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Saturday, 28 May 2016 11:43

Ad Hoc Addition - Whims and Fancies of AO Cannot Decide Tax Liability of Assessee. Any Disallowance or Addition Cannot be made on Ad Hoc Basis. It has to be Backed Up by a Valid and Plausible Reason - Mumbai Tribunal Featured

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Ad-hoc & Personal Element Disallowances Ad-hoc & Personal Element Disallowances

Ad Hoc and Estimated Disallowances of Expenses

1. Transfer Pricing(TP) is a systematic, logical and step by step approach -

- that it envisages an in-depth analysis commencing with screening of data for choice of comparables through statistical tools and application of the Most Appropriate Method (MAM),

- that the provisions of Chapter-X of the Act require that a certain discipline is maintained by the assessee as well as the AO while computing the ALP of an IT,

- that for determining the ALP of a transaction particular method should be followed so that assesses cannot reduce their tax liability while entering in to transactions with their AEs

2. In taxation matters discretionary powers have been given to the AO.s., but they are expected to use the power in a fair and just manner

3. If the AO.s. determine the tax liability in an unfair manner and if the demand is not of the DUE taxes appellate authorities are expected to allow relief to the assessee

4. AO cannot step into the shoe of the businessman to decide what expenditure to incur

5. Documentary evidence cannot be brushed aside without dealing them logically

6. In the case of corporate entity no disallowance should be made citing personal element of expenditure

7. Any disallowance or addition,whether under chapter IV or chapter X of the Act, cannot be made on ad hoc basis. It has to be backed up by a valid and plausible reasons

8. In the TP matters the rule had to be strictly followed as the Act has provided a special mechanism to deal with determination of ALP

Facts

1. The assessee,a toll management company filed its return of income on 28.11.2003,declaring loss of Rs.1.62 lakhs.The AO completed the asst on 30.3.06 u/s. 143(3) of the Act,determining the total income at Rs.1.25 crores

2. During the assessment proceedings the AO found that the assessee had paid heavy consultancy charges to M/s.Intertoll Pty.Ltd.,South Africa,that it was an Associated Enterprise(AE)of the assessee

3. AO directed the assessee on various occasions to give the details and nature of consultancy charges paid to its AE and the assessee made very brief submissions stating that it had paid consultancy fee

4. AO invoked the provisions of section 92C of the Act

5. As per the AO,the assessee did not make any submission to justify the payment of consultancy charges.He held that the auditors,while endorsing the International Transactions (IT)with the AE,had only relied on the information provided by the assessee,that the assessee had not submitted any evidence to justify the payment of consultancy fee to its AE

6. Therefore,he restricted the consultancy charges, payable to the AE to the extent of 75% of the consultancy fees. As result,disallowance of Rs.66,55,303/- was made u/s. 92C of the Act,holding it to be excessive and unreasonable

7. During the asst proceedings,the AO found that the assessee had shown business promotion expenses(BPE)of Rs.7,70,780/-,that the payment for expensive gifts of jewellery and watches were made to a sister concern

8. Vide his letter dtd. 14.12.2005,he asked the assessee to file details of BPE and its admissibility in view of provisions of Sec.37 of the Act

9. In its reply the assessee filed details of nature of expenses and the amounts paid

10. As per the AO the assessee had not given any submission justifying the expenses

11. ‘In absence of details’he disallowed an amount of Rs.5lacs on estimated basis out of total expenditure of Rs.7.70 lakhs holding that the expenses were not incurred of the purpose of business

12. During the assessment proceedings,the AO found that the assessee had claimed an amt of Rs.4.83 lakhs as travelling expenses

13. He disallowed an amt of Rs.1.00 lakhs on an estimate basis holding that the assessee had not proved that the expenses were incurred for the purpose of business

14. While completing the assessment,the AO held that the assessee had claimed telephone expenses of Rs.1.16 lakhs for the month of March 2006 out of the total expenditure of Rs.3.80 lakhs.Vide his letter dt.23.3.2006, he asked the assessee to justify the expenditure and to explain the reasons for incurring heavy expenses in the month of March. As per the AO the assessee did not file any explanation. Therefore he disallowed an amount of Rs.75,000/- out of the total expenditure

15. During the assessment proceedings the AO found that L&T Ltd. had awarded operation and maintenance contract for Ahmedabad- Mehsana Toll to a joint venture company, namely Intertoll ICS(Ahmedabad Mehsana), Toll Management Company Ltd

16. The AO treated the entire amount of Rs.1.59 crores as income of the assessee for the year under consideration and made an addition of Rs.77.49 lakhs

17. Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority (FAA)

18. During the appellate proceedings the assessee filed additional evidence and additional grounds before the FAA who forwarded the documents to AO and called for a remand report

19. Finally, FAA partly allowed the appeal of the Assessee

20. Revenue moved to the Tribunal who dismissed the appeal of Revenue and decided in favour of the Assessee

Adjudication

On Payment made to the AE

We find that the AO has mentioned that the payment made to the AE was excess and unreasonable. But , not a single word has been uttered in the order as to how it was excess or not reasonable. Any disallowance or addition,whether under chapter IV or chapter X of the Act, cannot be made on ad hoc basis. It has to be backed up by a valid and plausible reason. In the TP matters the rule had to be strictly followed as the Act has provided a special mechanism to deal with determination of ALP of IT.s. In our opinion, the order of the FAA does not suffer from any legal or factual infirmity. So,confirming his order, we decide first effective ground against the AO.

On Disallowance of Rs. 4 Lacs

In our opinion the basic approach of the AO is fautly. During the remand report when all the material was available to him he should have conducted fresh inquries to justify the disallowance. Documentary evidence cannot be brushed aside without dealing them logically. In our opinion the FAA has rightly held that the AO.s. are not authorised to enter in to the proverbial shoes of the assessee. In the case before us, the AO had exactly done it. He has not doubted the genuineness of the payment. If the payment was as per the provisions of the Act then irrespective of the figure involved same had to be allowed. We are of the opinion that no interference is required to disturb the order of the FAA. Confirming his order we decide ground no.3 against the AO.

On PCE mobilisation advance

After considering the rival submissions we are of the opinion that the order of the FAA does not suffer from any legal infirmity, that the amount in question was received as advance, that the assessee had recognized a portion of the said amount during the year under appeal, that the recognition was based on scientific method, that the assessee had taken into consideration factors like start-up, recruitment etc., that the AO had disallowed the amount without considering the terms and conditions of the agreement. Therefore, confirming the order of the FAA, we decide the last ground against the AO.

Cases Referred to

Maruti Suzuki India Ltd. (328 ITR 210)

Additional Info

Read 9486 times Last modified on Saturday, 28 May 2016 12:44
Deepak Kumar

A Post Graduate and Chartered Accountant Deepak Sinha is a member of Taxpundit's core team. An analytical, result oriented professional with more than 10 years of combined experience in industry and consultancy.

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1 comment

  • Comment Link rakesh Monday, 30 May 2016 14:08 posted by rakesh

    Well reasoned orderby Mumbai Tribunal. Very well explained. Landmark Judgement. And very well summarised too. well done Mr. Deepak

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