Decided by: ITAT, Nagpur Bench, Nagpur (Third Member)
In The case of: Jagdamba Rollers Flour Mills Ltd. v. ACIT
Appeal No. : ITA No. 93/Nag/2007
Decided on: October 27, 2008
SUMMARY OF CASE LAW
The scope of enquiry under the provision of section 40A(2)(a) is with reference to the fair market value of the services rendered by the director concerned; in the absence of enquiry as contemplated by said section, no disallowance can be made or sustained on the ground that the payment is excessive or unreasonable.
RELEVANT PARAGRAPHS:
7. After going through the orders of the learned Members as well as the orders of the lower authorities, I am of the view that no disallowance was required to be made for the reasons given hereafter. The question for consideration is whether on facts of the case, the disallowance was justified in view of the specific provisions of section 40A(2)(a) of the Act. It would be appropriate to reproduce the relevant portion of the said provision below:
40A(1) - “the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head “Profits and gains of business or profession”
40A(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 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.”
8. Perusal of the above provisions shows that such provisions are non-obstante provisions and, therefore, have an overriding effect over the other provisions allowing the deductions. This provision presupposes allowability of the expenditure otherwise. If the expenditure is not allowable under the provisions of sections 28 to 39 then the question of making disallowance u/s.40A would not arise. It is only in these cases where the deduction is allowable u/s.28 to 39 but the expenditure is found to be excessive or unreasonable, the disallowance u/s.40A can be made if payment on account of expenditure is made to the persons specified under sub-section (2)(b) of section 40A of the Act. The expenditure on account of remuneration paid to employees is governed by the provisions of section 37 of the Act. According to the said section, the expenditure is allowable if it is incurred wholly and exclusively for the purpose of business. It is not in dispute that such expenditure is otherwise allowable under section 37 of the Act. However, a part of the expenditure can be disallowed if it is shown - (i) that the payment was made to the persons specified in clause (b) of section 40A(2) of the Act and (ii) If it is found that expenditure is excessive or unreasonable, having regard to the fact that the market value of the goods, services or facilities for which the payment is made. Undisputedly, the payment to the director falls under clause (b) of section 40A of the Act and, therefore, the Assessing Officer was duty bound to make enquiry whether such expenditure was excessive or unreasonable having regard to the fair market value of the services rendered. To that extent, I am in agreement with the observations of the learned Accountant Member. However, no enquiry was made by the Assessing Officer to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the services: On the other hand, the Assessing Officer made the enquiry in a different direction i.e. whether the increase in the salary as compared to the salary paid to last year was justified on facts or not Such enquiry, in my view, is not required to be made as per the provisions of section 40A(2)(a). The scope of enquiry under the above provision is with reference to the fair market value of the services rendered. In the absence of enquiry as contemplated by the provisions of section 40A(2)(a), no disallowance could have been made or sustained. The onus was on the Assessing Officer to bring the material on record to prove that the payment made by the assessee was excessive or unreasonable having regard to the fair market value of the services rendered. If some material/evidence is brought on record to indicate that payment appeared to be excessive or unreasonable then the onus would shift to the assessee to prove that the payment was not excessive or unreasonable. Since no enquiry as contemplated by the aforesaid provisions was made on this account, it cannot be said that the payment was excessive or unreasonable. Therefore, I find myself in agreement with the conclusions arrived at by the Learned Judicial Member though for different reasons.