TMI Blog2008 (2) TMI 660X X X X Extracts X X X X X X X X Extracts X X X X ..... that interest paid to one of the parties is unrelated and interest to such party at the rate of 18 per cent cannot be disallowed. However, in respect of interest paid to other related parties, the part was disallowed holding excess over 12 per cent per annum as covered under provisions of section 40A(2) and disallowable as such. The assessee is in further appeal before us. 4. Learned counsel for assessee Shri R.S. Jhalani submitted that the loan was taken for the purpose of business and even if the expenditure may not have been incurred under any legal obligations but is allowable as such if it was incurred on grounds of commercial expediency. Once it is established that there was nexus between expenditure and purpose of business, the revenue cannot be justified to put itself in the armchair of businessman to decide as to how much is the reasonable expenditure. Interest to unrelated parties was paid at the rate of 18 per cent per annum. Interest to related parties are also paid at the rate of 18 per cent per annum. Only because interest is paid at the rate of 12 per cent to one of the related party, 18 per cent cannot be considered as unreasonable so as to disallow the same pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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." The scope of the section has been set out in the Circular of CBDT vide Circular No. 6P (LXXVI-66) of 1968, dated 6-7-1968 in which at paras 72 and 74 it is stated thus : "Para 72 : The Finance Act, 1968, has introduced a new section 40A in the Income-tax Act with effect from 1-4-1968. Under sub-section (2) of new section 40A, expenditure incurred in a business or profession for which payment has been or is to be made to the taxpayer s relatives or associate concerns is liable to be disallowed in computing the profits of the business or profession to the extent the expenditure is considered to be excessive or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable under section 37(1) of the Act. In other words, section 40A(2) provides for subjective satisfaction of the assessing authority qua allowability of the payment irrespective of the fact that the payment is otherwise found to be allowable as bona fide under section 37(1) of the Act. This view is supported by the decisions in the case of N.M. Anniah Co. v. CIT [1975] 101 ITR 348 (Kar.), Hathiwala Silk Mills v. ITO [1984] 19 TTJ (Ahd.) 284, M Co. v. ITO [1985] 23 Taxman 37 (Ahd.) (Mag.) and ITO v. Swamy Industries [1981] 12 TTJ (Coch.) 370. Reasonableness is to be decided on the basis of fair market value of the goods, services or facilities. The reasonableness of any expenditure is to be seen from the viewpoint of the businessman and not from the view point of the revenue authorities. Refer : Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 105 (Guj.). 6.3 The provision of section 40A(2) is intended to prevent evasion of tax in the like manner as section 104 of the Act or section 23A of the Act of 1922. In considering the scope of reasonableness Their Lordships in CIT v. Gangadhar Banerjee Co. (P.) Ltd. [1965] 57 ITR 176 (SC) have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in collecting more revenue. . . . It is not for the Income-tax Officer to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived or accruing to the company must also be considered from the angle of a prudent businessman. The term "benefit" to a company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases. Both these aspects have to be considered judiciously, dispassionately without any bias of any kind from the view point of a reasonable and honest person in business." Though, these provisions were laid down in the context of provisions of section 10(4A) of the Act of 1922 which is analogous to section 40A(2) of the Act of 1961, they would apply with equal force. 6.4 When an assessee claims expenditure, the onus lies upon him to prove the sum is allowable under the provision of the Act. Thus, it is true that for the purpose of claiming deduction under section 37(1), the onus lies upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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