Law: Income Tax Act, 1961

Section: 40,40A(2),40A(2)(b)

(a) Income-tax---Business expenditure---Disallowance---Excessive payment for goods, services or facilities---Scope of S.40A(2)---Indian Income Tax Act, 1961, S.40A(2). According to section 40A(2)(a) of the Income Tax Act, 1961, if the Income-tax Officer is of opinion that any expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities availed of for which payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, then so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Held, that, in the instant case, the amounts paid by the assessee-­company to the holding company by way of reimbursement in relation to the utilisation of the services of the employees of the holding company ran to the tune of Rs.1,48,587 and Rs.1,44,471 for the assessment years in question respectively. The excessive nature of the claim or its unreasonableness or otherwise had not been taken into account by the Income-tax Officer. The Commissioner of Income-tax set aside the assessments with a direction to the Income-tax Officer to consider the applicability of the provisions of section 40A(2)(b) of the Income-tax Act and redo the assessments according to law. His order was valid. (b) Income-tax--- ----Revision---Condition precedent---Order which is erroneous and prejudicial to Revenue---ITO allowing payments to holding company for utilisation of services of its employees without considering applicability of S.40A(2)---Order of revision was valid---Indian Income Tax Act, 1961, Ss.40A & 263. Venkatakrishna Rice Co. v. CIT (1987) 163 ITR 129 (Mad.) ref. JUDGMENT M. S. JANARTHANAM, J.---The assessee, the Mofussil Warehouse and Trading Co. Ltd., Madras, is a wholly owned subsidiary company of Parry & Co. The assessee owned warehouses and godowns and derived income from letting out the same. In connection with its business of letting out its warehouses and godowhs on hire, it had utilised the services of the employees of the holding company Parry & Co., and for the services of…

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