Delhi High Court Grants Assessee An Opportunity To Adduce Evidence On Qualification, Experience, Work Profile Of Employees To Avoid Section 40A(2) Disallowance

The Delhi High Court has granted the assessee an opportunity to adduce appropriate evidence—documentary or otherwise—before the Assessing Officer in order to establish its claim regarding educational qualification, experience, work profile, and in particular the duties discharged by the concerned persons to justify the claim of the appellant or assessee qua payment of salary to the persons concerned.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that as per the provision under Section 40A(2)(a) of the Income Tax Act, before recording disallowance, the Assessing Officer has to form an opinion. The opinion has to have regard to, inter alia, the legitimate needs of the business, the benefit derived, or even the fair payment outgoing for services rendered.

In accordance with Section 40A(2), the appellant or assessee paid salaries to the relatives listed. In the meantime, the assessee was called upon by the AO to defend the payments made to particular individuals during the assessment processes. Dissatisfied with the justification, AO increased the assessee's income.

The assessee contended that the orders impugned in the appeals were not sustainable in the eyes of the law because the appellant had described in detail the circumstances under which no salary was paid to the persons concerned. In an effort to justify the payment of salary to the persons concerned, the assessee pointed out the profile of the persons, including their educational qualifications, experience, and job contribution to the business of the assessee company.

The department supported the respondents and submitted that since the assessee provided no evidence in support of its contentions, there was no illegality in the orders.

The court found that the assessee was not granted a fair opportunity to provide evidence in order to prove its justification for the payment of salaries to the persons.

The court held that all that the AO did was ask the assessee to justify the salaries paid and, without seeking relevant evidence, simply rejected the claim.

Counsel For Appellant: Salil Aggarwal

Counsel For Respondent: Sunil Agarwal

Case Title: Mehra Jewel Palace Pvt Ltd Vs Pr. Commissioner Of Income Tax

Citation: 2023 LiveLaw (Del) 1031

Case No.: ITA 972/2018

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