The Income Tax Appellate Tribunal (ITAT), New Delhi Bench ruled that the disallowances purely hypothetical without any tangible material shall be invalid.
The assessee, M/s Interarch Building Products (P) Ltd. paid Rs.10.02 Cr. on account of design charges for T3 Airport construction. The AO treated the amount as capital in nature whereas the assessee claimed it under the revenue expenditure. The amount has been paid by the assessee to an entity namely, M/s Corus Building System Ltd. for availing the services of structural design & drawings.
The CIT (A) deleted the addition holding that the expenditure on account of drawings does not give any enduring benefit to the assessee.
AO has disallowed an amount of Rs.80,000/- on the ground that the appellant had not submitted comparative rates in the same location, where the premises are situated. The detailed submission of the appellant show that the appellant had to hire the factory premises to reduce its cost of manufacturing and to cater to the workload. The factory owned by M/s Intertec (firm) was adjoining the factory premise of the appellant and therefore, hiring of such premises was in the administrative and functional prudence of the appellant company. Moreover, M/s Intertec (Firm) and the appellant company both are entitled for deduction under section 80IC and therefore, there is no tax avoidance angle. The appellant has also explained about the job work payment to M/s Intertec (Firm). The Ld. AO could not furnish any evidence as to how such charges were higher compared to the fair market value or whether any undue benefit was passed on to the related person for such payment.
The CIT(A) held that regarding the disallowance of rental payment for providing accommodation to the two directors, it was informed that the value of the rent free accommodation has been offered as persequite for taxation by the two directors. Further, the amounts of Rs.3.60 lakhs and Rs.3.00 lakhs per annum respectively, keeping in view the high level of remuneration paid to the Directors cannot be held as excessive or unreasonable. In view of this, the addition made on this ground is also deleted.
The coram of Bhavnesh Saini and Dr. B. R. R. Kumar gone through the order of the Assessing Officer and that of the ld. CIT (A) with regard to the disallowance u/s 40A(2)(b). The relevant part of the order of the ld. CIT (A) on this issue pertaining to payments made to Mr. Arvind Nanda, with regard to the vehicle purchase, payment made to M/s Intertec on account of job work and the rental payments has been examined.
The ITAT refused to interfere in the order of the CIT(A) held that the disallowances are purely hypothetical without brining any tangible material to prove that the payments are over and above the market rates.
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