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2016 (7) TMI 910 - AT - Income TaxDisallowance of business expenditure - ratio of personnel cost - nexus between the expenditure incurred and the business of the assessee - only objection of both the authorities is that the assessee was suffering loss but had paid higher salary to its employees - why was the assessee not reducing his expenses proportionately when in was earning lesser income - Held that:- There is a basic and fundamental flaw in the approach of the AO and the FAA. They have tried to step in to the proverbial shoes of the businessman. It is not their domain to decide as to how much expenditure is to be incurred or under which it head it has to incurred. Assessee has to decide its business needs and no other person is authorised to do so. Whether or not to incur any expenditure or how much expenditure to be incurred is the prerogative of an assessee. The employee are not hit by the provisions of section 40A of the Act, so, the FAA was not justified in questioning the reasonableness of the expenditure. Both of them have ignored the principle of commercial expediency. Phrase commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. AO has no role to decide the ‘Laxman-Rekha’ of ‘preservation, protection or advancement of his business interest. ’ Reasonableness of an expenditure cannot and should not be the deciding factor while allowing an expenditure u/s. 37 of the Act. In the case before us, both the authorities have misdirected themselves and ventured in to prohibited territory. Therefore, their action cannot be endorsed. Reversing the order of the FAA, we decide the effective ground of appeal in favour of the assessee.
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