Saturday, 26 May 2018

In absence of any yardstick or guideline to determine an expenditure as excessive payment, AO has no discretion to make disallowance: HC

THE ISSUE IS - Whether, in the absence of any yardstick or guideline to determine an expenditure as excessive payment, AO has no discretion to make disallowance. YES IS THE VERDICT.   


Facts of the case:
The assessee company had filed return for relevant AY. During assessment AO noted that assessee had paid certain commission to the Chairman cum Managing Director of the company. It appeared that the commission was computed at the rate of 20% of the profit of the assessee before tax. The AO found that the amount of commission paid to Chairman cum MD fell within the ambit of Section 40A(2) of the Act. The AO disallowed the profit commission paid considering it to be excessive and unreasonably high. On appeal, CIT(A) and Tribunal passed order in favour of assessee.
On appeal, the High Court held that,
++ an appeal lies u/s 260A of the IT Act, on a substantial question of law. Right of appeal is not automatic. Right of appeal is conferred by statute. When statute confers a limited right of appeal only in a case which involves substantial questions of law, it is not open for Court to sit in appeal over the factual findings arrived at by the Appellate Tribunal;
++ section 40A(2)(a) provides that if the officer is of opinion that expenditure to a Director of a company was excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment was made or the legitimate needs of the business, occupation of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as was considered by him to be excessive or unreasonable would not be allowed as a deduction. There is no yardstick or guideline for judging when the expenditure incurred by the assessee would be excessive or unreasonable. The decision is left to the AO. The decision is a subjective decision having regard to the facts of the case. Hence there is no question of law far less any substantial question of law involved in these appeals.

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