Section 40A(2)(a) disallowance failed where share purchase was treated as investment and valuation support was absent.

Section 40A(2)(a) could not be applied to treat the share acquisition from an associate concern as excessive expenditure where the shares were shown as non-current investments in the balance sheet and were not routed through the profit and loss account. The assessee's business objects did not change the character of the transaction. The Assessing Officer also assumed face value to be fair market value without any valuation exercise or comparable material. On these facts, the disallowance had no proper foundation, so the addition was set aside and the matter was restored for fresh adjudication.

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Issues: Whether section 40A(2)(a) of the Income-tax Act, 1961 could be invoked on the facts of the case to treat the alleged excess payment on acquisition of shares from an associate concern as excessive expenditure and sustain the addition.

Analysis: The shares acquired by the assessee were reflected in the balance sheet as non-current investments and were not routed through the profit and loss account. The character of the transaction could not be altered merely because the assessee's objects included dealing in shares. The Assessing Officer had also assumed the face value of the shares to be their fair market value without any valuation exercise or comparable material on record. In these circumstances, the foundation for the disallowance was found unsustainable and the matter required fresh examination.

Conclusion: The addition was set aside and the issue was restored to the Assessing Officer for de novo adjudication.

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