Disallowance under sec. 40A(2) without a comparable to prove the excessive payment is not justified: ITAT

Case Details: Bright Enterprises (P.) Ltd. v. DCIT - [2021] 132 taxmann.com 32 (Amritsar - Trib.)

Judiciary and Counsel Details

• • Laliet Kumar, Judicial Member and Dr. Mitha Lal Meena, Accountant Member
  • Sudhir Sehgal, Adv. for the Appellant. 
  • Smt. Jatindra Kaur, DR for the Respondent.

Facts of the Case

Assessee-company had filed its return of income and claimed professional expenditure incurred towards taking consultancy and technical services from its sister concern. Assessing Officer (AO) disallowed same by invoking the provision of section 40A(2) on the ground that such expense was excessive of fair market value prevailing of such services rendered to the assessee by sister concern.
On appeal, the Commissioner (Appeals) restricted disallowance made by the AO at the rate of 20 percent of total expenditure. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that it is essential for the AO to bring on record that the expenditure incurred by the assessee was either excessive or unreasonable, having regard to the market value. From looking into the order passed by him, which was partly confirmed by the CIT(A), it can be concluded that both the authorities have missed this essential aspect.
The CIT(A) had wrongly, and in a pro-rata manner, sustained 20 percent of the expenditure claimed by the assessee. There was no reason for coming to a conclusion for sustaining 20 percent of the disallowance. No fair market value of the services or goods had been brought on record by the lower authorities.

In the absence of comparable instances of rendering similar services/supply of goods, it would not be permissible to disallow the expenditure under section 40A(2). In these peculiar facts and circumstances when the comparable fair market value had not been brought on record by the lower authorities, further the benefit of another 10 percent was to be granted to the assessee.

Thus, the disallowance is restricted up to 10 percent of the expenditure claimed by the assessee by making the payment to sister concern for both the assessment years.