The order of the Bench was delivered by
B.R. Baskaran, Accountant Member:-The appeal filed by the Revenue and the cross-objection filed by the assessee are directed against the order dated February 18, 2013 passed by the learned Commissioner of Income-tax (Appeals)-IV, Kochi and they relate to the assessment year 2008-09.
2. The appeal filed by the Revenue is barred by limitation by 60 days. Similarly, the cross-objection filed by the assessee is barred by limitation by 21 days. Both parties have filed petition requesting the Bench to condone the delay. We heard the parties on these primary issues. Having regard to the submissions made in their respective petition, we condone the delay and admit the appeal and the cross-objection for hearing.
3. Grounds No. 1 and 7 are general in nature. Ground Nos. 2 and 3 relate to the validity of reduction of disallowance made from salary expenses from 10 per cent. to 5 per cent. Ground No. 4 relates to non-consideration of disallowance of "agents incentive" expenses under section 40A(2)(b) of the Act. We notice that grounds 5 and 6 raised by the Revenue do not arise out of either the assessment order or the order of the learned Commissioner of Income-tax (Appeals). Hence, the learned Departmental representative was asked to explain the reason for urging those grounds before us. In response thereto, the learned Departmental representative sought clarifications from the Assessing Officer, who has clarified that those grounds were raised to support the ground relating to the disallowance to be made under section 40A(2)(b) of the Act. Thus we notice that we need to adjudicate the following two issues:-
(a) Reduction of disallowance made from salary expenses.
(b) Disallowance of "agents incentive" expenses under section 40A(2)(b) of the Act.
4. The facts relating to the issues referred above are stated in brief. The assessee is a partnership firm consisting of 8 partners. It is engaged in share broking business by undertaking franchise licence from M/s. JRG Securities Ltd. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 42,00,895 as deduction under the head "Agents incentive". The Assessing Officer noticed that the incentives were given to M/s. Anson Wealth Management, M/s. Systematic Associates and M/s. Image Associates. According to the Assessing Officer, one of the partners of the firm named Shri Soby Mathew is the proprietor of M/s. Image Associates and the proprietor of M/s. Systematic Associates named Sri Titus Joseph is near relative of another partner of the firm. M/s. Anson Wealth Management is one of the group companies. Thus, according to the Assessing Officer all three concerns cited above are related parties as defined under section 40A(2)(b) of the Act. Accordingly, the Assessing Officer took the view that the expenses claimed as "agents incentive" is disallowable under section 40A(2)(b) of the Act. However, since the Assessing Officer disallowed the abovesaid expenses under section 40(a)(ia) of the Act on account of non-payment of tax deducted at source within the due date, he did not consider disallowing the same again under section 40A(2)(b) of the Act.
4.1. The Assessing Officer noticed that the assessee has deducted tax at source from the payments made as "agents incentive", but has remitted the same belatedly, i.e., on September 30, 2008. Since the TDS was not paid within the due date prescribed under the Income-tax Rules, the Assessing Officer disallowed "agents incentive" expenses under section 40(a)(ia) of the Act.
4.2. The assessee had claimed expenses under the head "salary and allowances" to the rune of Rs. 60.72 lakhs. The assessee furnished the details of employees to whom salary was paid. It was noticed that there are 65 employees and most of them hailed from Tamil Nadu. According to the Assessing Officer, none of the employees were from Kottyam district. The Assessing Officer further noticed that all the employees were drawing salary in the range of Rs. 5,000 to Rs. 12,000 and none of them were falling under the Provident Fund Act or employees State insurance. Further it was noticed that the vouchers have been prepared at a stretch and they have not been stamped. Under these set of facts, the Assessing Officer disallowed 10 per cent. of salary expenses, apparently to cover possible deficiencies.
5. In the appeal filed, the learned Commissioner of Income-tax (Appeals) noticed that the TDS deducted from "agents incentive" was remitted to the Government account before the due date of filing the return of income prescribed under section 139 of the Act. Accordingly he deleted the disallowance of "agents incentive" expenses made under section 40(a)(ia) of the Act. It is pertinent to note that the Assessing Officer, after discussing about the applicability of the provisions of section 40A(2)(b) of the Act, did not make disallowance under that section only for the reason that he disallowed the same under section 40(a)(ia) of the Act. Hence, the grievance of the Department is that the learned Commissioner of Income-tax (Appeals) should have sustained the disallowance of "agents incentive" expenses, alternatively by invoking the provisions of section 40A(2)(b) of the Act. However, the learned Commissioner of Income-tax (Appeals) did not consider the disallowance under section 40A(2)(b) of the Act. The learned Commissioner of Income-tax (Appeals) reduced the disallowance made from the salary expenses from 10 per cent. to 5 per cent. Aggrieved, the revenue has filed this appeal before us challenging the decision of the learned Commissioner of Income-tax (Appeals) in reducing the disallowance made from salary expenses from 10 per cent. to 5 per cent. and also in not considering the disallowance of "agents incentives" under section 40A(2)(b) of the Act.
6. In the cross-objection, the assessee supports the order passed by the learned Commissioner of Income-tax (Appeals) and also contends that the disallowance of "agents incentive" expenses under section 40A(2) (b) is not warranted.
7. We have heard rival contentions on both issues and carefully perused the record. With regard to the disallowance made from salary expenses, we notice that the Assessing Officer did not express any doubt about the genuineness of expenses claimed. The deficiencies, according to the Assessing Officer were that the vouchers seem to have been prepared at a stretch and further they have not been stamped. Hence, the Assessing Officer has disallowed 10 per cent. of salary expenses to cover up possible deficiencies. The learned Commissioner of Income-tax (Appeals) has reduced the disallowance from 10 per cent. to 5 per cent. with the reasoning that the disallowance of 10 per cent. is on the higher side. Before us, the learned Departmental representative placed reliance on the decision of the hon'ble jurisdictional Kerala High Court rendered in the case of MIL Controls Ltd. v. CIT [2012] 340 ITR 190 (Ker) and submitted that the disallowance of 50 per cent. made in that case was upheld by the High Court. We have gone through the said decision and we notice that the assessee therein made certain payment to a group company for the corporate services rendered to it and claimed the same as deduction. Since the details of services were not given, the Assessing Officer disallowed the entire claim. However, the learned Commissioner of Income-tax (Appeals) restricted the disallowance to 50 per cent. and the same was upheld by the Tribunal. The High Court upheld the decision of the Tribunal with the following observations (page 192):-
"... The appellant's contention that the claim is allowable merely because the payment is made and the same is bona fide cannot be accepted. This is because the payee is a related company within the group and, therefore, the standard of proof required for allowing the claim is more than what is required in other cases. If the payment was to a stranger and bona fide, presumption of reasonableness of payment would apply but not when payments are between related parties. This is because in the case of related companies beneficiaries are the same set of people and, therefore, unless details are furnished justifying the payment of service charges, the Department is not bound to allow the claim."
In the above cited case, it can be seen that the payment was made to a related person, which is not the case here in respect of salary payments. Hence, in our view, the decision of the jurisdictional High Court cannot be applied to the facts of the instant case.
7.1. According to the assessee, it has got 10 branches in Tamilnadu and one branch in Kerala and the salary expenses have been incurred wholly and exclusively for the purposes of business. Since the branches were spread mostly in Tamilnadu, the assessee had to employ persons hailing from Tamilnadu. We find force in the abovesaid contentions of the learned authorised representative. On a perusal of the assessment order, we notice that the Assessing Officer has not doubt about the genuineness of the salary payment, even though he made certain observations about the nativity of the employees. Further there is no finding that the salaries were paid to related persons. Even though, the Assessing Officer has pointed out the deficiencies in the vouchers, yet we notice that the Assessing Officer did not take any step to prove that the vouchers were bogus. Thus, as stated earlier, the Assessing Officer has made an estimated disallowance of 10 per cent. only to cover up possible deficiencies. The learned Commissioner of Income-tax (Appeals) has reduced the said estimate to 5 per cent. Thus, it is seen that the issue under consideration is only that of an estimate for possible deficiencies. Under these set of facts, we do not find any reason to interfere with the decision of the learned Commissioner of Income-tax (Appeals) on this issue.
8. The next issue relates to the claim of disallowance of "agents incentive" under section 40A(2)(b) of the Act. Under the provisions of the Act, the disallowance if any is required to be made under section 40A(2)(a) of the Act, if the payment is found to have been made to the persons specified in section 40A(2)(b) of the Act. Hence, what is required to be considered is section 40A(2)(a) of the Act. For the sake of convenience, we extract below the provisions of section 40A(2)(a) of the Act.
"40A(2)(a). Where the assessee incurs any expenditure in respect of which payment has been made 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.
(b) The persons referred to in clause (a) are the following, namely:-
..."
8.1. A careful perusal of the provisions of section 40A(2)(a) would show that the said section does not provide for automatic disallowance of the claim for deduction of payments made to the persons specified in section 40A(2)(b) of the Act, as assumed by the Assessing Officer. The Assessing Officer is required to form an opinion that the said expenditure is excessive or unreasonable. The measure of excess or unreasonable nature has to be determined having regard to:-
(a) the fair market value of the goods, services or facilities for which payment is made or
(b) the legitimate needs of the business or profession or
(c) the benefit derived or accruing therefrom.
After carrying out the abovesaid exercise, the Assessing Officer can disallow only that portion of expenditure, which was considered by him as excessive or unreasonable.
8.2. In the instant case, the Assessing Officer has not carried out the exercise as discussed above, but has simply taken the view that the payments made to related persons is disallowable under section 40A(2)(a) of the Act. Further, the Assessing Officer has observed that M/s. Systematic Associates and M/s. Image Associates fall under the category of related concerns specified under section 40A(2)(b) of the Act. However, the assessee contends before us that the abovesaid observations of the Assessing Officer are against the facts. According to the assessee, M/s. Systematic Associates and M/s. Image Associates were not parties covered under section 40A(2)(b) of the Act. According to the assessee, both the abovesaid concerns are partnership firms and the partners of the said firms are not either partners of the assessee-firm or relatives of any of the partners of the assessee-firm. Thus, according to the assessee, M/s. Anson Wealth Management alone is a related party covered under section 40A(2)(b) of the Act. We notice that the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) has failed to consider these factual aspects.
8.3. According to the assessee, it has shared the commission income at the uniform rate of 60 per cent. with all the three parties. Since the concerns M/s. Systematic Associates and M/s. Image Associates are not related parties, it was contended by the learned authorised representative that the payment made to M/s. Anson Wealth Management at the same level cannot be considered as excessive or unreasonable. We find force in the said contentions of the learned authorised representative.
8.4. Thus, we notice that the Assessing Officer, first of all, has failed to prove that the concerns M/s. Systematic Associates and M/s. Image Associates are related parries as defined under section 40A(2)(b) of the Act. Secondly, the view entertained by the Assessing Officer that the payments made to related parries and claimed as expenditure is required to be disallowed under section 40A(2)(a) is not the correct view. Thirdly, the Assessing Officer has not established that the payments made to the related parties are excessive or unreasonable under the three criterias specified in section 40A(2)(a) of the Act. On the contrary, the contention of the assessee is that the payments have been made by it to both related and unrelated parties at the same level and hence the question of excessiveness or unreasonableness in the payment made to the related parties does not arise. Thus, in our view, the Assessing Officer has discussed about the disallowance to be made under section 40A(2)(a) of the Act without properly appreciating the relevant provisions. Before us also, the Revenue did not bring any material on record to show that the provisions of section 40A(2)(a) can be applied to the payments made as "agents incentive".
8.5. In view of the foregoing discussions, we are of the view that there is no case for making disallowance of "agents incentive" expenses by invoking the provisions of section 40A(2)(a) of the Act. Accordingly, we reject the grounds raised by the Revenue on this issue.
9. We have already noticed that the assessee has filed cross-objection only to support the order of the learned Commissioner of Income-tax (Appeals). Hence it does not require adjudication.
10. In the result, the appeal filed by the Revenue and the cross-objection filed by the assessee are dismissed.
The order pronounced in the open court on 3rd day of Jan 2014.