Form 26A and ad hoc expense disallowance issues led to partial relief, remand, and deletion of additions.

Form 26A and related statutory verification material can entitle an assessee to relief from disallowance under section 40(a)(ia) where the recipient has included the income in its return, but the matter must be verified on facts; the interest paid to NBFCs was therefore remanded for de novo consideration. Salary paid to directors was also remanded because the assessee later produced Form 26A supporting the proviso to section 201(1). Rent disallowance was deleted to the extent supported by the leave and licence agreement, which showed annual rent of Rs. 1,50,000. An ad hoc disallowance from diesel, petrol, oil and freight expenses was deleted for want of a rational basis.

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Issues: (i) Whether disallowance under section 40(a)(ia) on interest paid to NBFCs was to be sustained or remanded for verification of Form 26A and related material; (ii) Whether disallowance under section 40(a)(ia) on salary paid to directors was to be sustained or remanded for verification of Form 26A; (iii) Whether disallowance under section 40(a)(ia) on rent paid was liable to be deleted to the extent of the amount covered by the leave and license agreement; (iv) Whether the ad hoc disallowance out of diesel, petrol, oil and freight expenses was justified.

Issue (i): Whether disallowance under section 40(a)(ia) on interest paid to NBFCs was to be sustained or remanded for verification of Form 26A and related material.

Analysis: The assessee relied on the second proviso to section 40(a)(ia) and produced additional evidence in the form of certificates under Form 26A to show that the recipient NBFCs had taken the interest income into account while computing taxable income. The existing record had not established such compliance before the lower authorities. Since the additional evidence bore directly on the statutory conditions for relief, it was admitted and required factual verification.

Conclusion: The issue was remanded to the Assessing Officer for de novo consideration after verification of the additional evidence, with the assessee obtaining partial relief.

Issue (ii): Whether disallowance under section 40(a)(ia) on salary paid to directors was to be sustained or remanded for verification of Form 26A.

Analysis: The salary payments to the directors were not in dispute, and the directors had shown the receipts in their returns. The earlier rejection rested on the absence of the accountant's certificate required under the first proviso to section 201(1). The assessee later furnished Form 26A, making factual verification necessary before applying the statutory relief.

Conclusion: The issue was remanded to the Assessing Officer for verification and fresh adjudication, with the assessee obtaining partial relief.

Issue (iii): Whether disallowance under section 40(a)(ia) on rent paid was liable to be deleted to the extent of the amount covered by the leave and license agreement.

Analysis: The leave and license agreement showed rent of Rs. 12,500 per month, amounting to Rs. 1,50,000 annually, and no cogent material was produced to show a different contractual obligation or separate higher payments attracting tax deduction at source. On the facts accepted on record, the amount under the agreement did not cross the threshold for deduction.

Conclusion: The disallowance was directed to be deleted to the extent of Rs. 1,50,000, and the assessee succeeded partly on this issue.

Issue (iv): Whether the ad hoc disallowance out of diesel, petrol, oil and freight expenses was justified.

Analysis: The assessee was engaged in the transport business, and the cash expenditure shown against freight income was very small. The disallowance had been made only on an ad hoc basis without a concrete basis for doubting the business expenditure or its quantum, despite the nature of the business and the supporting financial pattern.

Conclusion: The ad hoc disallowance was deleted and the assessee succeeded on this issue.

Final Conclusion: The appeal resulted in partial relief to the assessee, with some issues remanded for verification and the remaining additions reduced or deleted on merits.

Ratio Decidendi: Where the assessee produces Form 26A and similar statutory verification material showing compliance with the conditions linked to sections 40(a)(ia) and 201(1), the disallowance cannot be finally sustained without factual verification; further, ad hoc disallowance of genuine business expenditure cannot survive without a rational basis.

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