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Issues: (i) Whether labour charges paid to female relatives of the directors could be disallowed under section 40A(2)(b) of the Income-tax Act, 1961 without a finding that the payment was excessive or unreasonable having regard to fair market value; (ii) Whether the entire labour charges could be disallowed when corresponding job charges receipts were already shown.
Issue (i): Whether labour charges paid to female relatives of the directors could be disallowed under section 40A(2)(b) of the Income-tax Act, 1961 without a finding that the payment was excessive or unreasonable having regard to fair market value.
Analysis: Disallowance under section 40A(2)(b) is permissible only when the Assessing Officer forms an opinion, on the basis of fair market value of the goods, services or facilities, that the payment to specified persons is excessive or unreasonable. An ad hoc estimate or disallowance based on assumptions, without determining fair market value or bringing comparative material on record, is not sustainable.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Issue (ii): Whether the entire labour charges could be disallowed when corresponding job charges receipts were already shown.
Analysis: Once corresponding receipts for polishing job charges were shown, the disallowance of the entire labour charges could not be sustained on the footing that no labour expenditure was incurred. The material on record did not justify treating the whole payment as inadmissible.
Conclusion: The issue was answered in favour of the assessee and against the Revenue.
Final Conclusion: The appeal succeeded, the disallowance was set aside, and the assessee obtained relief on both questions decided.
Ratio Decidendi: A disallowance under section 40A(2)(b) requires a reasoned determination that the expenditure is excessive or unreasonable by reference to fair market value, and cannot rest on conjecture, ad hoc estimation, or unsupported assumption.
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