HIMANSHU V MEHTA,MUMBAI vs. ASST CIT CIR 19(2), MUMBAI

This appeal filed by the assessee on 23.4.2015 is against the order of the CIT (A)-34, Mumbai dated 20.3.2015 for the assessment year 2010-2011. In this appeal, assessee raised the following solitary ground which reads as under:- “The Ld CIT (A) erred in justifying the AO’s action to disallow Rs. 1,89,957/- u/s 40A(2)(b) of the Act on account of commission paid to relative, his spouse. It is respectfully submitted that appellant has paid the said commission to his wife, Mrs. Aarti Mehta, who was running proprietary concern, Mehta Solid Boards. It was mutually agreed between the appellant and his wife that appellant will take over the business of his wife and in turn, she will be paid commission at the rate of 2% on the sales. Hence, it is the genuine business expenditure and should have been allowed by the CIT (A).”

The only issue raised in this appeal relates to the validity of invoking of the provisions of section 40A(2)(b) of the Act with reference to the commission of 2% paid by the assessee to Mrs. Aarti Mehta, his wife. Briefly stated relevant facts of the case are that the assessee was having a trading business involving paper board. The said business was transferred to the assessee with oral condition that he shall paid commission @ 2% on the total sales. During the year under consideration, the sales recorded worked out to Rs. 94,97,840/- and the 2% on the same works out to Rs. 1,89,957/-, which is the subject matter of appeal before the Tribunal.

During the assessment proceedings, AO is of the opinion that the said payment of Rs. 1,89,957/- attracts the provisions of section 40A(2)(b) of the Act and disallowed the entire amount invoking the said provisions. Aggrieved with the said decision of the AO, assessee carried the matter in appeal before the first appellate authority.

During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) confirmed the said disallowance made by the AO. Again aggrieved with the said decision of the CIT (A), assessee is in further appeal before the Tribunal by raising the above mentioned ground.

During the proceedings before the Tribunal, Ld Counsel for the assessee brought my attention to the provisions of section 40A(2)(b) of the Act and submitted that the AO is under statutory obligation to discharge the onus in demonstrating that the said payment is excessive or unreasonable. AO has not discharged the onus, in such case, the provisions of section 40A(2)(b) of the Act are wrongly invoked and therefore, the disallowance should not be sustained.

On the other hand, Ld DR for the Revenue relied on the orders of the Revenue Authorities and submitted that the claim of the assessee does not have any backing of documentation and therefore, 2% of the commission paid by the assessee stands unevidenced. During the rebuttal time, Ld Counsel for the assessee submitted that, notwithstanding the original stand taken by him, it shall be genuine if the disallowance is restricted to at least 1% of the commission.

After hearing both the parties, I find, in matters attracting the provisions of section 40A(2)(b) of the Act, the onus is on the Revenue to demonstrate the payment made by the assessee is excessive and unreasonable as decided by the binding High Court judgment in the case of CIT vs. Shatrunjay Diamonds (261 ITR 258) (Bom.). As such, in the instant case, the Revenue did not discharge the onus on one side and the assessee did not have any documents to support their stand on the other. Therefore, considering the peculiar matrix of the case, I am of the