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TMI Blog2024 (3) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... trative Head, possesses the degree of Masters in Business Administration from University of Houston-Downtown engaged in looking upon areas related to students like accommodation, food facility, water supply, disciplinary actions etc. of the hostel. A show cause was issued since no return of income was filed by Smt. Palak A Shah with the following contents: "Please refer to your letter dated 12.09.2017 received in this office on 13.09.2017, it is seen that amount of Rs. 4,20,000/- paid to Palak A Shah as a business transaction. However, it is observed that Palak A Shah has not filed any return of income for A.Y. 2015-16. Moreover, no payment of salary by cheque or otherwise has been made to her and it is only a journal entry. Even, the tax paid by her is also at the rate of 10% only which is not the total tax required to be paid It is also seen that the same amount has been given back by Palak A Shah to M.S. Hostel and no interest has been charged on it. Therefore, in effect the money has been claimed as an expenditure and routed back in the form of a loan without any cost to you i.e. M.S. Hostel. Therefore, you are required to show cause as to why the salary paid to Palak A S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently, the grounds of appeal are dismissed." 4. At the time of hearing of the instant appeal, the Ld. Counsel appearing for the appellant relied upon the submissions made by him before the CIT(A) and reiterated the same before us. The contents whereof is as follows: "1 The order of learned DCIT is against law and facts 2 Salary paid to Palak Shah of Rs 420000 is in respect of administration work handled by her for the appellant firm 3 She has pursued Masters in Business administration 4 The tax due has been paid on the total salary income and hence there is no evasion of tax. The computation of total income was submitted during the course of assessment proceedings 5 The shortfall in TDS was made good by payment of self assessment tax on 7th April 2015 6 Since she was not in need of funds she has not withdrawn the same and kept with the appellant firm to the credit of her account" 2.1 Vide notices dated 06/01/2021, 11/06/2021, 06/04/2022, 25/04/2023 the appellant was requested to file its reply, In response to the notices, appellant filed the reply dated 02/07/2021, 07/04/2022 & 01/05/2023 which reproduced as under: "The learned Deputy Commissioner of Income Tax (DCIT) duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id section says "where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to in clause (b) of this subsection and the officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of goods. services or facilities for which the payment is made or 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 deduction." Thus, as per the provisions of section 37 r.w.s. 40A, any sum paid to the persons covered by the provisions of section 40A(2)(b) if found to be excess or legitimate though incurred for the purpose of business or profession shall not be allowed as deduction. 1. In the given case of the appellant firm, it has paid salary of Rs. 4,20,000/- to Mrs. Palak A Shah for administration work handled by her. She has pursued Master's in Business Administration from University of Houston, Downtown and appellant firm is engaged in running hostel needs an administrator to look upon areas related t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pre- requisite. The words used are expense has to be incurred and if the intention of law was allowability of expense only on actual payment then instead of incurred they would have definitely used word paid which is not the current scenario. Hence, the amount payable is equally eligible for claiming as an expense. Thus, whether salary has actually been paid or not does not determine allowability or disallowability of an expense. 1. Thirdly, it has been alleged that tax paid by her is also at the rate of 10% only which is not the total tax required to be paid. Here, we would like to state that the appellant firm has paid Rs 4,20,000/- to Palak Shah and deducted tax of Rs. 43,260/- and discharged its liability. Furthermore, she was paid salary for the work executed by her and service actually rendered to the appellant firm. Thus, since the said expense was wholly and exclusively incurred for the purpose of business, it is very much eligible as deduction 1. In respect of total income of Palak: Shah, we have already submitted during the course of assessment proceedings in our submission dated 27th July, 2017 that she has eamed salary income of Rs. 4,20,000/- each from Ambe Vidh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income- tax authorities must put themselves in the shoes of the assessee and see how a prudent business man would act. The authorities must not look at the matter from their own view point but that of a prudent businessman..." * The Hon'ble Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 held that the Income-lax authonties have to decide whether 2 the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the Supreme Court laid down that the reasonableness of the expenditure has to be adjudged from the paint of view of the businessman and not of the Revenue. Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as a deduction. From reading of this section, it is clear that the expenditure should have been incurred by the assessee which is otherwise deductible, but the deduction is restricted to a part of the sum by considering such expenditure to be excessive having regard to the fair market value of the goods or services etc., the disallowance is to be restricted to 'so much part of the expenditure as is so considered by him to be excessive or unreasonable. In order to be covered within the ambit of this section it is necessary that the expenditure incurred by the assessee should be proved by the Assessing Officer to be excessive or unreasonable Such unreasonableness can be proved by considering the fair market value of the goods or services for which the payment is made. It cannot be so as per the mere whims and fancies of the Officer. Hence, it is crystal clear from the assessment order of the learned AO that neither it was proved that the salary paid to Palak Shah is excessive or unreasonable in terms of fair value for invoking provisions of section 40A(2)(b) nor it was demonstrated that the salary expense was not incurred for the purpose of business of the appellant firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered by her to the appellant. Therefore, the expenditure was wholly and exclusively incurred for the purpose of business and very much eligible as deduction. 7.4 The details of income earned by Smt. Palak A Shah as it appearing from the reply filed by the appellant dated 27th July, 2017 is as follows: "1. In respect of total income of Palak Shah, we have already submitted during the course of assessment proceedings in our submission dated 27th July, 2017 that she has earned salary income of Rs. 4,20,000/- each from Ambe Vidhyatay KG section and M S Hostel during the year. The total income earned during the year amounts to Rs. 8,40,000/- and she has made investment of Rs. 29,000/- as 80C of the Income Tax Act, 1961. The net taxable income amounts to Rs. 8,11,000/- on which total tax payable amounts to Rs. 89,816/-. The appellant firm and Ambe Vidhyalty KG section has deducted tax of Rs. 57,783/- resulting into net tax payable of Rs. 32,327/- which was paid by her vide challan number 51716 Dated 7th April 2015. Thus, the question of evasion of tax does not arise at all and she has discharged her tax liability in accordance with the applicable tax rate." 7.5 Under these facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt businessman. 10. He has further relied upon the judgment passed by the Hon'ble Madras High Court in the case of CIT vs. Computer Graphic Ltd., reported in 258 ITR 84, where it has been held that where the appellant incurs any expenditure in respect of which payment has been made or is to be made to any person referred to Clause (b) of Section 40A(2) of the Act and the Ld. AO 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 as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction under Section 40A(2) of the Act. 11. Thus, having regard to the entire aspect of the matter, we find that when the expenditure incurred by the appellant is otherwise deductible but deduction is restricted to a part of the sum by considering such expenditure to be excessive, having regard to the fair market value of the goods or services etc. and so much part of the expenditure is disallowed or in other words, if the expenditure incurred by the appellant is proved by the Ld. AO to be excessive or unreasonable considering the fair market value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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