Even for applying the provisions of s. 40A(2), it is for the AO to make-out a case that the expenditure incurred is excessive or unreasonable having regard to the fair market value of such services.

Business expenditure Expenses or payments not deductible in certain circumstances Assessee filed return of income During assessment proceeding, AO observed that out of salary expenses claim and amount represented salary paid to relatives of Director AO disallowed same holding that assessee did not prove business exigencies to justify payment of salary and that payment made remain unverifiable CIT(A) deleted impugned addition Held, s. 40A(2)(a) deals with incurring of expenditure in respect of which payment was made to relatives and in AO’s opinion same was excessive and unreasonable having regard to FMV of goods, services or facilities, for which payment was made AO had not made any such case that payment made to relatives was on account of salary was excessive or unreasonable having regard to FMV of goods, services or facilities, for which payment was made Assessee had explained before lower authorities, circumstances of which payments were made to relatives and also expenditure as to what services they had rendered for assessee along with their qualification In earlier year, similar salary were allowed deduction by Department There was nothing unreasonable in this regard In any case, even for applying provisions of s. 40A(2), it was for AO to make-out a case that expenditure incurred was excessive or unreasonable having regard to FMV of such services However, no efforts were made by AO in this regard Therefore, there were no justifications for AO to disallow salary payment to employees who were relatives of Director In absence of any such finding by AO, there was no justification to disallow salary AO did not doubt salary paid to employees which was paid through banking channel and employees have shown same salary in their return of income, on which, TDS also deducted Revenue’s ground dismissed.

DEPUTY COMMISSIONER OF INCOME TAX & ORS. vs. KUSHAL INFRAPROJECT INDUSTRIES INDIA LTD. & ORS.

(2019) 57 CCH 0448 DelTrib