The section 40A(2) of the Income Tax Act, 1961 provides that, where the assessee incurs any expenditure, in respect of which payment is made or is to be made to certain specified persons (i.e. relatives or close associates of the assessee), and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived or accruing to him therefrom, so much of the expenditure, as is so considered by him to be excessive or unreasonable, shall not be allowed as a deduction.
Text of
Section 40A(2)
(2)(a) Where the assessee incurs
any expenditure in respect of which payment has been or is to be made to any
person referred to in clause (b) of this sub-section, and the [1][Assessing Officer] is
of opinion that such expenditure is excessive or unreasonable having regard to
the fair market value of the goods, services or facilities for which the
payment is made or the legitimate needs of the business or profession of the
assessee or the benefit derived by or accruing to him therefrom, so much of the
expenditure as is so considered by him to be excessive or unreasonable shall
not be allowed as a deduction :
[2][PROVIDED
that [3][for an
assessment year commencing on or before the 1st day of April, 2016] no
disallowance, on account of any expenditure being excessive or unreasonable
having regard to the fair market value, shall be made in respect of a specified
domestic transaction referred to in section 92BA, if such transaction is at
arm’s length price as defined in clause (ii) of section 92F.
(b)
The persons referred to in clause (a) are the following, namely:—
(i) where the assessee is an individual - any
relative of the assessee;
(ii) where the assessee is a company, firm,
association of persons or Hindu undivided family - any director of the company,
partner of the firm, or member of the association or family,
or any relative of such director,
partner or member;
(iii) any individual who has a substantial
interest in the business or profession of the assessee, or any relative of such
individual;
(iv) a company, firm, association of persons or
Hindu undivided family having a substantial interest in the business or
profession of the assessee or any director, partner or member of such company,
firm, association or family, or any relative of such director, partner or
member [4][or any
other company carrying on business or profession in which the first mentioned
company has substantial interest];
(v) a company, firm, association of persons or
Hindu undivided family of which a director, partner or member, as the case may
be, has a substantial interest in the business or profession of the assessee;
or any director, partner or member of
such company, firm, association or family or any relative of such director,
partner or member;
(vi) any person who carries on a business or
profession,—
(A)
where the assessee being an individual, or any relative of such assessee, has a
substantial interest in the business or profession of that person; or
(B) where the assessee being a
company, firm, association of persons or Hindu undivided family, or any
director of such company, partner of such firm or member of the association or
family, or any relative of such director, partner or member, has a substantial
interest in the business or profession of that person.
Explanation
: For the purposes of this sub-section, a person shall be deemed to have a
substantial interest in a business or profession, if, -
(a) in a case where the business or
profession is carried on by a company, such person is, at any time during the
previous year, the beneficial owner of shares (not being shares entitled to a
fixed rate of dividend whether with or without a right to participate in profits)
carrying not less than twenty per cent of the voting power; and
(b)
in any other case, such person is, at any time during the previous year,
beneficially entitled to not less than twenty per cent of the profits of such
business or profession
KEY NOTE
1.
Substituted for “Income-tax Oficer” by the Direct Tax Laws (Amendment)
Act, 1987, with effect from 01.04.1988.
2. Inserted by the Finance Act,
2012, with effect from 01.04.2013.
3. Inserted by the Finance Act,
2017, with effect from 01.04.2017.
4. Inserted by the Finance Act,
2012, with effect from 01.04.2013.
Applicability
of Section 40A(2)
Section
40A(2) applies where a person has incurred any revenue expenditure on goods,
services or facilities and payment for the same is made to:
(a)
A related person; or
(b)
A person who has substantial interest in the business of the assessee.
|
S.
No. |
Assessee
(i.e. Payer) |
Related
Person |
|
(i) |
Individual
|
Any
relative of the individual specified under section 2(41) (i.e. spouse,
brother, sister, lineal ascendant or
lineal descendant of the individual) |
|
(ii)
|
Firm
|
Partners
and their relatives [Section 2(41)] |
|
(iii)
|
Company
|
Directors
and their relatives [Section 2(41)] |
Specified
Persons [Section 40A(2)(b)]
Clause (a)
of section 40A(2) talks about the expenditure incurred in respect of payments
being made to certain specified persons mentioned in clause (b) of the same section.
The persons
included in section 40A(2)(b) are mentioned as follows:—
(i) Where the assessee is an individual (any
relative of the assessee);
(ii) Where the assessee is a company or a firm,
association of persons or a Hindu Undivided Family (any director of the
company, partner of the firm, or member of the association or family, or any
relative of such director, partner or member);
(iii)
Any individual who has a substantial interest in the business or profession of
the assessee or any relative of such individual;
(iv) A company, firm or association
of persons, or Hindu Undivided Family having a substantial interest in the
business or profession of the assessee or any director, partner or member of
such company, firm, association or family or any relative of such director,
partner or member;
(v) A company, firm, association of
members, or Hindu Undivided Family of which a director, partner or member, as
the case may be, has a substantial interest in the business or profession of
the assessee, or any director, partner or member of such company, firm,
association or family or any relative of such director, partner or member;
(vi)
Any person who carries on a business or profession:
(a)
where the assessee is an individual, or any relative of such assessee has a
substantial interest in the business or profession of that person, or
(b) where the assessee being a
company, firm, association of persons, Hindu Undivided Family, or any director
of such company, partner of such firm or member of such association or family
or relative of such director, partner or member has a substantial interest in
the business or profession of that person.
Particulars
of payment made or to be made to specified persons under section 40A(2)(b)
should be in the following way:—
(i) Name of recipient/beneficiary in case of
credit
(ii) Relationship
(iii) Nature of payment
(iv) Amount
The term “relative” means:
1.
Where the assessee is an individual
shall include:
§ Spouse of the individual
§ Brother or Sister of the individual
§ Lineal Ascendant or lineal
descendent of the individual
2.
Where the assessee is a Firm/ HUF/ AOP- the relationship shall
be determined with reference to the partners or members or persons having
substantial interest in such Firm/ HUF/ AOP.
3.
Where the assessee is a Company- the relationship shall be determined
with reference to the directors or persons having substantial interest in the
Company.
4.
A person who is the beneficial owner
of shares, carrying not less than 20% of the voting power/ share of profits in
such business or profession at any time during the previous year shall be
considered to be having ‘substantial
interest’.
Related
persons covered under Section 40A(2)(b)
|
Assessee (Who makes the payment) |
Related Persons |
|
Individual
|
Any
relative of such individual |
|
|
any
person in whose business or profession the assessee (i.e. individual) himself
or any
relative of such individual has a substantial interest |
|
Company,
firm, AOP or HUF |
Company
: Any director of the company Any relative of such
director Firm : Any partner of the firm Any relative of such
partner AOP/HUF
: Any member of the AOP/HUF Any relative of such
member |
|
|
any
person in whose business or profession the assessee (i.e. Company, firm, AOP or
HUF)-itself,or any director, or any partner, or any member, or any relative
of above persons, has a substantial interest. |
|
All
Assessees |
Any
individual who has substantial interest in Assessee’s business or profession,
or any relative of such individual |
|
|
A
Company, firm, AOP or HUF having substantial interest in Assessee's business
or profession, any director, partner or member of any such entity or any
relative of any such director, partner or member or any other company
carrying on business or profession, in which the first mentioned company has
substantial interest |
|
|
As
Company, firm, AOP or HUF of which a director, partner or member has
substantial interest in Assessee's business or profession or any director,
partner or member of any such entity or association or family or any relative
of any such director, partner or member of any sucg entity or Association or
family or any relative of any such director, partner or member |
“related
party” mean in section 40A(2)(b)?
“Related party” refers to any person who has a substantial interest in
the business of the taxpayer or who is closely related to the taxpayer. This
can include family members, business partners, and entities in which the
taxpayer has a significant ownership interest.
Meaning
of Substantial Interest
For this
sub-section, a person shall be deemed to have a substantial interest in a business
or profession, if:
§
in
a case where the business or profession is carried on by the company, such
specified person was the beneficial owner of shares in the previous year (the
shares not being entitled to a fixed rate of dividend, whether with or without
a right to participate in profits), carrying more than or equal to 20% of
voting power, and
§
in
any other case, such person is, at any time during the previous year,
beneficially entitled to more than or equal to 20% of the profits of such
business or profession.
On what basis the Assessing Officer will decide that
the expenditure is excessive or unreasonable..
Assessing
Officer shall determine whether the expenditure is excessive or unreasonable
having regard to the following:
§ The Fair Market Value of the goods,
services or facilities for which payment is made
§ The legitimate needs of the
business or profession of the Assessee
§ The benefit derived by or accruing
to the Assessee from the payment.
NOTE
It is to be
noted that the disallowance under this Section is not automatic and will be
disallowed only if Assessing Officer finds such expenditure as unreasonable or
excessive in nature.
Disallowance
in case of Unreasonable Expenditure
If
the payment made for the expenditure specified above is excessive or
unreasonable having regard to the Fair Market Value (FMV) of the goods,
services or facilities, that portion of the expenditure which is unreasonable
or excessive shall be disallowed.
Example:
Mr.
A has taken a godown on rent from his sister and has paid rent of Rs. 50 lakhs
during previous year 2023-24 whereas the FMV of such rent was only Rs. 40
lakhs. In this case, an amount of Rs. 10 lakh shall be disallowed under section
40A(2).
Amount
not deductible in respect of payment to relatives [Section 40A(2)]
Any
expenditure incurred by an assessee in respect of which payment has been made
to the relatives is liable to be disallowed in computing business profits to
the extent such expenditure is considered to be excessive or unreasonable,
having regard to the fair market value of goods or services or facilities, etc.
If
the assessee incurs any expenditure for which payment is made to the specified
persons and the Assessing Officer is of opinion that:
(a) such
expenditure is excessive or unreasonable having regard to fair market value of
the goods, services or facilities for which payment has been made; or
(b) the
legitimate needs of the business or profession of the assessee; or
(c) the
benefit derived by or accruing to the assessee therefrom, 􀂾 then, such
excessive or unreasonable part of the expenditure will not be allowed as
deduction.
Disallowance
= Expenditure incurred – Fair Market Value (FMV) of good, services, facilities,
benefits etc. received by the assessee.
NOTE
Unreasonable
payment to Relatives
Reasonable
payment : allowed
Excessive
payment : disallowed
Conditions
for Disallowance of Expenditure made to Relatives under Section 40A(2)
For
expenditure to be disallowed under this section 40, the following three
conditions must be fulfilled:—
(i) The payment must be in respect of an
expenditure.
(ii) The payment must be made to certain
specified persons.
(iii) The Assessing Officer is of the opinion that
such expenditure is unreasonable and excessive having regards to:
(a)
the fair market value of the goods, services or facilities for which the
payment has been made;
(b)
the benefits derived by or accruing to the assessee from the payment made;
(c)
the legitimate business needs of the assessee's business or professions,
Ø
Then,
the amount considered unreasonable or excessive by the Assessing Officer will
be disallowed under this section.
The
above does not apply for disallowance in respect of a specific transaction
referred to in section 92BA if such transaction is at arm's length price as
defined in clause (ii) of section 92F. The provisions of section 40A(2) are
applicable when any one of the above conditions is satisfied. The expense will
be disallowed if it satisfies any of the above mentioned conditions.
NOTE
The
disallowance under section 40A(2) are relevant for computation of income under
the head “income from business or profession” and by virtue of section 58(2)
these provisions also apply to computation of income under the head “income
from other sources”.
Documents/Information
to be collected by the Assessing Officer
(i) In case of purchases, the Assessing Officer
can call for the copy of invoices raised by the seller to outside parties and
compare these with the invoices raised to related parties. Invoices of related
parties and the outside parties should be of similar product and preferably
affected on same time or nearest to the time.
(ii) For services also, similar exercise can be
done as mentioned above.
(iii) For interest payment, look for the details
whether the assessee has paid lesser interest rate to any outside parties
within the category of unsecured loan. Otherwise also, whether the assessee has
paid higher interest rate as per the market rate.
(iv) Any sharp rise in Salary/Remuneration should
be correlated with the increased Turn Over/higher profitability to the concern.
Salary paid to related person allowable sans allegation of excessiveness or unreasonableness
During
the previous year relevant to impugned Assessment year 2015-16, Assessee made
salary payment of Rs. 4,20 Lac to one Smt. Palak A. Shah on which tax was
deducted at source. The Assessee treated as balance amount net of TDS as
unsecured loan obtained from Smt. Palak A Shah. Smt. Palak A Shah was the
Administrative Head and MBA degree holder from University of Houston-Downtown.
She was employed by the Assessee for looking upon areas related to students
like accommodation, food facility, water supply, disciplinary actions etc. of
the hostel. Smt. Palak A Shah was relative of one of the partners of the
Assessee-firm. The salary paid to Smt. Palak A Shah was disallowed under
Section 40A(2)(a) on the following grounds:
(i) Smt. Palak A Shah
is a relative of the partner and stood covered within the purview of Section
40A(2)(b);
(ii) By claiming this
particular expenditure, Assessee had got a benefit of 30% as per its taxation
rate being a partnership firm. Hence, this was a collusive transaction to evade
payment of tax.
(iii) Moreover, the amount net of
TDS has been immediately given back by Smt. Palak A Shah as an interest free
unsecured loan to the firm and particularly when the same was neither made
through bank account or by any other means the transaction has been found to be
paper/sham transaction to claim excess expenditure
Aggrieved
by the aforementioned order, Assessee filed appeal before CIT (A) which was
dismissed. The present appeal is filed by the Assessee before ITAT
against the CIT(A)’s order.
ITAT deletes disallowance of salary to employee (relative of a partner
of the Assessee-Firm) as neither the factum of rendition of service was doubted
nor was it alleged that the salary was unreasonable or excessive; Holds that to
make disallowance under Section 40A(2)(a), it is essential to prove that the
payment made to related person as defined in Section 40A(2)(b) is excessive or
unreasonable having regard to the FMV; Revenue disallowed salary payment on the
grounds that (i) the payee was relative of partner and stands covered by
Section 40A(2)(b); (ii) Assessee got tax benefit of 30% by claiming the said
expenditure (iii) There was no actual cash outflow as the amount payable after
TDS was converted into interest free unsecured loan; Revenue alleged that it
was a collusive transaction to evade payment of tax; ITAT holds that Section 37
and 40A are attracted if the expenditure is not found to have been incurred
exclusively for the business purpose and is excess as compare to the fair
market value is found to be acceptable; Holds that the contention of the
Assessee that if a non-related party is hired for the said position the said
person would have been paid similar or even more salary considering the
responsibility handled by her cannot be brushed aside; Holds that non-filing of
return by the employee cannot be the reason for making disallowance under
Section 37 read with Section 40A(2)(a); Notes that the Assessee deducted tax at
source in respect of the salary and the same has been duly paid to the credit
of Central Government; Notes that the payee paid taxes due (after considering
the TDS credit) on the salary earned by way of self-assessment tax; Notes
payment of salary to non-relative person would also have resulted in tax
benefit to Assessee and merely because the payee is a related person covered by
Section 40A(2)(b) the same cannot be a ground to disentitle the Assessee when
no extra benefit, is given particularly, when the salary is as per the present
market rate and the service is rendered by a competent person (MBA graduate)
capable enough to look into allocated responsibility; Observes that payment of
salary and granting of interest free loan are two different transactions and
there is no scope of clubbing the same to attract the provision of Section
40A(2)(b) and question of diversion of funds or routing of funds does not and
cannot arise; Holds that income-tax authorities must not look at the matter
from their own viewpoint but must put themselves in the shoes of the Assessee
and see as to how a prudent businessman would act; Relies upon the judgments
of Supreme Court in S.A.
Builders Ltd. v. CIT (Appeals) (2007) 288 ITR 1 (SC), and CIT v. Walchand & Co. (P) Ltd.
(1967) 65 ITR 381 (SC), Allahabad High Court in Abbas Wazir (P) Ltd. v. CIT (2004) 265
ITR 77 (All.), Rajkot ITAT in ACIT,
Jamnagar v. Suresh Magan Lal Ravani (2013) 143 ITD 25 (ITAT Rajkot) and of
coordinate bench in Omkar Mal Gauri Shanker v ITO; Deletes disallowance
and allows the appeal.
[In favour of assessee] (Related Assessment years : 2015-16) - [M S Hostel
v. DCIT, Vadodara [TS-224-ITAT-2024(Ahd)] – Date of Judgement : 24.03.2024
(ITAT Ahmedabad)]
Assessee
had received services from a company TACL in respect of which payment had been
made as per documentary evidence on record and moreover said payment was
adjudged on principle of commercial expediency, no disallowance could be made
in respect of such payment under section
40A(2)
Assessee entered into international transaction with
its AE (TACL). Assessing Officer made disallowance in respect of administrative
charges paid to TACL under section
40A(2). Tribunal recorded that Assessing Officer had failed to discharge onus
as per mandate of provisions of section
40A(2). It further held that assessee had received services from TACL in
respect of which payment had been made as per documentary evidence on record
and thus, there was no warrant for disallowance of amount paid to TACL by
assessee when payment was adjudged on principle of commercial expediency when
viewed from point of view of a prudent businessman. In view of above factual
position, order of Tribunal needed no interference. [In favour of assessee] (Related Assessment year : 2010-11) – [PCIT v. Nippon Leakless Talbros (P) Ltd.
(2023) 455 ITR 335 : 153 taxmann.com 279 (P&H)]
SLP dismissed against order of High Court that where issue of payments made to persons specified under section 40A(2)(b) was never raised by Commissioner in notice served upon assessee, said ground could not form basis for revision of assessment order under section 263
Assessee filed an income tax return for assessment
year 2009-10 which was completed under section 143(3). Thereafter, notice under
section 263 was issued by Commissioner on two issues, namely, (a) disallowance
of Fringe Benefit Tax (FBT) included in miscellaneous expenses and not allowed
by Assessing Officer and (b) provision in respect of slow moving and obsolete
inventories. Commissioner also directed Assessing Officer to make enquiry in
respect of third issue being particulars of payments made to persons specified
under section 40A(2)(b) allowed in assessment order. Tribunal held that issue
of payments made to persons specified under section 40A(2)(b), was never raised
by Commissioner in notice served upon assessee and therefore, said ground could
not form basis for revision of assessment order under section 263. High Court dismissed said appeal by holding
that there was a finding by Tribunal, that no issue was raised by Commissioner
in respect of particulars of payment made to persons specified under section
40A(2)(b) and even show cause notice was silent about that - Revenue filed
instant Special Leave Petition before Supreme Court. Since there was a huge
delay of 411 days in filing this Special Leave Petition and said delay had not
been explained to satisfaction of this Court and there was no merit in
petition, special leave petition was to be dismissed both on ground of delay as
well as on merits. [In favour of assessee] (Related Assessment year : 2009-10)
– [PCIT v. Universal Music India (P) Ltd.
(2023) 295 Taxman 232
: 155 taxmann.com 231 (SC)]
Assessing
Officer made additions towards remuneration paid by assessee-company to its
director for rendering services without giving any cogent reason to conclude
that remuneration paid was not commensurate with market value of services,
since such high remuneration paid to company’s director was accepted by
Assessing Officer during scrutiny assessment in subsequent assessment years,
impugned additions made under section 40A(2) were to be
deleted
Assessee-company paid huge amount of remuneration to
its director for rendering services. Assessing Officer made addition under
section 40A(2) on ground that assessee failed to justify said services. It was
noted that lower authorities had given concurrent findings on fact in favour of
assessee by observing that higher salary paid to director of company as
remuneration was accepted by Assessing Officer during scrutiny assessment in
subsequent assessment years. It was also noted that Assessing Officer had not
brought on any evidence/material for making disallowance under section
40A(2)(b) and had arbitrarily disallowed 50 per cent of remuneration. Since
Assessing Officer had failed to give cogent reason to conclude that
remuneration paid was not commensurate with market value of services rendered
by director, impugned additions made were to be deleted. [In favour of
assessee] (Related Assessment year : 2009-10) - [PCIT v. Future First Info Services (P) Ltd. (2022) 447 ITR 299 : 145
taxmann.com 35 : (2023) 290 Taxman 490 (Del.)]
Interest on unsecured loans from related parties at 18%, not ‘excessive
and unreasonable’ considering business contingencies
Mumbai ITAT allows Assessee’s appeal, deletes disallowance made for interest
paid for unsecured loans borrowed from related persons referred to in
section 40A(2)(b); Assessee-Partnership Firm (engaged in the business of
trading and wholesaler of fabric) paid interest on unsecured loans from
related persons at 18% p.a. and from unrelated persons at 12% p.a.; Revenue
concluded that interest on the loans taken from the related persons at higher
rate was excessive and unreasonable as per the provisions of Section 40A(2)(a),
thus disallowed the additional 6% interest, expended over and above the 12%,
effectively adding Rs.20.84 Lacs to Assessee’s income, which was confirmed by
CIT(A); ITAT observes that the expenses with respect to related persons as
envisaged under Section 40A(2)(a) should not be excessive or unreasonable
having regard to market value of the goods and services or facilities, although
it does not explains what is ‘fair market value’; States that Revenue has
failed to demonstrate what method was adopted to determine the fair market
value and addition was made based on the interest paid on similar loans availed
from unrelated persons at a rate of 12%, remarks that it should not have been
the sole reliance for disallowance; Holds that the interest paid by the
Assessee on unsecured loans during the relevant period cannot be said to be
excessive or unreasonable as unsecured loans are without any security and are
always availed for business contingencies; States that the nature of business
of Assessee warrants continuous amount of funds which cannot be always availed
in the banks and the only spontaneous availability is from persons known to the
Assessee; Holds that Revenue’s argument that Assessee has paid 12% rate of
interest to others, is inappropriate as the borrowing of money for higher rate
of interest depends on the necessity of funds required in the functioning of
business and remarks that the Revenue failed to make detailed enquiries as to
the fair market rates and has not made any comparables with regard to
prevailing market rate. [In favour of assessee] (Related Assessment year : 2015-16) – [Zee Fabrics Inc. v. ACIT – Date of Judgement :
28.02.2022 (ITAT Mumbai)]
Disallowance under section 40A(2) without a
comparable to prove the excessive payment is not justified
Excessive or
unreasonable payments (Professional expenses) - Assessee-company claimed
professional expenditure incurred towards taking consultancy and technical
services from its sister concern. Assessing Officer disallowed same by invoking
provision of section 40A(2) on ground that said expenditure was excessive of
fair market value. It was noted that no comparable instance of third party
rendering similar services was brought on record so as to show that said
expenses incurred by assessee were excessive. Further, Assessing Officer had
allowed similar expenditure claimed by assessee for subsequent assessment years
2015-16, 2017-18 and 2018-19. On facts, disallowance of said expenses under
section 40A(2) was to be restricted only to extent of 10 percent of total
expenses. [Partly in favour of assessee] (Related Assessment years : 2013-14
and 2014-15) – [Bright Enterprises (P) Ltd. v. DCIT(C), Jalandhar (2021) 132
taxmann.com 32 (ITAT Amritsar)]
Where High Court upheld Tribunal’s
order deleting disallowance made by Assessing Officer under section 40A(2)
holding that once remuneration paid by assessee-company to its directors in
preceding year was accepted by revenue, Assessing Officer was not justified in
considering and comparing renumeration paid in assessment year 2004-05, SLP
filed against said decision of High Court was to be dismissed
For relevant year, assessee filed its return
declaring certain taxable income. In course of assessment, Assessing Officer
noted that there was an extraordinary increase in salary paid to Directors as
compared to said payments made in assessment year 2004-05. Assessing Officer
thus made certain disallowance under section 40A(2)(b) out of renumeration paid
to directors of assessee-company. Tribunal took a view that once renumeration
paid in preceding year was accepted by revenue, Assessing Officer was not
justified in considering and comparing renumeration paid in assessment year
2004-05. Tribunal thus deleted disallowance made under section 40A(2). High
Court upheld order passed by Tribunal. On facts, SLP filed against decision of
High Court was to be dismissed. [In favour of assessee] (Related Assessment
year : 2008-09) - [PCIT v. Patel Alloy
Steel Co. (P) Ltd. (2019) 262 Taxman 166 : 103 taxmann.com 432 (SC)]
Merely because there was an agreement between assessee
company and related party in which one of directors had substantial interest,
same could not be allowed in absence of genuineness of transaction
Assessee-company, engaged in
business of share broking, paid certain amount to it's sister concern, which
was a partnership firm. The amount was paid as research and advisory fees
towards business procurement, research and advisory services.
The Assessing Officer found that in
the sister concern, AN, a director of the assessee-company, had substantial
interest and, thus, payment made was to a person as specified in section
40A(2)(b)(v). The Assessing Officer required the assessee to establish that
services were actually rendered by the sister concern. The assessee stated
before the Assessing Officer that no separate documents or accounts were
maintained, that the services were rendered on getting telephonic communication
and that the payment was solely based on the copy of agreement executed between
the assessee-company and sister concern. The assessee could not produce any
evidence to establish that services were rendered by the sister concern. On the
ground of lack of genuineness of transaction, the Assessing Officer held that
such payments were not made for business purposes and payment made to a related
party were clearly unreasonable. The Assessing Officer disallowed payment made
by the assessee company.
On appeal, the Commissioner
(Appeals) held that the payment was made under an agreement. The sister concern
was an established firm in the stock broking business which had a rich
experience in the field and had the requisite competence to render advice to
the assessee company the Commissioner (Appeals) also found that payment was
made as per the agreement executed between the assessee company and its sister
concern for providing advisory service to the assessee company and, thus, there
was no intention to avoid tax. As a result the Commissioner (Appeals) allowed
the advisory fees paid by the assessee.
On further appeal, the Tribunal
reversed order of the Commissioner (Appeals) holding that the assessee did not
produce any documentary evidence to prove genuineness of transaction and that
same was paid to sister concern. On the Revenue's appeal to the High Court:
Held : The findings of the Tribunal
even though upon reversal of the order passed by the Commissioner (Appeals)
cannot be said to be perverse in any manner and they remain findings on facts.
Therefore, it cannot be contended that merely because there was an agreement
between the assessee company and the related party or the partnership firm, the
Research and Advisory fees made by the assessee company to the partnership
firm, in which AN, one of the Directors, had a substantial interest ought to be
allowed wholly or partly as a business expenditure. The mere fact that the same
person ‘AN’, who had substantial interest in the partnership firm, was the
person to whom Research and Advisory fees was paid by the assessee company was
also the Director in the assessee company itself and could have rendered such
advisory services to the assessee company in the best business interest of
assessee company even pro bono in which he himself was the Director. Therefore,
naturally a doubt could arise in the minds of the Assessing Authority about the
genuineness of the payment made to the partnership firm, a related party in
which the same person had substantial interest. It will naturally, therefore,
depend upon the facts and circumstances of the case whether disallowance under
section 40A(2)(ab) could be made or not.
With respect to establishing the
disallowance under section 40(A)(2)(ab), the Tribunal on the basis of materials
available before it, cannot be said to have committed any perversity in making
such disallowance even though resulting in the reversal of the order passed by
the First Appellate Authority viz., Commissioner (Appeals). The Tribunal being
the second and higher tier of the Appellate Forums viz., higher than the
Commissioner (Appeals), naturally has the same and wider powers of the lower
Appellate Authority and, therefore, reversal by the final fact finding body
i.e., the Tribunal in all such cases need not be and cannot be declared to be
perverse. The scope of section 260-A is limited and only the substantial
questions of law can be entertained and answered by the High Court under
section 260-A.
No such substantial questions of
law arose in the instant case. Equally there is no merit in the contentions
raised on behalf of the appellant/assessee on the facts of the case and
therefore, the instant appeal of the assessee is to be dismissed. [In favour of
revenue] (Related Assessment year : 2003-04) – [Patterson & Co. (P) Ltd. v. DCIT (2019) 105 taxmann.com 150
(Mad.)]
Expenses
or payments not deductible–Excessive or unreasonable - Contribution and
commission of directors-Directors are paying tax at maximum marginal rate – No
disallowances can be made
The
Assessing Officer held that the assessee had paid commission expenses in excess
of the market rates and disallowed the amount under Section 36(1)(ii). He
considered that an amount as excessive and made addition under the provisions
of Section 40A(2)(b). For the assessment year 2010-11 he held that the assessee
had tried to evade dividend distribution tax under Section 115- O by giving
commission which was far more excessive. On appeal the Tribunal held that the
assessee was not bound by section 198 and section 309 of the Companies Act,
1956 as the assessee was neither a public company nor a private company which
was the subsidiary of a public company nor received any payment beyond the
provisions of sub-section (1)(a) of section 309. In terms of the Board
resolution a maximum commission of 27 per cent. over the turnover can be paid
to the directors whereas the total payments was only 1.25 per cent. of the
value of the export orders achieved by them. The Assessing Officer had not
brought anything on record nor gathered any evidence about the contribution of
the directors which went contra to the payments they received. There was no
doubt about the qualifications and contribution of the directors for obtaining
the orders and increasing the turnover. The payment of commission had been the
practice of the company for the past seven years. The directors who had been
receiving commission paid tax at the maximum marginal rate and no revenue
leakage could also be found based on the tax payments. Increase in personal
expenses and comparing it with the increase in directors remuneration could not
be accepted as a methodology to calculate the reasonable remuneration. The
company could determine the rates of
salary, remuneration, commission as long as it did not infract any law
in force. Hence the addition made by the Assessing Officer was deleted.
(Related Assessment years :2006-07 2009-10, 2010-11, 2011-12) - [DCIT v.
Impulse International (P) Ltd. (2019) 71 ITR 28 (SN) (ITAT Delhi)]
Trade
discount is not a payment and therefore, does not fall in the ambit of section
40A(2)(a)
The
Tribunal deleted the disallowance made under section 40A(2)(a) on account of
trade discount allowed by assessee to its related parties where no such
discount was offered to other parties, as the trade discount is not a payment
and therefore, does not fall in the ambit of said section. Tribunal held that
there was no actual outgo from the assessee as discount was allowed on sale
made and in absence of any prohibitory provisions under section 40A(2)(a) or
under section 37, same could not be disallowed. - [ACCME (Urvashi Pumps)
Eng. (P) Ltd. v. JCIT (2018) 90 taxmann.com 189 (ITAT Jaipur)]
Burden is on the revenue to establish that expenditure is excess of fair market value, disallowance is not automatic - Provisions of section 40A(2) are not automatic and can be called into play only if Assessing Officer establishes that expenditure incurred is, in fact, in excess of fair market value
Assessee-company was engaged in trading of dyes and chemicals. A search
was carried out in business premises of assessee wherein documents seized
showed that assessee had paid commission to sister concern for rendering
services of sales agent. According to the Assessing Officer, the relationship
between the parties militated against the claim being bona fide, particularly
in the absence of proof of rendition of service by the sales agent. He thus
rejected assessee's claim for payment of commission.
The Commissioner noted that sister concern had been appointed as sales
agent for the sake of maintaining uniformity in sale prices and to avoid
unnecessary and uneconomical competition between the sister concerns. A
decision thus came to be taken by the entities that a bifurcation of duty was
called for and one concern identified to act as the selling agent for the
entire group companies. The transaction thus found favour with the Commissioner
as being bona fide and genuine. The Tribunal also approved the findings of the
Commissioner (Appeals). On revenue's appeal:
Held : There is no prohibition that related parties cannot engage in
business transactions. Such an interpretation would render the provisions of
section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing
Officer to effect a disallowance of payments that are, 'in his opinion'
excessive or unreasonable giving regard to fair market value of the goods,
services or facilities for which the payment is made or the legitimate needs of
the business or profession of the assessee or the benefit derived by him or
accruing to him. Such 'opinion' has to be based on tangible material and not
assumptions and suspicions.
The provisions of section 40A(2) are not automatic and can be called into
play only if the Assessing Officer establishes that the expenditure incurred
is, in fact, in excess of fair market value. This had not been done in the
present case. The quantum of commission paid is thus at arms length. The
decision to streamline business activities and establish a division of labour
or hierarchy of operations is within the domain of the entities and cannot be
trespassed upon by the Assessing Officer except where the officer establishes
that such design or method is a ruse to circumvent legitimate payment of tax.
The Supreme Court in the case of Vodafone
International Holdings BV. v. Union of India (2012) 341 ITR 1 : 204 Taxman 408
: 17 taxmann.com 202 (SC) points out the difference between ‘looking
through’ a transaction and ‘looking at’ a transaction settling the position
that a conclusion of colourable/sham can be arrived at by viewing the
transaction in a commercially realistic and wholistic perspective, not adopting
a truncated and dissecting approach. In the present case, there is a consistent
finding of fact that the transaction was bona fide and acceptable. Nothing is
placed on record to indicate that the findings are perverse. Thus there is no
need to interfere with the concurrent findings of the authorities. In the
result, revenue’s appeal is dismissed.
[In favour of assesse] (Related Assessment year : 1997-98) - [CIT v.
Parameswari (Smt. L.) (2017) 246 Taxman 126 : 153 DTR 63 (Mad.)]
Excessive
or unreasonable – Salary paid to son of assessee – Nothing to establish son did
not render any services to assessee's business – Starting salary of firm for
fresh graduate more than assessee’s son's salary – Salary expenses allowable
On
appeal, it was held that the Commissioner of Income-tax (Appeals) held that the
Assessing Officer could not establish that the son of the assessee had not
rendered any services to the assessee's business. Moreover in this firm the
starting salary for a fresh graduate was Rs. 60,000/- per month, and in this
year the salary paid to the assessee's son was Rs. 40,000/- per month
only. Therefore, the Commissioner of
Income-tax (Appeals) had rightly allowed the claim. [In favour of assesse]
(Related Assessment Years : 2005-06, 2009-10). - [ACIT v. Nishith Desai
(2017) 56 ITR 560 (ITAT Mumbai)]
Excessive
or unreasonable – Purchases from sister concern – Department was not able to
prove that rate was higher, addition was not justified
Assessee
filing details of purchase from sister concern showing sale of identical item
to other independent parties at a higher rate, however the department was
unable to show that rate was higher, addition was deleted. (Related Assessment
Year 2005-06) - [Loil Overseas Food Ltd. v. ITO (2017) 55 ITR 544 (ITAT
Chandigarh); DCIT v. Loil Overseas Food Ltd. (2017) 55 ITR 544 (ITAT
Chandigarh)]
Assessee
could not give satisfactory reason for increase in conversion charges paid to
its sister concern, part of such conversion charges was disallowed under
section 40A(2)
During relevant assessment year assessee paid conversion charges to a
company in which it was having substantial interest - Assessing Officer
disallowed payments being excessive/unreasonable - Assessee could not explain
that conversion charges paid was equal to market price - Whether disallowance
of conversion charges was justified.
The Assessing Officer while disallowing the claim of the appellant had
found as under:
“On scrutiny it reveals that
assessee paid conversion charge to M/s Marcandi Prasad Radha Prasad, 65, G.T.
Road, Howrah. The assessee firm paid conversion charge to the above mentioned
party during the F.Y.19 92-93 corresponding to A.Y. 93-94 @ 1749.04 per Mt. but
during the F.Y. 1993-94, relevant to A.Y. 1994-95 assessee paid conversion
charge to the same party @ 2766.76 per M.T. On query, the assessee firm
submitted explanation vide letter dated 27.02.97, submitted before me on
28.02.1997 that "assessee has not occupied any factory and all the
production has been made by outsider to fulfil the contract in time high rate
of conversion charge was paid”. Considering the relationship between the
assessee firm and concerned party (Marcandi Pd. Radha Pd (P) Ltd.) with whom
assessee holding 37200 shares, it is more or less established that so far as
expenditure or conversion charge is concerned, the assessee firm had made undue
favour to said party by allowing conversion charge at exorbitantly high rate as
compared to earlier year. After admitting the fact that there may be some
increase in conversion charge in relevant year, I think Rs. 2000/- per M.T.
should be optimum rate.
In view of the above
observation conversion charge (2766-76-2000) = 766.76 per M.T. is disallowed
u/s 40A (2) of Income Tax Act as excessive and unreasonable. Hence Rs.
(1033.652 x 766.76) = 792563/- is disallowed.”
Being aggrieved, the appellant preferred appeal before the CIT(A) who had
allowed the appeal by holding as under:
“I have considered the facts
of the case as well as the submission made by the learned A.R. of the
Appellant. Since all the payments were made by A/C Payee cheque and the I.T.O.
could not found any defect in respect of payment made to Marcandy Prasad
Radhakrishna Prasad Pvt. Ltd. and also failed to cite any comparable case of
any other party in the same line of business the disallowance amounting to Rs.
7,92,563/- out of conversion charges appears to be based on suspicion and
surmise and not on any documentary evidence. As such the entire amount of
disallowance is deleted”.
Aggrieved by the said order, the Revenue preferred appeal before the
Tribunal. The Tribunal while allowing the appeal, inter alia, held as under:
“It has not been disputed by
the assessee that the assessee has substantial interest in M/s. Mercandy Pd.
Radha Pd. (P) Ltd. wherein they held 37200 shares the case of the assessee
rates only in the ground that during the year under consideration there were
conversions of railway sleeper scrap in addition to pig iron and C.I. Scrap
though in earlier year there was a conversion of Pig iron and C.I. scrap only
and that the melting loss of railway sleeper scrap is more than other cases we
have carefully perused the statement of total quantity got converted by the
assessee through M/s. Marcandy Pd. Radha Pd. P. Ltd. during the year under
consideration as well as in the immediate preceeding assessment year. We find
that during the year under consideration the assessee got converted pig iron
and C.I. Scrap to the extent of 476.417 M.T. and 49.260 M.T. respectively The
Assessee has not given any explanation as to why the conversion charges in
respect of pig iron and C.I. Scrap has been made at a rate of 2766.76 per M.T.
as compared to 1749.04 M.T, paid in the last year there is no reason to Pay
higher rate of conversion charges in respect of pig iron and C.I. Scrap. The
Assessee's case is only that the quality of railway sleeper scrap is generally
of rough and of rejected sleeper and having of good amount of dust and rust
resulting in the melting loss at a higher percentage than pig iron and C.I.
Scrap. Therefore paying the higher rate of conversion charges in respect of
railway sleeper scrap can be well understood but we fail to understand the
reason for making the higher rate of conversion charges in respect of pig iron
and C.I. Scrap. The Assessee has also not furnished any information or evidence
to show that even the rate of 2766.76 M.T. on account of conversion of pig iron
and C.I. Scrap is equal to the market rate the assessee has nowhere pleaded
that the rate of 2766. 16 paid for conversion of pig iron & C.I. Scrap is
reasonable and not excessive having regard to the legitimate need of the
business and the market value of the matter we are therefore of the considered
view that the rate of 2766. 76 paid by the Assessee to M/s. Marcandy Pd. Radha
Pd. P. Ltd. on account of the conversion charges of pig iron & C.I. Scrap
is excessive and unreasonable and is liable to be disallowed to the extent of
its being so excessive or unreasonable. The rate of conversion adopted by the
A.O. at Rs. 2,000/- per M.T. for the year under consideration is found
reasonable and proper in as much as the assessee has not disputed as such this
rate adopted by the A.O. We therefore direct to allow the deduction of
conversion charges for pig iron & C.I. scrap @ Rs. 2,000/- per M.T. and to
allow the conversion charges in respect of railway sleeper scrap @ Rs. 2,766.76
per M.T. as claimed by the Assessee. The A.O. shall modify the assessment order
accordingly”.
We find that though Mr. Mukherjee submits that no opportunity was granted
to the appellant, however, the Assessing Officer had specifically noted that
the rate of conversion adopted by the Assessing Officer was not disputed by the
assessee. It is also evident from the letter dated 21st November, 1998 that the
sister concern had explained for charging rate of conversion charges at 2766.76
for the accounting year 1993-94.
As the Tribunal had dealt with the facts specifically, and as the entire
issue relates to fact, we are of the view the order under challenge calls for
no interference. Hence, Appeal is dismissed. [In favour of revenue] – [Prakash Engineering Works v. CIT (2015) 373
ITR 246 : 229 Taxman 528 : 54 taxmann.com 411 (Cal.)]
Assessee failed to furnish explanation to justify payment of excessive rent to persons falling under section 40A(2), said payment was rightly disallowed by authorities below
Assessee took premises on rent from his son, daughter and daughter-in-law
for business purpose. During relevant year, assessee paid higher rent on ground
that there was addition of two floors in rented business premises. Assessee
claimed a deduction of a sum of Rs. 10,50,806/- as rent paid to three persons
who also fall within the ambit of Section 40A(2)(b) of the Act.
Assessing Officer finding was that no rent agreement was furnished by
assessee to justify payment of high rent to persons falling under section 40A(2).
The Assessing Officer disallowed the same. The Assessing Officer observed that
no explanation was furnished by the assessee to justify the payment. No rent
agreement was furnished. Indeed the appellant stated that there was no rent
agreement at all.
The Assessing Officer’s inference that there was no plausible explanation
regarding the high rent during the relevant year cannot be said to be perverse.
The Commissioner (Appeals) upheld the disallowance of deduction for the same
reasons, namely, that there was no evidence to support/justify the deduction.
The view that the payment of TDS on the said amount is irrelevant is correct.
The Tribunal observed that the appellant had paid Rs. 14,40,000/- towards
rent which was approximately 370% more than the rent paid in the preceding year
namely Rs. 3,89,194/-. This is purely a question of appreciation of facts which
in the facts of this case cannot be held to be perverse. No question of law
arises in respect thereof. It was then contended that the increase in the rent
was on account of the increase in the area of the property. The appellant,
however, failed to establish the facts necessary for the apportionment in
respect thereof. Accordingly, Tribunal confirmed said disallowance. Finding
recorded by authorities below, being finding of fact, same did not require any
interference. The appeal is, therefore, dismissed. [In favour of revenue] (Related Assessment year : 2007-08) – [Subhash
Chander Malik v. DCIT, Chandigarh (2015) 57 taxmann.com 180 (P&H)]
Reasonableness
to be judged from businessman point of view
The
Assessing Officer disallowed salary paid to Chairman-cum-Managing Director
under section 40A(2). On appeal, before CIT(A) deleted the disallowance and
further CIT(A)'s decision was upheld in Tribunal. On appeal High Court
confirmed findings of lower authorities and held that it is for the assessee, a
businessman, who is well versed in running business to come to a conclusion to
what remuneration/salary is to be paid to an employee and reasonableness
thereof is to be judged from the angle of a businessman rather than from the
angle of Assessing Officer. Further the director was justified in getting
salary of Rs. 24 Lacs as he was the sole person who was instrumental in
securing the business from the assessee-company. Receipts of the
asseeseecompany has increased from preceding years mainly due to the competence
of the director and the said increase in salary was approved after passing a
proper resolution in an extraordinary general meeting of the shareholders. Also
revenue had not made out a case that the salary paid to director was not as per
the fair market value as provided under section 40A(2)(a) of the Act. (Related Assessment Year 2004-05) - [CIT
v. Consulting Engineering Group (2014) 365 ITR 284 : 267 CTR 447 : 223 Taxman
440 (Raj.)]
Disallowance was not justified without giving a finding that excessive or unreasonable
The
assessee-company had purchased yarn and finished fabric from a company ‘P’, and
which was specified under section 40A(2)(b). Assessing Officer disallowed
certain payment made to ‘P’ by considering it as excessive and unreasonable.
Tribunal held that Assessing Officer has not given a finding that the payment
made by the assessee is excessive or unreasonable having regard to the fair
market value of the goods. Disallowance made by the Assessing Officer was not
justified. (Related Assessment year : 2009-10) - [ITO .v. Axon Global (P)
Ltd. (2014) 146 ITD 473 : (2013) 38 taxmann.com 392 (ITAT Jodhpur)]
Addition on account of interest paid at higher rate to relative would be just
The authorities under the Act has
added Rs. 18,002/- on account of higher rate of interest i.e 18.5% paid by the
appellant to his mother as against the market rate of 15%.
Held : Addition was made in appellant’s account because of higher rate of interest paid by appellant to his mother as against market rate. Since transaction in question was not a genuine and bona fide transaction, Tribunal was justified in confirming addition of interest paid on old loan at higher rate of interest by applying provisions of section 40A(2)(b). [In favour of revenue] (Related Assessment year : 2007-08) – [Ramesh Chand (HUF) v. CIT, Karnal (2013) 217 Taxman 75 : 35 taxmann.com 63 (P&H)]
Reasonableness of expenditure to be judged from view point of businessmen and not revenue while invoking section 40A(2)
The assessee company had increased
the salary of the two of its directors. This increase in salary was disallowed
by the ITO. Allahabad High court held that while invoking provisions of Section
40A(2) of the Act, the reasonableness of the expenditure for the purpose of
business had to be judged from the point of view of a businessman and not that
of the revenue. “when a company pays a higher salary to the directors or the
managers or other officers or employees as a matter of commercial expediency,
it is not for the Income Tax Officer to say that in his opinion the said salary
should not have been paid. A company may decide to pay a higher remuneration to
its directors, officers or employees so as to encourage them to work hard,
expand the business, or for a host of other commercial considerations and the
matter has to be looked at from the viewpoint of the company.” High Court held
that the disallowance was not justified. [In favour of assessee] – [Abbas Wazir (P) Ltd. v. CIT
[TS-11-HC-2003(ALL)] - Date of Judgement : 02.09.2003 (All.)]
Assessing Officer disallowed discount given by assessee firm on sale of sarees to another firm because of close connection between partners of assessee firm and other firm – On appeal, Tribunal held that assessee was charged only on basis of net price realised from another firm and assumption that entire sale proceeds were taxable subject to an allowance by way of deduction of discount was incorrect – In view of finding of Tribunal that assessee had charged only net price and no discount or rebate was given to purchasers and bona fides of transactions not being in dispute, it had to be held that there was no expenditure in instant case which could be disallowed by reference to section 40A(2)(a)
The assessee firm consisted of five partners.
The first four were brothers and the fifth was their mother. There was another
firm ‘S’ consisting of one of the partners of the assessee firm and five minor
sons of the other partners of the assessee firm who were admitted to the
benefits of the partnership. The assessee firm sold silk sarees to 'S' at a
discount and the actual price payable was only the net amount. This net amount
was carried over to the sales account. As the sale account showed only the net
figure, the total amount of discount in the several bills raised on 'S' did net
find a place either in the trading account or in the profit and loss account of
the assessee-firm. While computing the assessment of the assessee-firm the ITO
disallowed the discount given to ‘S’ because of the close connection between
the partners of the assessee firm and the partners of the other firm on appeal,
the AAC directed the allowance of the claim made by the assessee. On further
appeal the Tribunal confirmed the order of the AAC and concluded, that the
assessee was charged only on the basis of the net price realised from ‘S’ and
that the assumption that the entire sale proceeds were taxable subject to an
allowance by way of a deduction of the discount was incorrect. It was,
therefore, held that the provisions of section 40A did not all come into the
picture in such a case. On reference :
Held : Clause (b) of section 40A(2) refers to dealings between a firm and a partner, etc., and in respect of such dealings, the application of section 40A(2)(a) would have to be considered. In the instant case, having regard to the constitution of the two firms, it was clear that there was some kind of connection between the two firms and the partners of the assessee-firm were closely related to the partners of the other firm. Therefore, section 40A(2)(b) would apply.
Section 40A(2)(a) contemplates an assessee incurring any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of section 40A(2). If there were any such expenditure and if the ITO was of opinion that such expenditure was excessive or unreasonable, then so much of the expenditure as was considered by him as excessive or unreasonable was not to be allowed as deduction.
The Tribunal’s finding on the facts was that the assessee had charged only the net price and that there was no discount or rebate given to the purchasers. The bona fides of the transaction were not in dispute. In these circumstances and in view of the finding of the Tribunal as to what happened between the seller and the purchaser in the instant case, it had to be held that there was no expenditure which could be disallowed by reference to section 40A(2)(a). [In favour of assessee] (Related Assessment year : 1971-72) - [CIT v. A.K. Subbaraya Chetty & Sons (1980) 123 ITR 592 : 16 CTR 252 (Mad.)]
The question as to whether a particular expenditure on rent is excessive and unreasonable or not is essentially a question of fact and does not involve any question of law.
The Supreme Court observed that “The question whether a particular
expenditure on rent is excessive and unreasonable or not is essentially a
question of fact and does not involve any issue of law and hence we are of the
view that the second question ought not to have been directed to be referred by
the High Court. But if the second question could not form the subject-matter of
a reference, then obviously the first question becomes academic, because
Section 40A(2)(a) cannot have any application, unless it is first held that the
expenditure on rent was excessive or unreasonable.” The Supreme Court thus set
aside the order of reference made by the High Court. [In favour of
revenue] – [Upper India Publishing House (P) Ltd. v. CIT (1979) 117 ITR 569
: 10 CTR 101 : 1 Taxman 365 :
[TS-6-SC-1978]
(SC)]
Reasonableness has to be proved by assessee and not by
Department
Under the articles of association,
the rate of remuneration to be paid to the managing director and deputy
managing director was fixed. The ITO disallowed part of the remuneration paid
to the managing director and the deputy managing director under section 10(4A)
of the 1922 Act holding that the remuneration paid to the directors was
excessive or unreasonable having regard to the legitimate business needs of the
company and the benefit derived by and accruing to it therefrom. The AAC and
the Tribunal agreed with the ITO. The High Court also affirmed the order of the
Tribunal. On assessee's appeal to the Supreme Court :
It is for the taxpayer to establish by evidence that a particular
allowance is justifiable. Apparently, no evidence was tendered by the assessee
relating to the duties of the managing director and the deputy managing
director, the services rendered by them, the manner in which the profits earned
by the assessee were enhanced by reason of their special aptitude or
qualifications, the legitimate business needs, of the assessee and the benefit
derived by or accruing to the assessee in consequence of the services rendered
by the managing director and the deputy managing director. In the absence of
any such evidence, the finding recorded by the ITO and confirmed by the AAC and
the Tribunal must be accepted. It can not be said that even if the taxpayer
does not produce any evidence in support of the claim for allowance, the ITO
must independently collect evidence and decide that the allowance claimed is
excessive or unreasonable having regard to the legitimate business needs of the
assessee before the power under section 10(4A) of 1922 Act may be exercised.
The appeal was to be therefore dismissed. [In favour of revenue] – [Nund & Samonta Co. (P) Ltd. v. CIT
(1970) 78 ITR 268 (SC)]
