The main legal point established in the judgment is the requirement for a fair and reasonable assessment of excessive or unreasonable payments under Section 40A(2) of the Income Tax Act, 1961, considering the legitimate business needs and benefits derived by the assessee, and the need for benchmarking expertise and comparative analysis to justify disallowances.

S. Ravindra Bhat, J.

CM No. 41578 of 2016

1. For the reasons stated in the application, the delay of 11 days in re-filing the appeal is condoned. The appeal is taken on record.

2. The application stands disposed off.

ITA 795/2016

3. The question of law which arises for consideration is as follows:-

“Did the ITAT fall into error in restoring the disallowance of 50% of Rs.48 lakhs paid to the appellant/assessee employee for the relevant assessment year validly under Section 40A(2)(b) of the Income Tax Act, 1961?"

4. The Assessing Officer (AO) had, for Assessment Year 2009-10, disallowed 50% of the payments made on account of professional remuneration to Mr. Preetpal Singh from the assessee’s claims. The AO had required details of the remuneration and the nature of services provided by Mr. Preetpal Singh. The AO felt that the assessee had not adequately addressed the concerns with respect to the time spent for its work, having regard to the qualifications and expertise of the said expert, and therefore, disallowed 50% of the claimed expenditure i.e. Rs.48 lakhs. The Commissioner of Income Tax (Appeals) [CIT(A)] after analysing Section 40A(2) of the Income Tax Act, 1961 (hereinafter to be referred as ‘the Act’) discussed the submissions of the parties and then on the basis of the analysis of previous Tribunals’ rulings as well as that of the High Courts, concluded that in the circumstances it could not be said that the expenditure was excessive. The CIT (A)’s reasoning is as follows:-

“Ground No.I :-is in respect of disallowance of 50% of remuneration amounting to Rs.24 lakhs u/s 40A(2)(b). The Payment was made to Sh Preetpal Singh a related party. Sh Preetpal Singh was a Bachelor of Engineering from USA and MBA in Marketing and Finance.

Before discussing the matter further, I shall quote Section 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 Income-tax 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."

In view therefore the AO should have been of the view that the expenditure was excessive and unreasonable having regard to the Fair Market Value of the goods services or facilities for which the payments was made or legitimate needs of the business or profession of the appellant or the benefit derived. However nowhere has the AO given any such finding. The AO has not made any attempt to find out the salary which would have been payable to a person with similar qualifications. The AO has nowhere discussed the legitimate needs of the business and profession and why the payment was not justified.

On the other hand the appellant on being asked to justify salary of four lakhs per months to Sh Preetpal Singh has furnished copy of a letter from Swastik Outsourcing which states:-

'We have been in touch with at least eight organization for discussing your CV as advised by you. Please note general consensus is that based on your qualifications and experience we can get you an yearly package of around Rs. 48 to Rs. 60 lakhs alongwith perks.

If you agree on this package please let us know to enable us to discuss your credentials with top management of few companies. Please note though your base office may be NCR, Delhi but your work area may extend to USA. Europe and certain parts of China but not to Russia, Australia and Middle East as agreed earlier."

The appellant has also given reason to justify the benefit to the business from employing Sh. Preetpal Singh. The appellant states that Sh Preetpal Singh was a highly qualified person and was engage