False expense claim test limits block assessment of supervisory charges absent a finding of bogus expenditure.

Disallowance of supervisory charges under section 40A(2) does not, by itself, make the amount undisclosed income for block assessment under Chapter XIV-B. A mere finding that related-party expenditure is excessive or unreasonable under fair market value, business need, or benefit derived is not enough; the claim must also be shown to be false or bogus for section 158B(b) to apply. Here, although the authorities treated the charges as not genuine business expenditure, they did not record a categorical finding that the claim was false. On that basis, the amount could not be assessed as undisclosed income.

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Issues: Whether disallowance of supervisory charges under section 40A(2) of the Income-tax Act, 1961 could be treated as undisclosed income for block assessment under Chapter XIV-B in the absence of a finding that the claim was false or bogus.

Analysis: Section 40A(2) permits disallowance only to the extent expenditure to a related person is excessive or unreasonable having regard to fair market value, the legitimate needs of the business, or the benefit derived. A mere disallowance on that basis does not by itself establish that the expenditure is false. For inclusion as undisclosed income under section 158B(b), the claim must be shown to be false, especially after the amendment inserting false expense claims within the definition. On the facts, the authorities found the supervisory charges to be not legitimate business expenditure, but no categorical finding was recorded that the claim was bogus or false.

Conclusion: The disallowance of supervisory charges under section 40A(2) could not be treated as undisclosed income for block assessment in the absence of a finding that the claim was false.

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