TaxTMI 
TaxTMI 
2005 (8) TMI 285
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....s retirement, he is serving with the appellant firm. As per the submission by assessee, Shri S.K. Sharma is a qualified technocrat, past Chairman of Confederation of Indian Industry (Southern Region), past President of Greater Mysore Chamber and Industry and has very wide business contacts, particularly in automobile industry. During the year, apart from the salary of Rs. 60,000 and conveyance charges of Rs. 24,000, Mr. Sharma was also paid commission at the rate of 2.5 per cent of total sales turnover. The Assessing Officer noted that the commission is excessive and unreasonable. He accordingly asked the assessee to show cause as to why the disallowance should not be made in terms of section 40A(2). The assessee replied that Shri Sharma is highly qualified man and was holding important offices. Shri Sharma rendered the services like procuring orders, follow-up approval, collection etc. It was also explained that due to his high offices held at MICO, he has good relation with other customers also. The payment is absolutely necessary and legitimate. Because of his services, much more benefit has been derived by the firm. Since Mr. Sharma wielded lot of influence on the customers, th....
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....fact that Sri S.K. Sharma is a highly qualified man who held different posts including Senior Vice President of MICO. The assessee has contended that their firm had sold a considerable amount of its products to MICO for which Sri Sharma was mainly responsible and they would have had to pay tax at the rate of 26.25 per cent while Sri Sharma in his individual capacity has paid tax at the rate of 30 per cent on the commission received by him. I do not agree with the contentions of the assessee. The reasonableness of any expenditure is to be judged having regard to the services for which the payment is made or the legitimate needs of the business or profession or the benefit derived by the taxpayer from the expenditure. No evidence has been given in support of the contention that Sri Sharma who retired as Vice President of MICO was the main reason for procuring the order from the said company. Assuming for a minute that the assessee has made a statement of fact it is noticed that in the previous year a commission of 0.94 per cent was paid to Shri Sharma. In the year under consideration the total turnover including scraps has gone up by Rs. 5,13,13,656. Keeping in mind the commission pa....
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....2.3 We have carefully considered the relevant facts and arguments advanced. We have also perused the decisions cited. It is seen that out of the total commission of Rs. 12.83 lakhs, Rs. 4.83 lakhs has been allowed and Rs. 8 lakhs has been disallowed, invoking the provisions of section 40A(2) of the Act. Section 40A was inserted in the Income-tax Act under Finance Act, 1968. The section imposes restriction and limitation on deductibility of expenses paid to certain categories of persons. In the present case, it is not in dispute that the payment made to Shri S.K. Sharma is falling within the parameters of section 40A(2)(b) of the Act. 2.4 The Taxpayers carrying on business made excessive and unreasonable expenditure resulting in remuneration and perquisites to their relatives or close associates and on payments for value of goods, services or facilities in dealings with those persons and claimed deduction on the ground that the said expenditure had been laid out wholly and exclusively for the purpose of business and the Courts had held that the taxing authorities were not entitled to consider whether payment of such remuneration was necessary [Ref. Newtone Studios Ltd. v. CIT [19....
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....onableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession or the benefit derived by, or accruing to, the tax-payer from the expenditure. Such portion of the expenditure, which, in the opinion of the Income-tax Officer, is excessive or unreasonable according to these criteria, is to be disallowed in computing the profits of the business or profession. Para 74: It may be noted that the new provision is applicable to all categories of expenditure incurred in businesses and professions, including expenditure on purchase of raw materials, stores or goods, salaries to employees and also other expenditure on professional services, or by way of brokerage, commission, interest etc. Where payment for any expenditure is found to have been made to a relative or associate concern falling within the specified categories, it will be necessary for the Income-tax Officer to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the section. The Income-tax Officer is expected to exercise his judgment in a re....
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....section is to prevent evasion of tax, the provision must be worked not from the standpoint of the Tax Collector but from that of a businessman. The Income-tax Officer must take an overall picture of the financial position of the business. He should put himself in the position of the prudent businessman or the director of the company and deal with a sympathetic and objective approach." In this regard, it is also worthwhile to note the decision of Hon'ble Supreme Court in CIT v. Asiatic Textiles Ltd. [1971] 82 ITR 816 wherein the earlier decision in the case of Gangadhar Banerjee & Co. (P.) Ltd. is followed. The decision in the case of Gangadhar Banerjee & Co. (P.) Ltd. is an authority for the proposition that the entire question has to be considered from the businessman's point of view and not necessarily from the view of the revenue. To the like effect is the decision of the Hon'ble Calcutta High Court in the case of CIT v. Edward Keventer (P.) Ltd. [1972] 86 ITR 370 [since approved by the Hon'ble Supreme Court in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149]. In this case it is observed: "In other words, even if the qualitative characteristics....
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....xclusively for the purpose of business. However, the question whether the expenses are "wholly and exclusively for the purpose of business" is not the question before us. For invoking the provisions of section 40A(2), the onus lies upon the Assessing Officer that the payment is excessive or unreasonable having regard to the fair market value of goods or legitimate needs of the business. 2.9 Under the general law, transactions even with the relatives and associate concerns cannot be discarded. The onus is on the department to prove that the transaction was sham or not bona fide or the value shown in the books was not the value really paid. In this regard the Hon'ble Gujarat High Court in the case of Marghabhai Kishabhai Patel & Co. v. CIT [1977] 108 ITR 54 has held: "that unless it has been shown that the transaction in question was a sham one or unless the value shown was not the value in the books of account or unless it was not a bona fide transaction, it is not open to the taxing authorities to disregard the figures of the transactions shown in the books of account of the firm." The Assessing Officer must establish that the payment is excessive or unreasonable....