No Adhoc Disallowance Is Warranted U/s 40A(2) On Payments Which Were Not Identified As Excessive Or Unreasonable By AO: Bangalore ITAT

The ITAT therefore allowed the assessee's appeal regarding the disallowance u/s. 40A(2) of the Income Tax Act, 1961, being 50% of the total back office charges paid to group consultant MEMGIIPL.

The Bench of the ITAT comprising of George George K. (Vice President) and Laxmi Prasad Sahu (Accountant Member) observed that, “The AO has not brought any material on record to show that the payment made by the assessee to MEMGIIPL is unreasonable and excessive and has made disallowance on adhoc basis. merely stating that the order of the ITAT in group case has not been accepted by the revenue. The AO has observed that the assessee may have benefitted from the bulk or centralized purchasing done though MEMGIIPL, but it does not justify the entire payment. Once it is accepted by the AO that the assessee is benefited through MEMGIIPL, no adhoc disallowance is called for.” (Para 12)

As per the brief facts of the case, the assessee's return was selected for scrutiny, wherein AO noted that the assessee is having a separate and sound set up for legal, audit and financial works/requirements and incurring huge amounts under these costs. Banks & financial institutions disburse loans individually to group companies and not to the groups as a whole. Banks give loans at rates at par with the market rates and hence no further efforts is actually needed by the holding company. Therefore the AO was not convinced with the explanation of the assessee and disallowed 50% of the amount u/s. 40A(2). The AO rejected the assessee's submission that similar disallowance in the case of assessee group concerns in the case of Manipal Health Systems Pvt. Ltd. in ITA Nos.1667/Bang/2016 was deleted by the ITAT on the ground that the matter was pending in appeal before the High Court.

The CIT(A) rejected the submissions of the assessee and observed that payment is made to a group concern, exact services has not been stated by the assessee and the work of facilitation of bank has not been substantiated with evidence.

The Bench noted that similar issue came up for consideration before the Tribunal in the case of assessee's group case viz., Manipal Health System Systems Pvt. Ltd. in ITA No.1667/Bang/2016, wherein it has been repeatedly held through various judicial pronouncements that the onus is on the AO to bring on record the comparable cases to prove that payment made by the assessee is in excess of fair market value and hence the same in his opinion is found to be excessive or unreasonable.

The Bench further stated by referring the case of Manipal Health System Systems Pvt. Ltd. in ITA No.1667/Bang/2016 that without bringing any cogent material on record to demonstrate that the payment made by the appellant is in excessive no disallowance can be made; more so in the light of the fact that both the companies are assessed to Income tax at maximum marginal rate.

The Bench reiterated while referring the decision of High Court of Karnataka in ITA No.817 of 2018 in the case of Manipal Health Enterprises Pvt. Ltd. that, “The ITAT has rightly held that the AO has not doubted the payment nor held the payment as excessive even though in terms of Section 40A (2) only 'legitimate needs of the business' is allowable as expenditure. Thus, there is no material on record to support AO's opinion. Therefore, we find no error in the order passed by the ITAT.”

Therefore, while relying on the decision of Karnataka High Court and Co-ordinate Bench, ITAT allowed the assesssee's appeal.

Counsel for Appellant/Taxpayer: S.K. Tulsiyan

Counsel for Respondent/Department: V. Parithivel

Case Title: Manipal Hospitals (Dwarka) Pvt. Ltd. verses The Assistant Commissioner of Income Tax

Case Number: ITA No.1075/Bang/2023

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