LI Network
Published on: October 15, 2023 at 16:29 IST
The Delhi High Court, dealt with a crucial matter concerning the disallowance of salary by the Assessing Officer (AO) under Section 40A(2)(b) of the Income Tax Act, 1961, as upheld by the Income Tax Appellate Tribunal (ITAT).
The High Court has directed the AO to revisit the case and give the taxpayer, Mehra Jewel Palace, a fair opportunity to present evidence supporting their claims related to the salaries paid to family members.
A Division Bench, comprising Justice Rajiv Shakdher and Justice Girish Kathpalia, emphasized that Section 40A(2)(a) of the Act specifies that the AO must form an opinion before making any disallowance. This opinion should consider factors like the legitimate needs of the business and what would be a fair payment for services rendered. Importantly, this opinion cannot be formed without the presentation of necessary evidence.
The Court noted that the AO’s previous actions merely involved asking the appellant/assessee to justify the salaries paid without requesting relevant evidence and subsequently rejecting the claim.
The appellant’s counsel argued that the orders under appeal were legally unsustainable because they had provided detailed explanations regarding the circumstances under which no salary was paid to the individuals in question during specific financial years. They also clarified the circumstances under which nominal salaries were paid in subsequent relevant years.
On the other hand, the counsel for the respondent/revenue supported the impugned orders and contended that, since the appellant/assessee had failed to produce corroborating evidence to support their contentions, there was no illegality in the impugned orders.
After considering these arguments, the Bench noted that there was no dispute that the individuals fell within the purview of Section 40A(2)(b). Additionally, the appellant/assessee was not afforded a fair opportunity to present evidence to substantiate their reasons for paying salaries to these individuals, as per the records.
The Bench also pointed out that the ITAT, in its impugned orders, had merely concurred with the CIT(A)’s findings without providing independent arguments or findings.
The Bench concluded that the AO had a duty to provide the appellant/assessee with an opportunity to submit the necessary evidence to support their claims. However, the AO had simply asked the appellant/assessee to justify the salaries paid without requesting relevant evidence and had subsequently dismissed the claim.
In light of these observations, the High Court decided that the most appropriate course of action would be to allow the appellant/assessee to present relevant evidence, including documents or any other form of evidence, before the AO. This evidence should aim to substantiate the appellant/assessee’s claims regarding the educational qualifications, experience, work profiles, and the duties performed by the individuals in question.
Consequently, the High Court set aside the previous orders and remanded the case to the AO, granting the assessee the liberty to present additional evidence.
Case Title: Mehra Jewel Palace Pvt. Ltd. v. Pr. Commissioner of Income Tax