Egberts India Private Limited Vs ITO (ITAT Chennai)
In a recent decision, the Income Tax Appellate Tribunal (ITAT) Chennai addressed the contentious issue of disallowance under Section 40A(2)(b) of the Income Tax Act, pertaining to consultancy charges paid to a resident director of Egberts India Private Limited. The dispute arose from a disallowance proposed by the Assessing Officer (AO) amounting to Rs. 73.78 lakhs, concerning consultancy charges paid to Mr. S. Sridharan, a resident director of Egberts India Private Limited. The AO contended that the increase in consultancy charges from Rs. 20 lakhs in previous years to Rs. 93.78 lakhs in the relevant assessment year was excessive and unreasonable under Section 40A(2)(b).
Egberts India Pvt Ltd, in defense, argued that Mr. Sridharan’s extensive experience and pivotal role in managing the company’s affairs justified the increased consultancy fee. They cited the commencement of a commercial project that substantially boosted the company’s revenues during the assessment year, highlighting Mr. Sridharan’s integral involvement.
The ITAT Chennai, in its adjudication, emphasized that the AO cannot substitute his judgment for that of a businessman regarding the reasonableness of business expenditures unless they are proven excessive or unreasonable compared to market rates. They cited precedents such as Computer Graphics Pvt. Ltd. vs. CIT (155 Taxman 612) to support their stance.
Furthermore, the tribunal noted that the AO failed to provide evidence establishing the excessive nature of the payments made to Mr. Sridharan. They observed that all payments were subjected to TDS and duly reflected in Mr. Sridharan’s tax returns, indicating compliance with tax regulations.
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