AO has to form Opinion before Recording Disallowance u/s 40A(2)(a) of Income Tax Act: Delhi HC [Read Order]

In a recent decision the Delhi High Court observed that the Assessing Officer has to form an opinion before recording disallowance under Section 40A(2)(a) of the Income Tax Act, 1961.

For the Assessment Year 2011-12, the Assessing Officer held that the appellant/assessee, Mehra Jewel Palace, had debited salary of Rs.29,42,930/- including Rs.24,00,000/- paid to the said persons covered under Section 40A(2)(b) of the Act despite there being a decline in the business during the relevant Financial Year and that there was no justification presented by the appellant/assessee in that regard, so an amount of Rs.20,40,000/- was liable to be disallowed being the difference between the salary paid to the persons concerned during the Financial Year 2010-11 and 2009-10.

The CIT(A) considered the salary component item wise and allowed the salary paid to Roshini Mehra and Aradhna Mehra at the rate of Rs.15,000/- per month on the basis of their academic qualification and nature of responsibility discharged by them during the relevant year.

As regards the salary paid to Charanjeet Lal Mehra and Lata Rani Mehra at the rate of Rs. 25,000/- per month, sustained the additions made by the Assessing Officer on the ground that the turnover of the assessee company during the relevant year had come down heavily from Rs.3,50,00,000/- to Rs.46,00,000/- and the appellant/assessee had failed to substantiate with evidence, services if at all rendered by them or their justifiability.

The counsel for appellant/assessee contended that the orders impugned in these appeals are not sustainable in the eyes of law because the appellant had described in detail circumstances under which no salary was paid to the persons concerned i.e. Charanjeet Lal Mehra, Lata Rani Mehra, Namita Mehra and Sakshi Mehra in Financial Years 2008-09 and 2009-10 as well as circumstances under which a meagre salary was paid to them for subsequent years relevant for present purposes.

A Division Bench comprising Justices Girish Kathpalia and Rajiv Shakdher observed that “The provision under Section 40A(2)(a) of the Income Tax Act, clearly shows that before recording disallowance, the Assessing Officer has to form an opinion; and that opinion has to be having regard to inter alia legitimate needs of the business or benefit derived or even what would be the fair payment outgo for services rendered. Such an opinion cannot be arrived at without adducing necessary evidence. That being so, the Assessing Officer was duty bound to provide an opportunity to the appellant/assessee to place on record the requisite evidence to justify its claim.”

“To our mind, therefore, the best way forward would be to grant an opportunity to the appellant/assessee to adduce appropriate evidence – documentary or otherwise before the Assessing Officer in order to establish its claim regarding educational qualification, experience, the work profile and in particular the duties discharged by the concerned persons to justify claim of the appellant/assessee qua payment of salary to the persons concerned” the Court concluded.

To Read the full text of the Order CLICK HERE

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