1985-VIL-44-ITAT-AHM

Equivalent Citation: TTJ 024, 571,

Income Tax Appellate Tribunal AHMEDABAD

Date: 19.10.1985

BINIT CORPORATION.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : U. T. SHAH., P. J. GORADIA.

JUDGMENT

These appeals directed against the order passed by the AAC of IT involve various common grounds and the effective grounds are as follows:

(1) That the ld. AAC of IT A.R. II, Ahmedabad, has grievously erred in confirming the disallowance of Rs. 15,830 being commission payment.

(2) The ld. AAC could not have ignored the preceding assessment years and could not have held that the said commission was not paid for the business consideration of the appellant.

(3) The ld. AAC, has, there, erred in concluding that the case of the appellant was clearly hit by the provisions of s. 40A(2) of the Act and in the absence of any evidence as to the alleged excessive payment, the same ought to have been allowed in full as claimed for.

2. The facts and the decisions of the authorities below can be appreciated from para 3 and 4 of the appellate order reproduced below:

The original assessment was completed by the ITO on 22nd Dec., 1976 whereby an amount of Rs. 15,830 being commission paid was disallowed by him under s. 40A(3) of the IT. Act. The assessee preferred an appeal and the ld. AAC vide his order No. IT/M 29th July 1978 dt. 2nd Feb., 1978 set aside the assessment. He held that whereas the provisions of s. 40A (3) were not applicable the ITO should examine the applicability of the provisions of s. 40(2) in this ease. The ITO, thereafter completed the fresh assessment on 29th Dec., 1978 for asst. yr. 1974-75 under s. 40A (2) of the Act. Similarly the commission payment was disallowed by him in asst. yrs. 1975-76 and 1976-77 under s. 40(2) of the Act and the appellant has come up in appeal against the said assessments.

The appellant is a registered firm with three partners shown below:

The firm paid the commission of the amounts stated above in the three assessment years to Subhodchandra Bhogilal Shah, father of the three partners. The appellant firm was dealing in colours and Chemicals. Commission was paid at the rate of 1 1/2 on the purchases made from M/s Arvind Panalal and M/s A. Pannalal and Sons who were selling agents of M/s Actul Products Ltd. During the asst. yrs. 1975-76 and 1976-77 the rate of commission was reduced from 1 1/2 per cent to 1 per cent. It was claimed by the appellant that the payment of commission was in consideration of Shri Subhodchand standing surety for the payment the purchases made from the two parties viz. M/s Arvind Panalal and M/s A. Panalal & Sons. The ITO examined Shri Arvind Panalal partner of the above two firms, Shri Subhodchandra Bhogilal, Shri Yogeshchandra Subhodchand & Shri Shreyank Arvind partner of M/s. Arvind Pannalal. From the fact gathered and the statements recorded the ITO came to the conclusion that the commission paid to Shri Subhodchand was not a payment out of business consideration and hence it was not a genuine expenditure. The ITO found that Shri Subhodchand aged 60 was formerly wording as an accountant in the firm of cloth marchant and had no previous experience in the line of colours and chemicals. It is also found that all the family members including the father were staying together in the same premises from where the business was also carried on. He noted that Shri Yogeshchandra, partner of the firm on the other hand had previous experience of cluours and chemicals. There was no written agreement with the two firms of M/s Arvind Panalal & M/s A. Pannalal & Sons regarding Shri Subhodchand standing as a surety on beheld of the firm as contended by the appellant. He also found that the financial condition of Shri Subhodchand was also such that he could hardly in question stand as a surety for the two concerns. He, therefore, came to the conclusion that the commission was paid neither fort business consideration nor for business expediency and, therefore, included the same in the hands of the appellant in all the three years under s. 40A(2) of the Act."

2.1 On appeal the AAC gave various findings, briefly (i) for asst. yr. 1973-74 the assessment was completed under s. 143 (1) of the Act and therefore, had no relevance, (ii) principle of res judicata did not apply to tax proceedings, (iii) Shri Subhodchand had no previous experience but in fact Yogesh Chandra had because in past he was carrying on business in similar line and, therefore, father was of no use to the firm, (iv) there was no written undertaking in respect of stand of the surety by the father. Besides the father had no financial stability, (v) the two firms of suppliers did not take surety from any other party, (vi) the two suppliers had no enforceable right against Shri Subhodchand in the event of any default, (vii) father did not make any withdrawals towards household expenses from the commission account which was only a hawala entry, (viii) in the contract for purchase there is no mention of the name of Shri Subhodchand and (ix) the theory of the surety of Subhodchandra is not a genuine one as stated in para 9 of his order.

3. The ld. counsel for the assessee brought to our notice various factual aspects of the case and submitted that earlier against the direction by the AAC regarding invoking of the provision of s. 40 (A) (2) of the Act the assessee did not prefer the appeal and made various submissions regarding the case of the assessee where business expediency etc. was not needed and authorised below adopted a wrong approach right from the very beginning.

4. The ld. Departmental Representative submitted a statement showing net profit, turnover, purchases etc, and stated that in various years the amount of commission payment varied between 16 per cent to 25 per cent of the net profit of firm and this was diversion of income. The father was not carrying on business of standing a surety and in fact he was not capable of because even the value of residential house belonging to him was not known and he was not wealth-tax payer.

5. We have gone through the order of the authorities below anxiously. The case of the Department and from the nature of the enquiries made and the conclusion reached is such that the expenditure claimed itself is not genuine one. We than fail to understand how no disallowance can be made under s. 40A(2) of the IT Act, Reading the provisions of s. 40A(2) (a) it would be seen that crucial words are 'for market value of the goods services or facilities.'

40A(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of this sub-section, and the ITO is of opinion that such expenditure is excessive of unreasonably having regard to the fair market value of the goods services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him, therefore, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

Therefore, necessary finding shall have to be given in respect of fair market value of the services etc. But then this will presuppose that some services are rendered in respect of which an expenditure is claimed but the amount is found excessive or unreasonable. Therefore, this s. 40A(2) cannot be invoked where transaction itself is treated as sham one or nor genuine one. And such is the finding that no expenditure can be said to have been incurred. Therefore, the disallowance if any can be made only under some other section of the AAC. Looking to the legislative history of s. 40A(2), it appears that it is intended as a curb on payment to connected persons where to government felt that tax liability is artificially reduced by diverting business profits to relatives in the form of excessive payments for goods and services. Hence it is clear that the type of disallowance thought of by the Revenue can only be under the General law where the transactions with relatives and associate concerns are proved to be sham or the value shown in the books was not the value paid or the transaction itself was not bona fide. We draw support from Ramalnga C. Mills Ltd. vs. CIT (1955) 28 ITR 952 (Mad) and CIT vs. Keshavlal Chandulal (1966) 59 ITR 120 (Guj).

5.1 Neither the assessee nor the Department come in appeal before the Tribunal against the decision of the first appellate authority directing to apply provisions of s. 40A(3) of the Act. Therefore, admittedly it is an accepted proposition by the Revenue that expenditure is incurred and the services are rendered but only thing is that amount paid is excessive or unreasonable having regard to fair market value etc. in the light of legitimate needs or the business and the benefit derives of accrued to the assessee.

It is pertinent to note that s. 40A (2) (a) casts very heavy burden on the ITO to record his finding before making any disallowance under this section. For this purpose he shall have to undertake following procedure.

(i) First of all he shall have to satisfy himself whether expenditure itself is genuine or not.

(ii) If it is genuine then for the purpose of finding out the portion of disallowance he shall have to find out the fair market value of the services and this would response that services are commonly available for which market value can be known.

(iii) He shall have to evaluate the legitimate needs of the business at a point of time when the services are rendered and this would involved an inquiry as a business man 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.

(iv) He shall also 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 facts of each case.

(v) Even the benefit accruing to the assessee shall have to be evaluated. This again may not confine the period of the accounting year only and again it would not be essential that benefit must be in the Revenue field.

(vi) Thereafter he shall have to give reasonable opportunity to the assessee to rebut his finding and his decision regarding portion proposed to be disallowed and then only he can take a decision. All these tests as aforementioned are not at all carried out by the ITO and therefore, the default on the part of the authorised below is fatal to the stand of the Revenue. We therefore, delete the disallowance made under s. 40A(2) of the IT Act in all the years.

6. The order of the first appellate authority are modified to the extent as above and the ITO is directed to pass consequential order in the case of the firm as also partners.

7. In the result, all the appeals are allowed.

 

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