Delhi HC Allows Assessee To Adduce More Evidence on Work Profile, Qualifications To Avoid I-T Section 40A(2) Discrimination

The Delhi High Court has allowed the taxpayer an opportunity to present suitable evidence—whether in the form of documents or otherwise—to the Assessing Officer.

This evidence aims to substantiate the claims made regarding educational qualifications, professional experience, job roles, and specifically the responsibilities carried out by the individuals in question. This is crucial to support the appellant’s or assessee’s assertion concerning the payment of salaries to these individuals.

Justice Rajiv Shakdher and Justice Girish Kathpalia, presiding over the bench, noted that under Section 40A(2)(a) of the Income Tax Act, the Assessing Officer must form an opinion before making any disallowance.

This opinion should take into account various factors, including the genuine requirements of the business, the value gained, and the fairness of the compensation for services provided.

Under Section 40A(2), the appellant or assessee disbursed salaries to the mentioned relatives. Subsequently, the Assessing Officer (AO) called upon the assessee to substantiate these payments to specific individuals during the assessment proceedings. AO disappointed with the explanations given, augmented the taxpayers’ declared income.

The assessee argued that the decisions contested in the appeals were not legally sustainable. This was because the appellant had extensively outlined the circumstances under which no salaries were paid to the individuals in question.

Seeking to validate the salary disbursements, the assessee highlighted the profiles of these individuals, encompassing their educational qualifications, experience, and contributions to the business of the assessee company.

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In contrast, the department supported the respondents and asserted that as the assessee failed to provide any evidence supporting its arguments, there were no legal flaws in the orders issued.

The court revealed that the taxpayer was not afforded a justifiable chance to furnish the evidence validating the payment of salaries to the individuals.

It was ruled by the court that the Assessing Officer (AO) merely requested the assessee to substantiate the salary payments but, without seeking pertinent evidence, outright dismissed the claim.