TMI Blog2005 (8) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the year under appeal. Looking to the background of Shri Sharma and the nature of services rendered by him, we find that payment of commission at 2 1/2 per cent cannot be considered as excessive or unreasonable. The partners of the firm are merely female partners whereas Shri S.K, Sharma is an influential person, who retired from M/s. MICO Ltd. as Senior Vice President and is able to influence the said company, which is one of the top most customers of the appellant-firm. We accordingly hold that no part of commission can be disallowed invoking the provision of section 40A(2) of the Act. In the result, the appeal is allowed. - HON'BLE GOPAL CHOWDHURY, JUDICIAL MEMBER AND DEEPAK R. SHAH, ACCOUNTANT MEMBER For the Appellant : K.A. Hemraj, Adv. For the Respondent : Ajit Korde, Adv. Order Deepak R. Shah, Accountant Member. 1. This appeal by assessee is directed against the order of learned CIT(A)-IV, Bangalore dated 13-12-2001. 1.1 The only ground of appeal is against disallowance of commission paid to one Mr. S.K. Sharma, who is the husband of one of the partners of assessee-firm. The disallowance is made invoking the provisions of section 40A(2) of the Act. 2. The appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcentage of commission in the said year works out at 0.94 per cent. During the year, the total turnover including scrap sales has gone up to Rs. 5,13,13,656. Going by the standard in the assessee's own case, the commission for the year should have been Rs. 4,82,348 for the current year. The assessee could not bring forth any additional material justifying the reasons for paying commission to the extent of Rs. 12,83,222 i.e., almost Rs. 8 lakhs more than what could justifiably be paid by the firm. The arguments that the recipient of the commission is paying more tax at a rate higher than that paid by the firm is also not correct. In fact, Sri Sharma, the recipient of the commission has claimed substantial expenditure against earning of such commission and paid tax only on the net amount That apart, the provision contained in section 40A(2) is a self-contained provision. The fact that Sri Sharma is paying lax on the commission earned cannot act as a deterrent for not invoking the provisions of section 40A(2). In view of the facts stated above and under the circumstances, it is held that commission paid to Sri Sharma now is unreasonable and in excess of legitimate amount payable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore disallowing the sum under section 40A(2), the Assessing Officer has to satisfy that the amount paid is excessive or unreasonable having regard to the fair market value of services. Since the Assessing Officer has not worked out what is the fair market value of services rendered, disallowance under section 40A(2) is not called for. It was also submitted that it is not found that the payment is not made towards legitimate needs of the business. No comparable cases have been cited. He further invited our attention to the decision of Hon'ble Supreme Court in the case of Shahzada Nand Sons v. CIT [1977] 108 ITR 358. Shri Hemraj further submitted that the reasonableness of the payment is to be judged from the point of view of businessman and not by the view point laid by the Assessing Officer. For this purpose, he relied upon the decision of Hon'ble Gujarat High Court in the case of Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 105. 2.2 Learned DR on the other hand heavily relied upon the appellate order. He further submitted that for immediately preceding year, commission at the rate of .94 per cent only was allowed. There is no justification for increasing the comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing regard to the fair market value of the goods, services or facilities for which the payment is made. 2.5 Section 40A(2)(a) provides as under:- 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 g 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd section 37 cannot go together because section 40A(2) is of overriding nature which would come into operation if the payment is otherwise found to be 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 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 [1982] 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.). 2.7 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 scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subjective and prejudiced opinion of an officer interested 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. 2.8 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 ded ..... X X X X Extracts X X X X X X X X Extracts X X X X
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