Onus is on the AO to prove unreasonableness of payment to related party u/s 40A(2) – Del ITAT

DCIT v Spark Hotels (P.) Ltd.  IT Appeal NO. 4631 (DELHI) OF 2011] (Delhi ITAT)

Facts of the case

The assessee company was engaged in the business of running hotel. Assessee derived income only from interest and dividend in the year under consideration while the assessee paid salary of Rs. 36 lacs to its director Shri Patanjali Keswani, Director @ Rs. 3 lacs per month.

The AO disallowed an amount of Rs. 30 lacs, invoking the provisions of sec. 40A(2)(a) of the Act, considering the salary of Rs. 50,000/-pm paid to shri Keshwani, reasonable.

Assessee’s contentions:

  • Shri Patanjali Keswani was a highly qualified individual, having B.Tech. from IIT and MBA from IIM beside having a experience of 15 years
  • The remuneration paid to shri Keshwani was due to business exigencies and substantial profits were earned by the assessee company.
  • Since shri Keshwani was paying tax at maximum rates, it could not be said that payment of remuneration was made to avoid taxes.
  • An employer fixing the remuneration, is entitled to consider the extent of business, the nature of duties to be performed, the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances.


  • AO can make disallowance u/s 40A(2) in the following circumstances:
    (a) fair market value of the goods, services or facilities for which the payment is made;
    (b) the legitimate needs of the business of the assessee; or
    (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities.
  • AO is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed, which are independent and alternative to each other.
  • It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Steel Manufacturing And Engineering Co. Private Limited, 117 ITR 569(SC).
  • The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.

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