Wednesday, July 17, 2013

Subsidiary co. isn’t a ‘related person’ for section 40A(2); payment made by holding co. isn’t subject to disallowance

Subsidiary company is not a related person within meaning of section 40A(2)(b)(ii) and, thus, payment made by assessee to its subsidiary can’t be disallowed by invoking provisions of said section   

In the instant case the assessee-company had entered into an agreement with its subsidiary company for manufacturing of footwear soles. The manufacturing related jobs were done by subsidiary company for which the assessee paid certain sum which was claimed as business expenditure. The AO allowed 50% of the claim of the assessee and disallowed remaining amount under section 40A(2)(b). The CIT(A) confirmed the order of AO, which was further reversed by the Tribunal. Aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1) To attract provisions of section 40A(2), assessee has to incur an expenditure for which a sum is paid or payable to a person as referred to in clause (b) of said Section. As the assessee was a company, the person to whom they had to make payment, in order to attract the said provision, was any director of the company or any relative of the director;

Admittedly, in the instant case, the payment was made to the subsidiary company and not to any director or any relative of the said director. Therefore, the requirement of the section was not fulfilled;

Merely because, a subsidiary company did not fulfill its obligations, that wouldn’t render the transaction illegal and consequently, it couldn’t be held that the expenditure laid out or incurred was not wholly for the business of the assessee-company;

4) These facts had not been properly appreciated by the assessing authority as well as the lower appellate authority. The Tribunal was therefore justified in directing the deletion of disallowance. Accordingly, the revenue's appeal was to be dismissed – CIT v Raman Boards Ltd [2013] 35 4 (Karnataka)

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