found that the AO had not provided sufficient evidence to prove the payment was excessive, and thus, deleted the disallowance under section 40A(2) of the Act.

Conclusion:
The Tribunal allowed the appeal by the assessee, noting that the disallowance lacked proper justification and evidence of excess payment. The decision was based on the lack of material supporting the AO's opinion of excessive payment and the precedent set by previous judicial pronouncements in similar cases. The disallowance of Rs. 17,05,381 u/s. 40A(2) was deleted, and the appeal was allowed.