Section 40A(2)(b) Addition allowed against Expense & not against income

IN THE INCOME TAX APPELLATE TRIBUNAL

The Relevant Text of the Order :

5.1 I further find that ITAT, ‘G’ Bench, Delhi in ITA No. 2327/Del/2016 (AY 2011-12) in Revenue’s Appeal in the case of ITO vs. Kec Delco Vraha (JV) has decided the similar issue in favour of assessee by holding as under:-

“9. We have considered the rival arguments made by both sides and perused the orders of the authorities below. We find the SMC Bench of the Tribunal in the case of ITO vs. M/s KEC Sidharth JV and in the case of ITO vs. M/s KEC PLR KPIPL JV in the consolidated order dated 03.4.2018 has decided identical issue and dismissed the appeal filed by the revenue in all these appeals by observing as under:-

“8 I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted position that the AO made the addition by= invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenses considered to be excessive or unreasonable having regard to the fair market value of the goods/services or facilities for which the payment is made. However, in the instant case, the AO estimated the profit of the assessee and determined the income, nowhere he .doubted the expenses incurred by the assessee. Therefore, I am of the confirmed view that the AO was not justified in making th~ addition by invoking the provisions of Section 40A(2)(b) of the Act which are applicable to the expenditure and not to the receipts and the ld. CIT(A) rightly deleted the same. A similar issue having identical facts has already been adjudicated by the ITAT Delhi Bench “SMC”, New Delhi vide order dated 21.11.2016 in ITA No. 2326/Del/2016 for the assessment year 2011-12 in the case of ITO, Ward-2(2), Gurgaon Vs KEC-Asiakom VB (JV), Gurgaon wherein the relevant findings are given in paras 5 & 6 of the order dated 21.11.2016 which read as under:

“5. It is noticed that the AO made disallowance u/ s 40A(2)(b) of the Act by opining that the assessee should have earned income from subcontracting. At this stage, it is relevant to note the prescription of the relevant part of Section 40A(2), which is as under:- .

’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 clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or ‘unreasonable 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 therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

6. On going through the mandate of the above prctnsion; it is clear that the disallowance under this section is made in respect of the expenses incurred or payments made which are not deductible. This section has no application to income aspect of the assessee. As the AO has made disallowance u/s 40A(2)(b) in respect of income which the assessee in his opinion ought to have earned rather than certain expenses incurred, I am of the considered opinion that the provisions of this section are not attracted. 1, therefore, uphold the impugned order on this score deleting the disallowance. “

9. The aforesaid order was followed in the assessee’s own case in ITA No. 5943/Del/2016 for the assessment year 2012-13 vide order dated 28.02.2017 wherein it has been held as under:

“4. I have considered the submissions of both the parties and perused the record of the case. Admittedly, the Assessing Officer has invoked the provisions of section 40A(2)(b) as the contract had been given to associated party. I find that under identical circumstances the Tribunal in the case of Kec-Asiakom UB (JV) (supra) has observed as under:-

“4. I have heard the ld. AR and perused the relevant material on record. None is present on behalf of the Revenue. In fact, there is no one to attend the proceedings from the side of the Revenue in all the cases fixed before the Bench today. The ld. AR insisted that the appeal be disposed of I am agreeable with the contention of the ld. AR and, accordingly, proceeding to dispose of the instant appeal ex parte qua the Revenue.

5. It is noticed that the AO made disallowance u/ s 40A(2)(b) of the Act by opining that the assessee should have earned income from sub-contracting. At this stage, it is relevant to note the prescription of the relevant part of Section 40A(2), which is as under:-

“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 clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable 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 therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.”

6. On going through the mandate of the above provision, it is clear that the disallowance under this section is made in respect of the expenses incurred or payments made which are not deductible. This section has no application to income aspect of the assessee. As the AO has made disallowance u/s 40A(2)(b) in respect of income which the assessee in his opinion ought to have earned rather than certain expenses incurred, I am of the considered opinion that the provisions of this section are not attracted. I, therefore, uphold the impugned order on this score deleting the disallowance.”

5. Respectfully following the decision of the Tribunal in the case of Kec-Asiakom us (JV) (supra), I allow the claim of assessee.”

10. So, respectfully following the aforesaid referred to order, I do not see any merit in this appeal of the department.

11. In ITA Nos. 7045 & 7046/Del/2017, identical issue having similar facts is therefore, the findings given in the former part of this order shall apply mutatis.

12. In the result, the appeals of the department are dismissed.”

10. Since the order of the CIT (A) is in consonance with the decisions of the Tribunal in other group concerns, therefore, in absence any contrary material brought to our notice against the orders of the Tribunal and considering the fact that the Ld. CIT (A) while deciding the issue has followed the decisions of the Hon ‘ble High Court, therefore, we find no infirmity in the order of Ld. CIT(A). Accordingly, the same is upheld and the grounds raised by the revenue are dismissed.

11. In the result, the appeal filed by the revenue is dismissed.”

6. After perusing the aforesaid findings of the ITAT, SMC Bench, Delhi as well as the ITAT, ‘G’ Bench, Delhi, I am of the considered that the issue in dispute has already been adjudicated and decided in favour of the Assessee in the aforesaid findings of the Tribunal. Therefore, respectfully following the same ratio, the addition in dispute is hereby deleted and all the 04 appeals filed by the assessee stand allowed.

7. In the result, all the 04 appeals filed by the Assessee are allowed.

The decision is pronounced on 05.05.2020.