Recorded finding of excessiveness required under section 40A(2): absence defeats disallowance for salary recharge reimbursements and sustains deductions.

Section 40A(2) requires a recorded finding that an expenditure is excessive or unreasonable relative to fair market value or business need before disallowance; absent such a finding, disallowance cannot be sustained. The assessee bears the onus under section 37(1) to prove expenditures were wholly and exclusively for business, and cost sharing agreements, accounting entries for reimbursements, and use of domestic payees taxed at the same rate supported the claim. Because no excessiveness or tax arbitrage finding was recorded and the sharing arrangement was not disputed, the Rs. 62,50,720 disallowance was deleted.

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Issues: Whether the disallowance of salary recharge and reimbursement of expenses amounting to Rs. 62,50,720/- under section 37(1) read with section 40A(2)(b) of the Income-tax Act, 1961 is sustainable in law.

Analysis: The statutory requirement under section 40A(2) mandates a recorded opinion that the expenditure is excessive or unreasonable with regard to fair market value, legitimate business needs or benefit derived; such a finding is a prerequisite before invoking disallowance. The onus under section 37(1) is on the assessee to establish that the expenditure was incurred wholly and exclusively for business purposes. The material shows the existence of cost sharing agreements, accounting entries evidencing reimbursements, and that the payee entities are domestic companies taxed at the same rate. The assessing authority and the appellate authority disallowed the expenditure primarily because minute individual deputation details and a formal mechanism of apportionment were not produced, but they did not record any finding that the payments were excessive or that tax evasion was intended or occurred. Where there is no finding of excessiveness or tax arbitrage and an arrangement for sharing personnel and corresponding reimbursements is not disputed, mere absence of granular deputation particulars does not satisfy the statutory threshold for disallowance under section 40A(2) nor negate the assessee's case under section 37(1).

Conclusion: The disallowance of Rs. 62,50,720/- under section 37(1) read with section 40A(2)(b) is not sustainable and is deleted; the appeal is allowed in favour of the assessee.

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