Disallowance of payment made to related persons
Introduction
Excessive payment made or is to be made to the related parties in respect of an expenditure shall be disallowed to the extent such expenditure is considered excessive or unreasonable. The object of this provision is to check evasion of tax through excessive or unreasonable payments to relatives and other specified persons.
1. About
1.1. When disallowance is made?
Where assessee incurs any expenditure, in respect of which payment has been or is to be made to the specified persons, it shall be disallowed to the extent it is considered excessive or unreasonable having regard to the following:
(a) Fair market value of goods, or services or facilities
(b) Legitimate needs of the business of the assessee
(c) Benefit derived by or accruing to assessee as a result of the expenditure.
The onus is on the Assessing Officer to bring the material on record to prove that the payment made by the assessee is excessive or unreasonable having regard to the criterion referred to above.
If Assessing Officer finds that a part of the expenditure, in respect of which payment is made to a specified person, is excessive having regard to the legitimate needs of the business, such expenditure shall be disallowed, even if the amount paid is not more than the fair market value of goods supplied, or services rendered by the recipient
1.2. Specified Persons
The specified persons for various types of assessee are discussed as below:
| Who has incurred the expenditure? | Specified persons to whom payment has been made |
| 1. An Individual | a) Any relative of such individual b) To a person in whose business the individual or any of his relative has a substantial interest |
| 2. A Company | a) Director of the Company b) Any relative of the director c) To a person in whose business the company or any of its directors or relative of such directors has a substantial interest. |
| 3. A Firm | a) Partner of the firm b) Any relative of the partner c) To a person in whose business the firm or any of its partners or relative of such partners has a substantial interest. |
| 4. AOP/BOI | a) Members of the AOP/BOI b) Any relative of the members c) To a person in whose business the AOP/BOI or any of its members or relative of such members has a substantial interest. |
| 5. A HUF | a) To a member of the family b) Any relative of the members c) To a person in whose business the HUF or any of its members or relative of such members has a substantial interest. |
| 6. Any other taxpayer | a) To an individual who has a substantial interest in business of taxpayer b) Any relative of such individual |
| 7. Any other taxpayer | a) To a company which has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director d) Any other company carrying on business or profession in which above mentioned company has a substantial interest |
| 8. Any other taxpayer | a) To a Firm or AOP or HUF who has substantial interest in the business of the taxpayer b) Partner or member of such person c) Any relative of such partner or member |
| 9. Any other taxpayer | a) To a company, one of whose directors has a substantial interest in the business of the taxpayer b) Any director of such company c) Any relative of such director |
| 10. Any other taxpayer | a) To a Firm or AOP or HUF, one of whose partners/members has a substantial interest in the business of the taxpayer b) Any partner or member of such person c) Any relative of such partner or member |
1.3-1. Meaning of ‘Relative’
The term ‘relative’ in relation to an individual shall include husband, wife, brother or sister or any lineal ascendant or descendant of that individual.
1.3-2. Meaning of ‘Substantial Interest’
A person is deemed to have substantial interest in the business or profession if such person is the beneficial owner of at least:
(a) 20% share (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) at any time during the relevant tax year, if business or profession is carried on by a company
(b) 20% of profits at any time during the tax year, if business or profession is carried on by any other concern.
References
Coronation Flour Mills v. CIT [2010] 188 Taxman 257 (Guj.)
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.