ANURAG AGARWAL VS ASSISTANT COMMISSIONER OF INCOME TAX -(ITAT)

1. This is assessee’s appeal for Assessment Year 2011-12, raising the following grounds:

“1. That having regard to the fact and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the addition of Rs.10,00,000/- fully as made by Ld. AO on account of alleged suppression of income and has further erred in sustaining the same to the extent of Rs.2,00,000/- by wrongly observing that the assessee has agreed for this addition during the course of assessment and this observation was made by Ld. CIT(A) without giving opportuntiy of hearing.

2. That in any case and in any view of the matter, action of Ld. CIT(A) in sustaining the action of Ld. AO in making addition of Rs.2,00,000/- on account of suppression of income is bad in law, against the facts and circumstances of the case and without observing the principles of natural justice.

3. That having regard to the fact and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting the disallowance of Rs.4,89,934/- fully as made by Ld. AO on account of alleged excessive rent paid on machineries to M/s Anurag Agarwal (HUF) and has further erred in sustaining the same to the extent of Rs.2,11,576/-.

4. That having regard to the fact and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of Rs.3,51,406/- on account of alleged excessive rent paid on machineries to M/s A.N. Agarwal (HUF).

5. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”

2. Grounds 1 and 2 are not pressed. Rejected as not pressed.

3. Ground No. 3 and 4 are against the CIT(A)’s action of not fully deleting the disallowance of Rs.4,89,934/- and confirming disallowance of Rs.3,51,406/- on account of alleged excessive rent paid on machineries hire for hospital. The ld. CIT(A) observed that the machinery were very old, obsolete and had outlived their use and utility and the payment of rent was only to reduce the liability of the assessee. These were also the very observations made by the AO.

4. The ld. Counsel for the assessee has contended that the ld. CIT(A) failed to appreciate that u/s 40A(2)(a) (of Income Tax Act, 1961), it is the onus of the AO to prove expenditure to be excessive and such onus was not discharged by the AO, rather, the AO only observed that the WDV of the machinery was low; and that the evidence brought on record was illegally not considered by the ld. CIT(A).

5. On the other hand, the ld. DR has duly strongly supported the impugned order. It is stated that the AO has observed that the rent was paid to persons covered u/s 40A(2)(b) (of Income Tax Act, 1961).

6. Heard. It is true that the AO observed that the payments were made to the persons covered u/s 40A(2)(b) (of Income Tax Act, 1961). But that is why section 40A(2)(a) (of Income Tax Act, 1961) has been invoked. The issue is whether the AO’s opinion that the expenditure was excessive, is correct. As per section 40A(2)(a) (of Income Tax Act, 1961), such opinion of the AO is to be formed having regard to the fair market value of the goods in which the payment is made. For this, the AO has to place on record material showing the fair market value of the goods. In the present case, the AO did not conduct any inquiry or verification into the reasonableness of the expenditure with reference to fair market charges payable under similar conditions.

7. In ‘CIT vs. Superior Crafts’, 353 ITR 101 (Del), in ITA No.244/2009, for A.Y. 2002-03, the Hon’ble Delhi High Court has approved the action of the Tribunal in deleting the similar addition/disallowance, dismissing the appeal filed by the Department.

8. In ‘ITO vs. Mayur Agarwal’, 128 ITD 55(Agra) (TM), it was held that u/s 40A(2)(b) (of Income Tax Act, 1961), the AO is bound to show as to how the rent paid to a relative is excessive.

9. In ‘ACIT vs. Bombay Real Estate Development Company (P) Ltd.’, 64 DTR 137 Mumbai, it was held that since the AO had not brought on record anything to show that the payment made was unreasonable or excessive having regard to the fair market value of the services for which the payment was made or the benefit derived from such services, the conditions of section 40A(2) (of Income Tax Act, 1961) were not satisfied.

10. In ‘S.K. Engineering vs. JCIT’, 103 ITD 97 (Bangalore), referring to paras 72 and 74 of CBDT Circular No.68 (LXXVI-66) of 1968, dated 06.07.1968, it was held, inter alia, that for invoking the provisions of section 40A(2) (of Income Tax Act, 1961), the onus lies on the AO that the payment is excessive or unreasonable having regard to the fair market value of the goods; and that the Revenue has to place on record evidence as regards excessiveness or unreasonableness.

11. In ‘Jagdamba Rollers Flour Mill Ltd. Vs. ACIT’, 117 ITD 260, (Nagpur ) (TM), it was held that disallowance u/s 40A(2) (of Income Tax Act, 1961) can be made only if payment is made to a person specified in section 40A(2)(b) (of Income Tax Act, 1961) and it is found to be excessive or unreasonable having regard to the market value of the goods, services or facilities for which the payment is made; and that in the absence of inquiry by the AO, as contemplated by the provisions of section 40A(2)(a) (of Income Tax Act, 1961) , no disallowance can be made.

12. No decision contrary to the above decisions has been cited.

13. In the above view of the matter, in the absence of any inquiry as stipulated by section 40A(2)(a) (of Income Tax Act, 1961) , the disallowances are unsustainable. They are deleted.

14. In the result, the appeal is allowed.

Order pronounced in the open court on 28/03/2018.

Sd/- Sd/-

(DR. MITHA LAL MEENA) (A.D. JAIN)

ACCOUNTANT MEMBER JUDICIAL MEMBER