For an amount to be disallowed under this Section, three conditions have to be fulfilled:
- the payment is in respect of any expenditure;
- the payment has been made or is to be made to a specified person in respect of such expenditure;
- the payment for the expenditure is considered excessive or unreasonable having regard to:
- The fair market value of the goods, services or facilities; or
- the legitimate business needs of the assessee’s business or profession; or
- the benefit derived by or accruing to the assessee from the payment.
If the above conditions are fulfilled, the Assessing Officer can disallow the expenditure to the extent he considers it excessive or unreasonable by the above objective standards or otherwise.
Section 40A(2) is applicable in the following cases (list is not complete, only important cases are given) –
- Payment made by an individual to his or her relative.
- Payment made by a company to a director of the company or any relative of the director.
- Payment made by a firm/AOP/HUF to a partner/member or a relative of partner/member.
- Payment made to an individual who has a substantial interest in the business of the payer or a relative of such individual.
- Payment made to a company who has a substantial interest in the business of the payer, any director of such company or relative of such director.
- Payment made to a firm/AOP/HUF who has a substantial interest in the business of the payer or partner/ member of such person or relative of partner/member.