2014 (1) TMI 1772 - AT - Income Tax

Adhoc disallowance @ 50% of the financial charges invoking provisions of section 40A(2)(b) - payment to related parties - Held that - The undisputed fact remains that the payments have been made to the related parties. It is also settled position of law that for invoking the provisions of section 40A(2) the AO should form an opinion that the charges which have been paid to the related parties are unreasonable and excessive. In the present case the AO had disallowed the claim on the basis that payments of financial charges aggregating to Rs. 20, 70, 000/- to the persons specified under section 40A(2)(b) of the Act is somewhat unreasonable having regard to the legitimate needs of the assesseecompany s business vis- -vis the benefits derived by or accruing to the assessee-company as a result of such payments of financial charges because the basis of quantification of such payments are not clear and instances of utilization of such services do not fully justify the payment. This finding of the AO was confirmed by the ld.CIT(A) on the basis that the total bank guarantee for the period 1.4.2007 to 31.3.2008 was Rs. 56, 500, 000/- 1% of such amount comes to Rs. 5, 65, 000/-. Thus this a reasonable amount to be paid as guarantee commission to the related parties on the basis of such payments made by the appellant itself in the earlier year. Balance amount allowed by the A.O. amounting to Rs. 4, 70, 000/- can be attributed to the amount paid by the appellant on account of interest free fund provided by the related parties from time to time. In page-4 of the paper-book No.2 the assessee has given the utilization of sources under LLMS guaranteed by the parties to whom the financial charges paid. Since this information was not before the authorities below thus this issue is to be restored to the file of the AO to decide the same afresh in the light of the information furnished - Decided in favour of assessee for statistical purposes only.

Summary

Issues:
1. Adhoc disallowance of financial charges under section 40A(2)(b) of the Act.
2. Justification of interest levy under section 234B of the Act.
3. Initiation of penalty under section 271(1)(c) of the Act.

Issue 1: Adhoc disallowance of financial charges under section 40A(2)(b) of the Act:
The appellant contested the disallowance of 50% of financial charges amounting to Rs. 10,35,000 under section 40A(2)(b) of the Act. The appellant argued that due to stock market volatility, the financial charges were necessary for fulfilling contractual obligations, and the lower authorities erred in not considering the business exigency. The appellant emphasized that fixed monthly charges ensured asset availability when needed, and there was no evidence of excessive payments to related parties. The AO's disallowance was based on the perceived unreasonableness of the payments to related parties, lacking clear quantification and justification for the services provided. The Tribunal found that the AO's decision lacked clarity on the reasonableness of the financial charges and directed a fresh assessment considering additional information provided by the appellant, thus allowing the appeal for statistical purposes only.

Issue 2: Justification of interest levy under section 234B of the Act:
The appeal challenged the levy of interest under section 234B of the Act, which was deemed consequential and upheld without further elaboration in the judgment.

Issue 3: Initiation of penalty under section 271(1)(c) of the Act:
The appellant objected to the initiation of penalty under section 271(1)(c) of the Act, arguing it was premature. The Tribunal rejected this ground, deeming the penalty initiation justified without providing detailed reasoning in the judgment.

In conclusion, the Tribunal partially allowed the appeal concerning the adhoc disallowance of financial charges under section 40A(2)(b) of the Act for statistical purposes only. The interest levy under section 234B of the Act was upheld as consequential, and the objection to penalty initiation under section 271(1)(c) of the Act was rejected.