Precision Shapes Vs ITO (ITAT Mumbai)
Mumbai ITAT has quashed a disallowance made u/s 40A(2)(b), holding that non-response to notices by related parties cannot be the sole basis for treating payments as excessive or unreasonable. The case relates to Precision Shapes vs. ITO (ITA No. 2299/Mum/2025, AY 2014-15, order dated 18.08.2025).
Assessee, a partnership firm engaged in manufacturing, filed its return of income declaring ₹19,64,050/-. During scrutiny, AO observed payments of ₹22,91,477/- to related parties, as disclosed in the audit report. Notices u/s 133(6) were issued to related parties. Since notices were either returned or not responded to, the AO treated the entire payments as excessive & disallowed them under s. 40A(2)(b).
On appeal, the CIT(A) upheld the addition, holding that the assessee failed to furnish sufficient documentary justification for such payments.
Before Tribunal, Assessee contended that all payments were disclosed in audited books, with TDS deducted & reflected in tax returns of the recipients. Payments comprised interest (@15% p.a.), labour charges, purchases, & salary—all genuine business expenses. AO did not determine fair market value (FMV) as required under s. 40A(2); without such a benchmark, no disallowance could be made. Similar payments were accepted in earlier & subsequent years.Assessee relied on CBDT Circular No. 6/1968 & Supreme Court rulings (UCO Bank, Paper Products Ltd., Indian Oil Corp. Ltd., Best Plastics Pvt. Ltd.) emphasizing that FMV must be established before invoking s. 40A(2).
