| Question And Answer | |
|---|---|
| Subject: | 40A(2) disallowence when both taxed at MMR |
| Category: | Income-Tax |
| Querist: | CA Subodh Vora |
| Answered by: | Dr .K. Shivaram Senior Advocate |
| Tags: | evasion of tax, Payment to sister concern, Section 40A(2) |
| Date: | February 26, 2022 |
Can there be any addition under section 40A(2) due to low GP of buyer (sister concern ) on account of enhanced /higer per unit purchase from seller( sister concern) ? Can it be argued that when both Firms ( seller and buyer) are paying maximum marginal rate of tax and there is no evasion of tax the addition cannot be made?. Please give any judicial ruling on this.
As per Board Circular No No. 6-P dated July 1968, (C& P Vol .2 -P. 2431 -32 ) no disallowance was to be made under sec. 40A(2) in respect of payment made to the relatives and sister concern where there was no attempt to evade tax. After referring the Circular, Bombay High Court in CIT v. Indo Saudi Services (Travel) P. Ltd. (2009) 310 ITR 306 / (2008) 219 CTR 562 / 12 DTR 304 (Bom.)(HC ) has deleted the addition .Also refer , CIT v. V. S. Dempo & Co. P. Ltd. (2011) 196 Taxman 193 / 61 DTR 74 / 244 CTR 102 / 336 ITR 209 (Bom.)(HC ) . In Orange Associates Pvt. Ltd. v. ACIT (2021)85 ITR 33 (SN)(Delhi) (Trib) the Tribunal held that The assessee-company and its directors were both in the same tax bracket, the highest and, therefore, there could be no question of any evasion of tax by paying remuneration to the directors. CBDT Circular No. 6-P dated July 6, 1968 clearly states that no disallowance was to be made under section 40A(2)(b) in respect of payments made to relatives and sister concerns where there was no attempt to evade tax. This circular was binding on the Department and since clearly no case of evasion of tax was made out and the Assessing Officer had not pointed out any comparables to demonstrate that the salary paid to the directors was excessive, the entire addition was liable to be deleted.