Excessive payment u/s 40A(3) are not disallowed incase business expediency and identity and genuineness of parties is proved

[Vivek Jalan]

Excessive payment u/s 40A(3) are not disallowed incase it can be established as follows-

1.    Payments have to be made in order that the assessee's business does not suffer or is hampered.

2.    Expenses which are sometimes not predictable or planned

3.    Expenses are extremely essential

The nature of the assessee's business is varied and no two events are comparable. Hence it was laid down in the case of SHRI MUNISH ARORA VERSUS THE ACIT, CENTRAL CIRCLE-II, CHANDIGARH - 2024 (11) TMI 1246 - ITAT CHANDIGARH that where due to business compulsions when the events are taking place, payments have been made to specified persons in spite of all constraints as they were holding an event to ransom and could have caused immense damage to the assessee's Goodwill and the assessee thereafter fired these people; the same would not be disallowed.

In GOENKA AGENCIES VERSUS COMMISSIONER OF INCOME-TAX - 2003 (5) TMI 44 - CALCUTTA HIGH COURT, it was held that-

“the identity of the payee who was an income tax assessee was established and the genuineness of the transactions was not doubted or disputed. It was held that the circular of the Board was not exhaustive but only illustrative. It was further held that the Income-tax Officer had to take a pragmatic view of the matter The Income Tax Officer should take a practical approach to problems and strike a balance between the direction of law and hardship to the assesses. He should not enmesh himself in technicalities. After all, the object is not to deprive the assessee of the deduction which he is otherwise entitled to claim. Where the amount was paid in cash or received in cash, the Assessing Officer has to find out whether the transaction is genuine or not and if he finds that the transaction is genuine, he should allow the deduction. The circular of the Board is not exhaustive, it is only illustrative and the Assessing Officer has to take into account the surrounding circumstances, considerations of business expediency and the facts of each particular case in exercising his discretion either in favour or against the assessee."

However, the following needs to be demonstrated –

1.    Business expediency

2.    Identity of parties

3.    Genuiness of parties