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TMI Blog2017 (7) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... rned assessing officer nor the learned CIT - A has applied the provisions of Section 92BA of the income tax act in its true spirit. In fact the adjustment has been made by disallowing part of the purchase prices from the related party by the learned assessing officer which is actually in conformity with the provisions of Section 40A (2) of the act. Now it is required to be seen whether the addition made by the learned assessing officer and partly confirmed by the learned CIT - AE is in accordance with that provisions of not Assessee has stated that the sister concern is the manufacturing unit of the group whereas the assessee is a marketing unit of the group. Therefore comparison of the gross profit and net profit of a manufacturing unit with a marketing unit is not proper. If the revenue wanted to apply the provisions of Section 40A (2) of the act it has to prove that purchase price paid by the assessee are unreasonable and excessive looking to the market rate of such goods and further the needs of the business of the assessee. No such exercise has been carried out by the learned AO. In fact this exercise could have been carried out by the learned assessing officer by verify ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact, it is a computer Monitor. Therefore, we hold that it is a computer entitled to 60% of the depreciation, as it is a monitor attached to the computers. Thus, ground No. 4 is allowed. Disallowance of rent to the related parties - AO found that assessee has paid rent to specified persons under Section 40A (2) (b) - HELD THAT:- For the purpose of Section 40A (2) (b) the Revenue authorities should have brought on record that the rent paid to the related party is excessive and un-reasonable. Merely the tax arbitrage cannot be the reason to make disallowance under Section 40A (2) (b) of the Act. Valuation of perquisite if shown properly by directors in their tax returns and if it is less than Rent paid by the assessee to the land lord in whose house the directors are residing, it is the duty of AO of the directors to see whether perquisites are correctly valued or not. It cannot straight away result in to disallowance u/s. 40A (2) of the Act unless it is shown that it is unreasonable and excessive having regard to the fair market value of such service or legitimate needs of the business of the assessee. All these ingredients are absent in the disallowance made by the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage value of investment of ₹ 100000/-. 2. Ld. C.IT.(A) has erred in law and on facts in confirming disallowance at ₹ 1766377/- out of total disallowance made by the Ld. A.O. at ₹ 5299130/- increasing net profit being one percent of turnover by applying provision of Section 92BA of The Act. 3. Ld. C.I.T.(A) has erred in facts in confirming disallowance at ₹ 36070/- out of total disallowance made by learned A.O. at ₹ 108210/- being 30 percent of Business Promotion and Advertisement expenses claimed at ₹ 360707/-. 4. Ld. C.I.T.(A) has erred in confirming depreciation of ₹ 20475/- claimed at the rate of 60 percent on addition of Apple LED Cinema amounting to ₹ 45500/- classified as computer including computer software. 5. Ld. C.I.T.(A) has erred in law and on facts that ₹ 297000/- being payment of rent to Smt. Maya Sachdeva and Sh Rahul Sachdeva being related parties within the meaning of Section 40A(2)(b) of The Act amounting of ₹ 180000/- each i.e. ₹ 360000/-. It is contented that rent so paid is neither excessive nor unreasonable. Similar rent have been paid in earlier years and have been al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 dated 2.09.2015 wherein it has been held that in absence of exempt income during the year no disallowance under Section 14A of the Act can be made. Thus, ground No. 1 is allowed. 5. Ground No. 2 is with respect to the disallowance on account of increase in net profit being 1% of the turnover made by the ld. Assessing Officer by disallowing the expenditure amounting to ₹ 5299130/- scaled down by the ld. CIT (Appeals) to ₹ 1766377/-. Facts shows that the management of the assessee has another related concern having common directors and carrying on the same business as that of the assessee and the entire purchases of the assessee amounting to ₹ 51 crores were purchased from that party. The learned assessing officer was of the view that though the provisions of Section 92BA relating to the related party domestic transactions are effective only from 1 April 2013 but he looked into the reasons for making hundred percent purchases from a related party and whether the transactions are at arm's-length or not and unreasonable profit has not been transferred to the other related party. This was also for the reason that assessee has very low gross profit and net prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 where in it has been held that Clause (i) of section 92BA having been omitted by Finance Act, 2017 with effect from 1-4-2017 from statute, resultant effect is that it had never been passed and, hence, decision taken by AO under effect of section 92BA and reference made to Transfer Pricing Officer under section 92CA was invalid and bad in law. However looking at the issue from the different perspective to note that neither the learned assessing officer nor the learned CIT - A has applied the provisions of Section 92BA of the income tax act in its true spirit. In fact the adjustment has been made by disallowing part of the purchase prices from the related party by the learned assessing officer which is actually in conformity with the provisions of Section 40A (2) of the act. Now it is required to be seen whether the addition made by the learned assessing officer and partly confirmed by the learned CIT - AE is in accordance with that provisions of not. In fact the AO is right that the hundred percent purchases of the assessee are from the related parties. However the hundred percent sales of the related party is not to the assessee. The turnover of the assessee is ₹ 52.99 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before the Assessing Officer. This expenditure was incurred through the credit cards of the Directors, but that fact itself cannot result into the disallowance. It needs to be tested under parameters of section 37 (1) of the Act. The details of the expenditure show that these are for the purchase of various diaries, Diwali expenditure and entertainment and gifts to the customers. Naturally these expenditure are incurred by the Directors, but that does not mean that these are the personal expenditure and not incurred wholly and exclusively for the purposes of the business of the assessee. Even otherwise, in the case of the company assessee, there cannot be any personal expenditure. In view of this, Ground No. 3 of the appeal is allowed and the disallowance is directed to be deleted. 8. Ground No. 4 is with respect to the depreciation on Apple LCD monitor on which assessee claimed depreciation @ 60% stating it to be computer and the Assessing Officer and CIT (Appeals) allowed it @ 15% holding it to be not a computer but general plant and machinery. The assessee has purchased Apple LED DIS which is in fact a monitor for ₹ 45,500/- which is required for display at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he market rate. 11. Ground No. 6 is with respect to the disallowance of the medical expenses of the Directors amounting to ₹ 29,506/-. The assessee has incurred total medical expenditure of ₹ 65,053/- out of which ₹ 29,506/- related to the Directors of the company. The ld. Assessing Officer disallowed as neither the appointment letter of the Directors nor the resolutions were filed. It were also not filed before the ld. CIT (Appeals), hence it was confirmed. Even before us, it was not shown that the Directors are employees of the company and they were entitled to reimbursement of medical expenditure as per their terms of appointment. In view of this, we do not find any infirmity in the orders of the lower authorities and ground No. 6 of appeal is dismissed. 12. Ground No. 7 is with respect to the confirmation of the disallowance of 10% of various expenditure such as Staff welfare, Repair, Telephone, Travelling, Vehicle running etc. The assessee has incurred total of these expenditure amounting to ₹ 19,43,521/-. The ld. Assessing Officer has disallowed 10% of such expenditure stating that the disallowance is in order to check leakage of profit under the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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