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TMI Blog2024 (3) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... actions i.e. payment of salary as well as loan is through journal entry and the amounts stands payable, on the other hand, in the form of creditor or lender as rightly pointed out by the appellant. As Smt. Palak A Shah did not withdraw salary, the amount was lying as unsecured loan as per normal accounting principle. Had the interest been paid the Revenue would have at loss because the appellant firm attracts 30.9% tax whereas Smt. Palak A shah, an employee falls under 20.6% tax slab. Income Tax Authority must put themselves in the shoes of the appellant and to see as to how a prudent businessman would act. The authorities must not look at the matter from their own view point but of a prudent businessman. When the expenditure incurred by the appellant is otherwise deductible but deduction is restricted to a part of the sum by considering such expenditure to be excessive, having regard to the fair market value of the goods or services etc. and so much part of the expenditure is disallowed or in other words, if the expenditure incurred by the appellant is proved by the Ld. AO to be excessive or unreasonable considering the fair market value of the goods or services for which the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st has been charged on it. Therefore, in effect the money has been claimed as an expenditure and routed back in the form of a loan without any cost to you i.e. M.S. Hostel. Therefore, you are required to show cause as to why the salary paid to Palak A Shah of Rs. 4,20,000/- should not be disallowed and added back to your total income u/s. 40A(2)(b) of Income Tax Act, 1961". 3. The appellant submitted a reply dated 07.12.2017, which was rejected by the Ld. AO on the premise Smt. Palak A Shah is a relative of the partner and stands covered within the purview of Section 40A(2)(b) of the Act. Further that, by claiming this particular expenditure, the appellant has got a benefit of 30% as per its taxation rate being a partnership firm. Hence, this is a collusive transaction to evade payment of tax. Apart from that as the same amount has been immediately given back by Smt. Palak A Shah as an interest free unsecured loan to the appellant and particularly when the same was neither made through bank account or by any other means the transaction has been found to be paper/sham transaction to claim excess expenditure relying upon the judgment passed in the matter of McDowell and Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06/01/2021, 11/06/2021, 06/04/2022, 25/04/2023 the appellant was requested to file its reply, In response to the notices, appellant filed the reply dated 02/07/2021, 07/04/2022 & 01/05/2023 which reproduced as under: "The learned Deputy Commissioner of Income Tax (DCIT) during the course of assessment proceedings has disallowed salary paid of Rs. 4,20,000/- to Smt. Palak Shah (relative of partner) by invoking provisions of section 40A(2)(b) of the Income Tax Act, 1961. Brief facts of the case: The appellant firm has paid salary of Rs. 4,20,000/- to Palak A. Shah who is administration head. Mrs. Palak Shah possesses the degree of Master's in Business Administration (MBA) from University of Houston, Downtown. The learned A.O. has disallowed the claim of the assessee firm for salary paid to Palak Shah amounting to Rs. 4,20,000 on following grounds: 1. Mrs. Palak Shah has not filed her return of Income. 2. Tax is deducted @ 10% 3. By claiming the expenditure, the assessee firm has got a benefit of 30% as per its taxation rate. This is clear cut collusive transaction. 4. The whole salary is a book entry as no payment was made to her. 5. The unpaid salary is giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the given case of the appellant firm, it has paid salary of Rs. 4,20,000/- to Mrs. Palak A Shah for administration work handled by her. She has pursued Master's in Business Administration from University of Houston, Downtown and appellant firm is engaged in running hostel needs an administrator to look upon areas related to students like accommodation, food facility, water facility, disciplinary actions, etc. Mrs. Palak A Shah being MBA is well qualified to look after smallest needs of the students as any unsolved issue can bring down the image of the renowned hostel resulting into decline in its business affairs. She is well educated and fully responsible to confirm that all the students are properly accommodated and none of the rooms are overloaded with students which may result into quarrels and also unintended issues. Moreover, she has to confirm that the quality as well as quantity of water as well as food is appropriately maintained by the Hostel as any lack of her responsibility means playing with the health of students and such scenario is not acceptable by parents resulting into deterioration of the image of well-known hostel. Also, she is obliged to see that proper di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively incurred for the purpose of business, it is very much eligible as deduction 1. In respect of total income of Palak: Shah, we have already submitted during the course of assessment proceedings in our submission dated 27th July, 2017 that she has eamed salary income of Rs. 4,20,000/- each from Ambe Vidhyalay KG section and MS Hostel during the year. The total income earmed during the year amounts to Rs. 8,40,000/- and she has made investment of Rs. 29,000/- a's 800 of the Income Tax Act, 1961. The net taxable income amounts to Rs 8,11,000 on which total tax payable amounts to Rs. 89,816/- The appellant firm and Ambe Vidhyalay KG section has deducted tax of Rs. 57,783/- resulting into net tax payable of Rs. 32,327/- which was paid by her vide challan number 51716 Dated 7th April 2015. Thus, the question of evasion of tax does not arise at all and she has discharged her tax liability in accordance with the applicable tax rate Even if a non-relative person would have been paid the above stated salary, the tax liability would remain same and even in such circumstances, the appellant firm would be eligible to derive benefit at the rate of 30% as per its taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the paint of view of the businessman and not of the Revenue. Hon'ble Madhya Pradesh High Court in the case of Birla Gwalior (P) Ltd. Vs. CIT(1962) 44 ITR 847 has stated that, "it is for the assessee to judge as to what rate is reasonable. It is further stated that when the income tax authonties have found that the borrowing transactions are not illusory or colourable and the capital is borrowed by the assessee for purpose of business and the amount of interest is paid, they have no jurisdiction to determine whether the rate of interest to pay is reasonable or not and to disallow a portion of interest which has been paid" * ITAT Ahmedabad Bench the case of Omkar Mal Gauri Shanker vs. ITO -(1991) held that "the rate of 24% cannot be treated as unreasonable or excessive and therefore directed allowance of entire interest. Further it was held that deposits being old, interest thereupon was never dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms and fancies of the Officer. Hence, it is crystal clear from the assessment order of the learned AO that neither it was proved that the salary paid to Palak Shah is excessive or unreasonable in terms of fair value for invoking provisions of section 40A(2)(b) nor it was demonstrated that the salary expense was not incurred for the purpose of business of the appellant firm to attract provisions of section 37 of the Act. Thus, only because she is working at two places simultaneously or return was not filed by her or tax was paid only at the rate of 10% or the salary was not paid through cheque or any other mode and the same was given as interest free unsecured loan to the appellant firm are not feasible criteria for disallowance of salary expense u/s 40A(2)(b) of the Act. Therefore, we kindly request you to delete the additions made by the learned AO considering the facts of the case and as decided by varibus jurisdictions for which act the undersigned shall be highly obliged" 5. The Ld. DR only relied upon the order passed by the authorities below but has not been able to controvert the submission made by the Ld. AR as indicated hereinabove. 6. Hence, the instant appeal be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 89,816/-. The appellant firm and Ambe Vidhyalty KG section has deducted tax of Rs. 57,783/- resulting into net tax payable of Rs. 32,327/- which was paid by her vide challan number 51716 Dated 7th April 2015. Thus, the question of evasion of tax does not arise at all and she has discharged her tax liability in accordance with the applicable tax rate." 7.5 Under these facts and circumstances, even if a non-relative person would have been paid the said salary, the tax liability would remain same and even in such circumstances, the appellant firm would have been eligible to derive benefit @30% as per its taxation rate being a partnership firm; merely because Smt. Palak A Shah is related person the same cannot be a ground to disentitle the appellant firm when no extra benefit, is given particularly, when the salary was as per the present market rate and the service was rendered by a competent person capable enough to look into allocated responsibility. 7.6 Apart from that, payment of salary and granting of interest free loan are two different transactions and there is no scope of clubbing the same to attract the provision of Section 40A(2)(b) of the Act. The same salary would ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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