1984 (3) TMI 83 - AT - Income Tax

Summary

Issues:
1. Disallowance of salary paid to a partner's son under section 40A(2).
2. Disallowance of commission paid to employees under section 40A(3).
3. Disallowance of interest debited in the books.

Analysis:

1. The Income Tax Officer (ITO) disallowed a salary payment of Rs. 5,195 to a partner's son under section 40A(2), considering it excessive. The assessee firm argued that the payment was reasonable and had been made in previous years without disallowance. The Appellate Tribunal held that disallowance under section 40A(2) must be based on excessive or unreasonable expenditure, considering market value of services, business needs, and benefits to the firm. The Tribunal found no justification for the disallowance and rejected the argument that section 40A(2)(b)(ii) applied, as the son of a partner was not entitled to less than 20% of profits.

2. The ITO disallowed commission payments to two employees under section 40A(3). The assessee contended that the disallowance was not warranted, citing a circular from the Central Board of Direct Taxes. The Tribunal agreed, stating that section 40A(3) aims to ensure payment verification, which was not an issue in this case. The disallowance was deemed unjustified as the employees had declared their commission income and the payments were not excessive.

3. The ITO disallowed Rs. 26,943 of interest debited in the books, alleging diversion of borrowed funds for personal use by partners. The Tribunal found no evidence of borrowing diversion and reduced the disallowance to Rs. 4,555 based on partner withdrawals for property construction. The Tribunal emphasized that partners were not obligated to contribute capital, and business operations could rely on borrowed funds. The final disallowance amount was adjusted to Rs. 4,555, directing the ITO to modify the assessment accordingly.

In conclusion, the appeal was partially allowed, with the disallowances of salary, commission, and interest being reassessed and reduced based on the Tribunal's analysis of the applicable legal provisions and factual circumstances.