Commissioner of Income Tax I V. Enviro Control Associated Pvt Ltd

TAXAP/1012/2013

AI Insights

The case involves multiple tax appeals by the Commissioner of Income Tax against Enviro Control Associated Pvt Ltd concerning disallowances made under Section 40A(2)(b) of the Income Tax Act, 1961. The appeals were based on the payments made to M/s. Pollucon Engineers, a firm associated with the director's wife, for services related to the operation and maintenance of infrastructure facilities. The Assessing Officer initially disallowed 10% of these payments, suspecting them to be excessive. However, both the CIT(A) and the ITAT found no evidence of excessiveness and deleted the disallowance, leading to the present appeals by the revenue.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 805920 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 27-12-2013
• Assessment Year: misc
• Other Referred Cases: Binit Corporation (24 TTJ 571)
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Assessee Lawyers: S UDHIR M EHTA
• Keywords: Adhoc disallowance; Disallowance; Excessive payment; Income Tax; Sister concern; Tax appeal
• Section: 142(1); 143(2); 143(1); 80IA(4); 40A(2)(b)

Judgement Text

"O/TAXAP/1009/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1009 of 2013 With TAX APPEAL NO. 1010 of 2013 With TAX APPEAL NO. 1012 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH ­ Sd/­ and HONOURABLE MR.JUSTICE R.P.DHOLARIA ­ Sd/­ ============================================= 1. Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2. To be referred to the Reporter or not ? NO 3. Whether their Lordships wish to see the fair copy of the judgment ? NO 4. Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5. Whether it is to be circulated to the civil judge ? NO ============================================= COMMISSIONER OF INCOME TAX I....Appellant(s) Versus ENVIRO CONTROL ASSOCIATED PVT LTD....Opponent(s) ============================================= Appearance: MR SUDHIR M MEHTA, ADVOCATE for the Appellant(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA Date : 27/12/2013 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.0. As common question of law and facts arise in all these Tax Appeals and as such with respect to same assessee but different assessment years and as such arising out of the common impugned judgment and order passed by the learned Income Tax Appellate Page 1 of 8 O/TAXAP/1009/2013 JUDGMENT Tribunal (hereinafter referred to as “ITAT”), all these appeals are decided and disposed of by this common judgment and order. TAX APPEAL NO. 1012 OF 2013 2.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT dated 30.04.2013 in ITA No. 3698/AHD/2008 for AY 2005­06, the revenue has preferred the present Tax Appeal to consider the following substantial question of law. “Whether on the facts and circumstances of the case and as per law, the Hon’ble ITAT is right in upholding the decision of learned CIT(A) of deleting the addition made by the AO of Rs. 15,00,000/­ made on account of payments made U/s. 40A(2) of the IT Act?” TAX APPEAL NO. 1010 OF 2013 3.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT dated 30.04.2013 in ITA No. 2817/AHD/2009 for AY 2006­07, the revenue has preferred the present Tax Appeal to consider the following substantial question of law. “Whether on the facts and circumstances of the case and as per law, the Hon’ble ITAT is right in upholding the decision of learned CIT(A) of deleting the addition made by the AO of Rs. 15,00,000/­ made on account of payments made U/s. 40A(2) (b) of the IT Act?” TAX APPEAL NO. 1009 OF 2013 4.0. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT dated 30.04.2013 in ITA No. 1021/AHD/2010 for AY 2007­08, the revenue has preferred the present Tax Appeal to consider the following substantial question of law. “Whether on the facts and circumstances of the case and as per law, the Hon’ble ITAT is right in upholding the decision of learned CIT(A) of deleting the addition made by the AO of Rs. 16,53,000/­ made on account of payments made U/s. 40A(2) (b) of the IT Act?” Page 2 of 8 O/TAXAP/1009/2013 JUDGMENT 5.0. For the sake of convenience, the facts of Tax Appeal No.1012 of 2013 for AY 2005­06 are considered, which in nutshell are as under: 5.1. The assessee claimed to have engaged in the business of development of infrastructure facilities mainly relating to water and sewage treatment on turnkey basis filed return of income for AY 2005­ 06 declaring total income at Rs. NIL. The return of income was processed under Section 143(1) of the Income Tax Act (hereinafter referred to as the “Act”). The case was selected for scrutiny assessment. Notice under Section 143(2) and 142(1) of the Act along with questioners were issued. That the assessee claimed deduction under Section 40A(2)(b) of the Act of Rs. 1.50 crore paid to the persons specified under Section 40A(2)(b) of the Act viz M/s. Pollucon Engineers, the proprietor of which is wife of Shri Anand Vashi, Director of the assessee company with respect to supply of labour for operating and maintenance work. That by the office letter dated 27.10.2006, the assessee was requested to justify the said claim. The assessee, vide its reply dated 15.11.2006 submitted that the business of the proprietor was looked after with the help of Engineers and other employees. The business was conducted from 26, Jivan Vikas Society, Athwalines, Surat. It was submitted that the job was awarded to M/s. Pollucon Engineers after inviting offer from other parties. It was further submitted that since the offer of M/s. Pollucon Engineers was found loweset and favourable, the offer was accepted. That the Assessing Officer was not convinced with the explanation given by the assessee and disallowed 10% payment of Rs. 1.50 crores and added to the total income of the assessee by observing that the assessee has failed to produce any supporting evidence against the claim; the proprietor of M/s. Pollucon Engineers is the wife of the Director of the assessee company and therefore, element Page 3 of 8 O/TAXAP/1009/2013 JUDGMENT of excessive payment cannot be denied. 5.2. Feeling aggrieved and dissatisfied with the order passed by the Assessing Officer in disallowing 10% of payment of Rs.1.50 crores i.e. making 10% disallowance out of the payment to specified persons under Section 40A(2)(b) of the Act and directing to make addition to the total income of the assessee, the assessee preferred appeal before the learned CIT(A)and the learned CIT(A) has deleted 10% disallowance out of the payment to specified person under Section 40A(2)(b) of the Act i.e. payment to M/s M/s. Pollucon Engineers. 5.3. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), in deleting disallowance to the extent of 10% of the payment mad to M/s. Pollucon Engineers, the revenue preferred appeal before the learned ITAT and by impugned judgment and order learned ITAT has dismissed the said appeal confirming the deletion of 10% disallowance made by the Assessing Officer. 5.4. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the learned ITAT, the revenue has preferred present Tax Appeals for AY 2005­06, 2006­07 and 2007­08. 6.0. With respect to assessment year 2006­07 and 2007­08 similar dis­allowance was made by the Assessing Officer with respect to payment made to M/s. Pollucon Engineers and the learned CIT(A) has deleted such disallowance and the same has been confirmed by the learned ITAT by impugned common judgment and order, which are subject matter of Tax Appeal No. 1010 of 2013 ( for AY 2006­07) and Tax Appeal No. 1009 of 2013 (for AY 2007­08). Page 4 of 8 O/TAXAP/1009/2013 JUDGMENT 7.0. Shri Sudhir Metha, learned advocate for the revenue has vehemently submitted that learned ITAT has materially erred in rejecting the findings of the Assessing Officer, more particularly, when the Assessing Officer noticed that the assessee has made payment Rs. 1.50 crores to M/s. Pollucon Engineers a sister concern of the assessee against the supply of labour for operation and maintenance work being done by the assessee. It is submitted that in the facts and circumstances of the case, Assessing Officer rightly disallowed the 10% of the payment made to M/s. Pollucon Engineers which was made by the Assessing Officer by observing that element of excessive payment cannot be denied. 7.1. It is further submitted by Shri Sudhir Mehta, learned advocate for the revenue that the learned ITAT has not properly appreciated fact that M/s. Pollucon Engineers to whom the payment was made under Section 40A(2)(b) of the Act was a sister concern run by the wife of the Director of the assessee company and therefore, element of excessive payment cannot be denied. It is submitted that as such the assesssee failed to produce any evidence which may suggest that the payment was reasonable or was necessitated out of the business need or payee was the only person who could have only handled the project of plant operation on contract basis. It is submitted that therefore, in absence of any evidence produced by the assessee, the Assessing Officer was justified in making disallowance of 10% made to M/s. Pollucon Engineers. Therefore, it is requested to allow / admit the present Tax Appeals. 8.0. Heard. Shri Sudhir Mehta, learned advocate for the revenue and perused the the respective assessment orders as well as orders passed by the CIT(A) as well as impugned common judgment and order Page 5 of 8 O/TAXAP/1009/2013 JUDGMENT passed by the learned ITAT. 9.0. At the outset, it is required to be noted that Assessing Officer directed to make disallowance of 10% of the payment made under Section 40A(2)(b) of the Act to M/s. Pollucon Engineers and added to the total income of the assessee on ad­hoc basis and solely on the ground that as M/s. Pollucon Engineers whom the payment was made under Section 40A(2)(b) of the Act was a sister concern run by the wife of the Director of the assessee company and therefore, element of excessive payment cannot be denied. However, it is required to be noted that there was no other material before the Assessing Officer that any excessive payment was made to M/s. Pollucon Engineers. It is required to be noted that it was not the case on behalf of the Assessing Officer and as such there was no finding by the Assessing Officer that the transaction / contract with M/s. Pollucon Engineers was not genuine one. As such there was no material before the learned Assessing Officer such as comparable rates etc. to come to the conclusion that excessive payment was made to the aforesaid firm which warranted disallowance / ad hoc disallowance. 10. While deleting the observation made by the Assessing Officer, the learned CIT(A) has observed as under: 4.3. I have considered the submission made by the appellant andservation of the A.O. The disallowance made by the A.O. u/s 40A(2)(b) is adhoc and without any basis. Disallowance u/s 40A(2)(b) by saying that the assessee has not followed due diligence and has not floated tender or obtaining the lowest rate is not correct. Various courts have held that the AO cannot dictate to the assessee as to how the business should be done. Hon’ble ITAT in the case of Binit Corporation (24 TTJ 571) has after considering various judicial pronouncement stated that first of all the AO has to satisfy himself whether the expenditure itself is genuine or not and if it is genuine then for the purpose of finding out the Page 6 of 8 O/TAXAP/1009/2013 JUDGMENT portion of disallowance he shall have to find out the fair market value of the services and this would presuppose that services are commonly available for which market value can be known. Thereafter, the AO shall have to evaluate the legitimate needs of the business at a point of time when the services were rendered and this would involve in inquiry as a businessman because in times of dire need services are obtained even at higher cost, the ultimate aim being to earn profit or to maintain the business relations. According to the ITAT, the AO shall have to find out what benefit is derived by the assessee and this would not necessarily confine to the year in question but shall have to take overall picture depending upon the facts of each case. Even the benefit accruing to the assessee shall have to be evaluated. This again may not be confirmed to the period of accounting year only and again it would not be essential that benefit must be in the revenue field. Thereafter according to the ITAT the AO shall have to give reasonable opportunity to the assessee to rebut his finding. If comparable instances of other parties are not available at least compare with earlier year, adhoc disallowance cannot stand the test of appeal. In view of the above, the disallowance made by the A.O is deleted. Therefore, this ground of appeal is allowed. 11. The learned ITAT has confirmed the above deletion by observing in para 22 is as under: 22. We have heard this issue in the light of the material placed before us. The provisions of Section 40A(2)(b) are to be applied when the AO is of the opinion that an expenditure is excessive or unreasonable having regard to the fair market value of the services for which the payment is made. In the present case, the genuineness of the expenditure has not been doubted by the A.O. The only reason for the impugned addition was that the payments was excessive in nature. But before arriving to a conclusion that the payment was excessive, the AO was expected to place on record the reason for holding such opinion. We have noted that no such comparable instance was quoted by the AO. Additionally, it has also been argued before us that the payment made to the wife of the Director was a business requirement of the assessee and that lady is also subject to tax at the maximum rate. Hence, it is pleaded that there was no intention to save the tax. It has also been pleaded that there was no motive to divert the income because the assessee is entitled for the claim of 100% deduction on the Page 7 of 8 O/TAXAP/1009/2013 JUDGMENT income u/s 80IA(4). Thus, the totality of the circumstances demonstrates that there was no justification on the part of the AO to make such an adhoc addition. Resultantly, we hereby confirm the findings of the CIT(A) and dismiss this ground of the Revenue for the years under consideration.” 12. We are in complete agreement with the reasoning and observations made by the learned CIT(A) confirmed by the learned ITAT. In absence of nay material before the Assessing Officer, such as comparative chart etc. to suggest that any excessive payment was made to M/s. Pollucon Engineers and the 10% ad hoc disallowance was made on the payment made under Section 40A(2)(b) of the Act to M/s. Pollucon Engineers solely on the ground that M/s. Pollucon Engineers to whom the payment was made, was run by the wife of the Director of the assessee company and therefore, there was an element of excessive claim, we are of the opinion that the Assessing Officer was not justified in adopting disallowance to the extent of 10% payment under Section 40A(2)(b) of the Act . Under the circumstances, disallowance made by the Assessing Officer is rightly deleted by the learned CIT(A) confirmed by the learned ITAT. 13. In view of the above, we see no reason to interfere with the impugned common judgment and order passed by the learned ITAT. No question much less substantial question of law arise in the present tax appeals. Hence, all these appeals deserve to be dismissed and are accordingly dismissed. sd/­ (M.R.SHAH, J.) sd/­ (R.P.DHOLARIA,J.) Kaushik Page 8 of 8 "