ITAT Ahmedabad Deletes ₹18.76 Lakh Disallowance On Herbalife Distributor's Commission To Wife's Firm

On 1 October, the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) held that commission paid by a Herbalife distributor to his wife's proprietary concern cannot be treated as excessive or unreasonable merely by comparing it with a different line of business.

Vice-President Dr. B.R.R. Kumar and Judicial Member Rahul Chaudhary deleted the Rs. 18.76 lakh disallowance made under Section 40A(2)(b) of the Income Tax Act, 1961, holding that the reasonableness of expenditure must be examined with reference to the taxpayer's own business and the services actually rendered. The Tribunal observed:

“the reasonableness of expenditure under section 40A(2)(b) has to be examined on the basis of the facts and circumstances of the assessee's own business and the services actually rendered. A mere comparison with a different line of business, without bringing any comparable material on record, cannot by itself establish that the commission paid was excessive or unreasonable.”

Nirav Dineshbhai Bhavsar had paid Rs. 31.87 lakh to Tanzil Nutrition Centre, a proprietary concern owned by his wife, towards promotion and development of his Herbalife distribution business.

The Assessing Officer restricted the commission to 30% of turnover and disallowed Rs. 18,76,286 as excessive, relying on a comparison with businesses dealing in Ayurvedic products.

The Tribunal noted that although the payment to Bhavsar's wife fell within the scope of Section 40A(2)(b), this did not by itself justify a disallowance. It held that the Assessing Officer had to establish that the expenditure was excessive or unreasonable with reference to its fair market value, the requirements of the business or the benefit derived from the expenditure.

Accordingly, the ITAT deleted the entire Rs. 18,76,286 disallowance and allowed Bhavsar's appeal.