The Ahmedabad Bench of the Income Tax Act, 1961 that for invoking Section 40A(2)(b)of the Income Tax Act, onus to prove the unreasonableness is on the Assessing Officer only.
The assessee is a company engaged in the business of imported wood and Eco friendly particle Boards. For the Asst. Year 2017-18, assessee filed its Return of Income on 04-10-2017 declaring total income of Rs.1,52,49,840/-. The case was selected for scrutiny assessment.
The Assessing Officer noticed that the purchases were made from M/s. Laxmi Enterprises as a bogus transaction. Therefore AO issued a summons u/s. 133(6) of the Act on 06-12-2019, however there was no response from M/s. Laxmi Enterprise. Therefore the assessee was issued a letter dated 14-12-2019 to the assessee company to produce the key persons of M/s. Laxmi Enterprises. In reply, the assessee submitted that the authorised person of M/s. Laxmi Enterprise visited the office of the Assessing Officer in response to u/s. 133[6] notice dated 06-12-2019.
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However the AO held that the Representative of M/s. Laxmi Enterprises did not furnish any relevant document, hence no statement was recorded u/s. 131 of the Act. Since M/s. Laxmi Enterprises is listed as a defaulter in the website of Gujarat Sales Tax and Commercial Tax Department, the purchases of Rs.43,95,474/- made from M/s. Laxmi Enterprises was treated as bogus and added as the income of the assessee.
Similarly, the assessee has taken 3 Flats Near VIP Road, Vesu, Surat and paid rental income of Rs.1,60,000/-, 1,44,000 and 1,44,000/- per month to the Co-owners. The AO noticed that the Co-owners of the property are covered u/s. 40A(2)(b) being related parties, why the rent paid of Rs. 22,40,000/- be disallowed.
Section 40A(2)(b) pertains to payments made by an assessee to specified persons (typically related parties) where such payments may be disallowed if they are found to be unreasonable or excessive in comparison to the fair market value of the goods, services, or facilities received.
The key point here is that the AO must provide evidence to demonstrate that the expenditure claimed by the assessee is unreasonable. Merely pointing out that the parties are related under Section 40A(2)(b) is not sufficient to justify disallowance. It is essential for the AO to conduct a proper inquiry to establish that the payment exceeds the fair market value or that it is not justified in the context of the business operations.
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This principle was reiterated in this case, where the AO made a partial disallowance under Section 40A(2)(b) but failed to provide conclusive evidence that the rent paid for properties leased from related parties was excessive.
In result, the tribunal noted that the onus was on the AO to prove unreasonableness, and simply referencing market comparisons without considering the specific circumstances (such as the location and amenities provided) was insufficient.
In this case, the tribunal held that the AO must establish that the expenditure in question is not at arm’s length, based on proper comparisons and assessments. Without such evidence, the disallowance cannot be upheld, the tribunal bench of Accountant Member Ramit Kochar and Judicial Member T R Senthil Kumar stated.
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