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TMI Blog1985 (10) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly hit by the provisions of s. 40A(2) of the Act and in the absence of any evidence as to the alleged excessive payment, the same ought to have been allowed in full as claimed for. 2. The facts and the decisions of the authorities below can be appreciated from para 3 and 4 of the appellate order reproduced below: The original assessment was completed by the ITO on 22nd Dec., 1976 whereby an amount of Rs. 15,830 being commission paid was disallowed by him under s. 40A(3) of the IT. Act. The assessee preferred an appeal and the ld. AAC vide his order No. IT/M 29th July 1978 dt. 2nd Feb., 1978 set aside the assessment. He held that whereas the provisions of s. 40A (3) were not applicable the ITO should examine the applicability of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . From the fact gathered and the statements recorded the ITO came to the conclusion that the commission paid to Shri Subhodchand was not a payment out of business consideration and hence it was not a genuine expenditure. The ITO found that Shri Subhodchand aged 60 was formerly wording as an accountant in the firm of cloth marchant and had no previous experience in the line of colours and chemicals. It is also found that all the family members including the father were staying together in the same premises from where the business was also carried on. He noted that Shri Yogeshchandra, partner of the firm on the other hand had previous experience of cluours and chemicals. There was no written agreement with the two firms of M/s Arvind Panalal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he surety of Subhodchandra is not a genuine one as stated in para 9 of his order. 3. The ld. counsel for the assessee brought to our notice various factual aspects of the case and submitted that earlier against the direction by the AAC regarding invoking of the provision of s. 40 (A) (2) of the Act the assessee did not prefer the appeal and made various submissions regarding the case of the assessee where business expediency etc. was not needed and authorised below adopted a wrong approach right from the very beginning. 4. The ld. Departmental Representative submitted a statement showing net profit, turnover, purchases etc, and stated that in various years the amount of commission payment varied between 16 per cent to 25 per cent of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which an expenditure is claimed but the amount is found excessive or unreasonable. Therefore, this s. 40A(2) cannot be invoked where transaction itself is treated as sham one or nor genuine one. And such is the finding that no expenditure can be said to have been incurred. Therefore, the disallowance if any can be made only under some other section of the AAC. Looking to the legislative history of s. 40A(2), it appears that it is intended as a curb on payment to connected persons where to government felt that tax liability is artificially reduced by diverting business profits to relatives in the form of excessive payments for goods and services. Hence it is clear that the type of disallowance thought of by the Revenue can only be under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint of time when the services are rendered and this would involved an inquiry as a business man because in times of dire need services are obtained even at higher cost, the ultimate aim being to earn profit or to maintain the business relations. (iv) He shall also have to find out what benefit is derived by the assessee and this would not necessarily confine to the year in question but shall have to take overall picture depending upon facts of each case. (v) Even the benefit accruing to the assessee shall have to be evaluated. This again may not confine the period of the accounting year only and again it would not be essential that benefit must be in the Revenue field. (vi) Thereafter he shall have to give reasonable opportunity t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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