No Disallowance of Salary Just Because Employee Gave It Back as Interest-Free Loan to Employer | ITAT
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Case Details: M S Hostel vs. Deputy Commissioner of Income-tax - [2024] 167 taxmann.com 735 (Ahmedabad-Trib.)[21-03-2024]
Judiciary and Counsel Details
- Smt. Annapurna Gupta, Accountant Member & Ms Madhumita Roy, Judicial Member
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Prashant Upadhyay, AR for the Appellant.
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Ms Saumya Pandey Jain, Sr. DR for the Respondent.
Facts of the Case
The assessee, a partnership firm, paid salary to an employee after deducting tax at source and claiming the deduction as business expenditure. The employee was the administrative head and relative of the partner. Subsequently, the employee immediately gave the amount of salary back as an interest-free unsecured loan to the assessee.
The Assessing Officer (AO) treated such an amount as bogus salary expenses and disallowed it by invoking the provisions of section 40A(2)(b). On appeal, CIT(A) confirmed the AO’s disallowance, and the matter reached the Ahmedabad Tribunal.
ITAT Held
The Tribunal held that the basic and foremost requirement of allowability of expenditure is that it should be incurred wholly or exclusively for the purpose of business and should not be in the nature of capital or personal expenses as per section 37 read with section 40A. If the sum paid to the persons covered by the provisions of section 40A(2)(b) was found to be excess or illegitimate, though incurred for the purpose of business or profession, it was not allowed as a deduction.
In the instant case, the employee was paid compensation for the work she did and services rendered to the assessee. Therefore, the expenditure was wholly and exclusively incurred for the purpose of business and very much eligible as deduction.
Even if a non-relative person had been paid the said salary, the tax liability would remain the same, and even in such circumstances, the assessee would have been eligible to derive benefit at the rate of 30 per cent as per its taxation rate being a partnership firm. Merely because the employee was a related person, the same cannot be a ground to disentitle the assessee when no extra benefit was given, particularly when the salary was as per the present market rate. The service was rendered by a competent person capable enough to look into allocated responsibility.
Further, payment of salary and granting of interest-free loans are two different transactions, and there is no scope for clubbing the same to attract the provision of section 40A(2)(b). None of the orders passed by the authorities below doubted the services so rendered by the employee nor alleged to have been paid salary excessive or unreasonable, which is sine qua non in invoking the provision of section 40A(2)(b), in the absence of which, the order of disallowance is found to be not sustainable, bad in law and, therefore, quashed.
List of Cases Reviewed
- S.A. Builders Ltd. v. CIT(A) [2007] 158 Taxman 74/288 ITR 1 (SC)(para 9)
- CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC)(para 9)
- Asstt. CIT v. Sirish Maganlal Ravani [2013] 35 taxmann.com 195 (Rajkot – Trib.)(para 9)
- Abbas Wazir (P.) Ltd. v. CIT [2005] 145 Taxman 249/265 ITR 77 (All.)(para 9)
- CIT v. Computer Graphic Ltd. [2006] 155 Taxman 612/258 ITR 84 (Madras)(para 10) followed.
List of Cases Referred to
- Mc Dowell & Co. Ltd. v. Commercial tax Officer [1985] 22 Taxman 11/154 ITR 148 (SC) (para 3)
- Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 7 (SC) (para 3)
- CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) (para 3)
- CIT v. Durga Prasad More [1971] 82 ITR 540 (SC) (para 3)
- Bombay Oil Industries Ltd. v. Dy. CIT [2002] 82 ITD 626 (Mumbai) (para 3)
- S.A. Builders Ltd. v. CIT (Appeals) [2007] 158 Taxman 74/288 ITR 1 (SC) (para 8)
- CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) (para 8)
- Asstt. CIT v. Shirish Maganlal Ravani [2013] 35 taxmann.com 195/143 ITD 25 (Rajkot – Trib.) (para 8)
- Abbas Wazir (P.) Ltd. v. CIT [2003] 133 Taxman 702/[2004] 265 ITR 77 (Allahabad) (para 8)
- CIT v. Computer Graphic Ltd. 258 ITR 84 (para 10).
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