Reasonableness of Business Expenditure should be Judged from the point of view of Businessman and not Revenue: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) allowed the appeal, emphasising that the reasonableness of business expenditure should be judged from the point of view of the businessman and not the Revenue.

The appeal was directed against the assessment order passed by the Assessing Officer ( AO ) under Section 143(3) of the Income Tax Act, 1961.

The appellant, Ramanlal Jivrajbhai Patel, a partner in three firms, filed his return of income on 06.01.2017, declaring a total income of Rs. 28,25,340 for AY 2016-17. The case was selected for scrutiny, and a notice under Section 143(2) of the Act was issued on 19.09.2017.

The AO subsequently passed an order under Section 143(3) of the Act on 19.12.2018, making an addition of Rs. 24,72,507 and assessing the income at Rs. 52,97,847. Aggrieved by this order, the assessee filed an appeal before the CIT(A), who upheld an addition of Rs. 16,75,102. Dissatisfied with this outcome, the assessee appealed to the ITAT.

The assessee, represented by B.K Patel, argued that the salary of Rs. 9,60,000 paid to the assessee's son was a legitimate business expenditure incurred wholly and exclusively for business purposes. The son, Paresh Patel, assisted in executing business operations.

It was further contended that the disallowance of Rs. 2,70,507 in respect of the insurance premium paid for the assessee's son was incorrect as per the provisions of Section 80C. The expenses amounting to Rs. 4,44,595 were incurred wholly and exclusively for business purposes and should be allowable under Section 37(1) of the Act.

Ketan Gajjar, appearing for the revenue, relied on the order of CIT(A) and contented that the salary to son is paid to exploit the tax arbitrage as concluded by the CIT(A) as son is paying taxes at lower tax bracket. He also raised the question relating to education qualification and the nature of service.

The ITAT found the expenditure reasonable if allowed proportionately. The court allowed the salary to the extent of Rs. 5,39,520 (i.e., 56.20% of Rs. 9,60,000).

The tribunal allowed the claim of the assessee, stating that legitimate deductions under Section 80C should not be disallowed without proper justification. It was observed by the bench that  the reasonableness of business expenditure should be judged from the point of view of the businessman and not the Revenue.

The two-member bench, comprising Siddhartha Nautiyal (Judicial Member) and Makarand V. Mahadeokar (Accountant Member), upheld the addition of Rs. 2,13,800 due to cash payments in light of the provisions of Section 40A(3) and deleted the remaining addition confirmed by the CIT(A).

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Ramanlal Jivrajbhai Patel vs The ITO , 2024 TAXSCAN (ITAT) 807 , B.K. Patel , Ketan Gajjar