2024 (12) TMI 109 - AT - Income Tax

Ad-hoc disallowance of payment has been made to related parties - Contention of appellant on the ground of parity of tax rate in the case of payees and appellant, there was no loss to the revenue - HELD THAT - CIT(A) confirmed ad-hoc disallowance of sum paid to four individuals on the grounds that payment has been made to related parties ignoring the ground of parity of tax rate in the case of payee and appellant there was no loss of Revenue and on the ground that the supporting evidence of the ITR filed by payee were fresh evidence for which no application u/s 46A was made. Additional evidence i.e., ITR for the year 2018-19 showed that the tax rate by the employees in question is 30% which is not much lower than the tax rate paid by the company who is to separate the theory of no loss making payment to the concerned employee - As per ratio of judgment in Orange Associates Pvt. Ltd. 2021 (1) TMI 286 - ITAT DELHI it is well settled law that the assessee company and its director were both in the same tax bracket, the highest and, therefore, there could be no question of any evasion of tax by paying remuneration to the directors relying on the above Circular. Non-deduction of ESI/EPF on salary of persons - This objection is without merit as the employees drawing higher salaries and exercised the option of non-deduction. Shri Jatin Goyal and Shri Akhil Goyal were not covered in the list of relatives under section 40A(2)(b) of the Act. Hon ble Delhi Court in CIT vs. DLF Hilton Hotels 2016 (5) TMI 492 - DELHI HIGH COURT held that where the assessee had reasonably established that the expenses incurred by it were for running business and in the absence of any finding by the AO that the expenses were non-genuine and the fact that the books of accounts of the assessee had not been rejected, 50% of the expenses could not be disallowed on an arbitrary basis. Accordingly, ground No.1 to 3 are allowed. Disallowance u/s 36 (1)(iii) on proportionate basis - Hon'ble Apex Court in the case of CIT vs Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT wherein it was held that if the interest free funds available to the assessee are sufficient to meet its investment, it could be presumed that the investments are made from the interest free funds available with the assessee and not from borrowed funds. Thus, ground is allowed.

Summary

Issues Involved:
Appeal against order of Learned Commissioner of Income Tax (Appeals) regarding ad-hoc disallowance of payments made to related parties, disallowance of interest expenses, and non-deduction of ESI/EPF on salaries paid.

Analysis:

1. The appeal was filed against the order of the Learned Commissioner of Income Tax (Appeals) regarding the ad-hoc disallowance of payments made to related parties and other issues. The appellant declared income in the Income Tax Return and later revised it, leading to scrutiny by the authorities. The case involved examining personal expenditure and ICDS compliance. The appellant, engaged in manufacturing and processing pulses, faced scrutiny over salary payments to individuals related to shareholders/key persons. The order by the Learned Assessing Officer resulted in additions to the declared income.

2. The appellant filed an appeal before the Learned Commissioner of Income Tax (Appeals), which was dismissed. The appellant then preferred the present appeal, challenging the ad-hoc disallowance of payments made to related parties and the disallowance of interest expenses. The appellant argued that the disallowances were unjustified, emphasizing the tax rates of the payees and the lack of loss to revenue. The appellant also contested the disallowance of interest expenses, citing the utilization of interest-free funds.

3. The appellant's representative argued that the disallowances were not warranted, pointing to the tax rates of the payees, the absence of loss to revenue, and the utilization of interest-free funds. The representative relied on legal precedents and circulars to support the appellant's case. The objections raised by the Revenue regarding non-deduction of ESI/EPF on salaries were also addressed, highlighting the option available to employees regarding welfare schemes.

4. Upon examining the rival contentions, the tribunal found that the ad-hoc disallowance and disallowance of interest expenses were not justified. The tribunal referred to legal principles and precedents to support its decision. The objections raised by the Revenue were deemed without merit, and the tribunal allowed the appeal filed by the assessee.

5. In conclusion, the tribunal set aside the order of the Learned Commissioner of Income Tax (Appeals) and allowed the appeal filed by the assessee, ruling in favor of the appellant on the issues of ad-hoc disallowance and interest expenses.

This detailed analysis covers the key aspects of the judgment, addressing the issues raised in the appeal and the tribunal's decision on each matter.