TMI Blog2021 (8) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... s also for the reason that assessee has very low gross profit and net profit margins - HELD THAT:- The turnover of the assessee is ₹ 52.99 crores whereas the turnover of the sister concern is ₹ 69.95 crores. Further assessee has stated that the sister concern is the manufacturing unit of the group whereas the assessee is a marketing unit of the group. Therefore comparison of the gross profit and net profit of a manufacturing unit with a marketing unit is not proper. If the revenue wanted to apply the provisions of Section 40A (2) of the act it has to prove that purchase price paid by the assessee are unreasonable and excessive looking to the market rate of such goods and further the needs of the business of the assessee. No such exercise has been carried out by the learned AO. In fact this exercise could have been carried out by the learned assessing officer by verifying the books of the sister concern where that sister concern sales to the assessee as well as to the other party. AO could have obtained the comparative prices of the similar goods supplied to the assessee by the sister concern and to the other parties. No such efforts have been made but merely a statis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 40A (2) (b) of the Act. Valuation of perquisite if shown properly by directors in their tax returns and if it is less than Rent paid by the assessee to the land lord in whose house the directors are residing, it is the duty of AO of the directors to see whether perquisites are correctly valued or not. It cannot straight away result in to disallowance u/s. 40A (2) of the Act unless it is shown that it is unreasonable and excessive having regard to the fair market value of such service or legitimate needs of the business of the assessee. All these ingredients are absent in the disallowance made by the revenue. In view of this, we direct the ld. Assessing Officer to delete the disallowance of rent paid to related parties as Revenue failed to show that it is excessive and un-reasonable compared to the market rate. Disallowance of the medical expenses of the Directors - HELD THAT:- The assessee has incurred total medical expenditure of ₹ 65,053/- out of which ₹ 29,506/- related to the Directors of the company. The ld. Assessing Officer disallowed as neither the appointment letter of the Directors nor the resolutions were filed. It were also not filed before the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance made by learned A.O. at ₹ 108210/- being 30 percent of Business Promotion and Advertisement expenses claimed at ₹ 360707/-. 4. Ld. C.I.T.(A) has erred in confirming depreciation of ₹ 20475/- claimed at the rate of 60 percent on addition of Apple LED Cinema amounting to ₹ 45500/- classified as computer including computer software. 5. Ld. C.I.T.(A) has erred in law and on facts that ₹ 297000/- being payment of rent to Smt. Maya Sachdeva and Sh Rahul Sachdeva being related parties within the meaning of Section 40A(2)(b) of The Act amounting of ₹ 180000/- each i.e. ₹ 360000/-. It is contented that rent so paid is neither excessive nor unreasonable. Similar rent have been paid in earlier years and have been allowed. 6. Ld. C.I.T.(A) has erred in facts in confirming the disallowance of director's medical expenses claimed at ₹ 29506/-. It is contended that director of the company are also employee of the assessee company and expenses is allowable as per past history of the case. 7. Ld. C.I.T.(A) has erred in facts and circumstances in confirming disallowance of ₹ 194350/- being 10 percent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (Appeals) to ₹ 1766377/-. Facts shows that the management of the assessee has another related concern having common directors and carrying on the same business as that of the assessee and the entire purchases of the assessee amounting to ₹ 51 crores were purchased from that party. The learned assessing officer was of the view that though the provisions of Section 92BA relating to the related party domestic transactions are effective only from 1 April 2013 but he looked into the reasons for making hundred percent purchases from a related party and whether the transactions are at arm's-length or not and unreasonable profit has not been transferred to the other related party. This was also for the reason that assessee has very low gross profit and net profit margins. Therefore the assessee was asked to prove the prices paid for goods and services to the related party whether they are at arm's-length price supported by documentary evidences and the prices charged was not excessive and was comparable unreasonable. The assessee was also asked to show the profit and loss account and balance-sheet of the related party. Assessee submitted that assessee is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat neither the learned assessing officer nor the learned CIT - A has applied the provisions of Section 92BA of the income tax act in its true spirit. In fact the adjustment has been made by disallowing part of the purchase prices from the related party by the learned assessing officer which is actually in conformity with the provisions of Section 40A (2) of the act. Now it is required to be seen whether the addition made by the learned assessing officer and partly confirmed by the learned CIT - AE is in accordance with that provisions of not. In fact the AO is right that the hundred percent purchases of the assessee are from the related parties. However the hundred percent sales of the related party is not to the assessee. The turnover of the assessee is ₹ 52.99 crores whereas the turnover of the sister concern is ₹ 69.95 crores. Further assessee has stated that the sister concern is the manufacturing unit of the group whereas the assessee is a marketing unit of the group. Therefore comparison of the gross profit and net profit of a manufacturing unit with a marketing unit is not proper. If the revenue wanted to apply the provisions of Section 40A (2) of the act it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred by the Directors, but that does not mean that these are the personal expenditure and not incurred wholly and exclusively for the purposes of the business of the assessee. Even otherwise, in the case of the company assessee, there cannot be any personal expenditure. In view of this, Ground No. 3 of the appeal is allowed and the disallowance is directed to be deleted. 8. Ground No. 4 is with respect to the depreciation on Apple LCD monitor on which assessee claimed depreciation @ 60% stating it to be computer and the Assessing Officer and CIT (Appeals) allowed it @ 15% holding it to be not a computer but general plant and machinery. The assessee has purchased Apple LED DIS which is in fact a monitor for ₹ 45,500/- which is required for display at the time of conferences and presentation and is required to be attached to a CPU. In fact, it is a computer Monitor. Therefore, we hold that it is a computer entitled to 60% of the depreciation, as it is a monitor attached to the computers. Thus, ground No. 4 is allowed. 9. Ground No. 5 is disallowance of rent to the related parties of ₹ 2,97,000/-. The Assessing Officer found that assessee has paid rent to speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso not filed before the ld. CIT (Appeals), hence it was confirmed. Even before us, it was not shown that the Directors are employees of the company and they were entitled to reimbursement of medical expenditure as per their terms of appointment. In view of this, we do not find any infirmity in the orders of the lower authorities and ground No. 6 of appeal is dismissed. 12. Ground No. 7 is with respect to the confirmation of the disallowance of 10% of various expenditure such as Staff welfare, Repair, Telephone, Travelling, Vehicle running etc. The assessee has incurred total of these expenditure amounting to ₹ 19,43,521/-. The ld. Assessing Officer has disallowed 10% of such expenditure stating that the disallowance is in order to check leakage of profit under the guise of personal expenses debited under these heads. He disallowed 10% of this expenditure. The ld. CIT (Appeals) held that the above disallowance is reasonable for the reason that appellant is a private company run by its Directors and naturally certain expenditure have to be of personal nature. We find that before the Assessing Officer assessee has submitted the complete details of this expenditure. It is als ..... X X X X Extracts X X X X X X X X Extracts X X X X
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