Business disallowance - Excessive/ unreasonable payments
Expenditure must first be proved as excessive and unreasonable - Section 40A(2)(a) cannot have any application, unless it is first held that the expenditure was excessive and unreasonable - Upper India Publishing House (P.) Ltd. v. CIT  117 ITR 569 (SC).
‘Services’ must be commercial in character, having market value - The expression ‘services’ in section 40A(2)(a) is an expression of wider import. The goods, services and facilities referred to in section 40A(2)(a) are those which have a market value and which are commercial in character - T.T. (P.) Ltd. v. ITO  121 ITR 551 (Kar.).
Items not covered by section 40(b) are alone covered - Section 40A(2) applies in the case of firms only to payments made in lieu of goods, services and facilities to partners which are not covered by section 40(b), and to all payments made for the goods, services and facilities to members of the family of a partner, or any relative of a partner. If has to be held that the overriding effect given to section 40A(2) is only in respect of matters not covered by section 40(b) - N.M. Anniah & Co. v. CIT  101 ITR 348 (Kar.).
Allowance of discount cannot result in any ‘expenditure’ - Where the assessee-firm sold goods to another firm in which the close relatives of the partners of the assessee-firm were partners, and on the bills raised for such goods the assessee allowed discount of 6 per cent and raised demands for the net amount of the bills, there was no ‘expenditure’ which could be disallowed under section 40A(2)(a), since the assessee had charged only the net price and had not parted with any portion of the sale price or its income - CIT v. A.K. Subbaraya Chetty & Sons  123 ITR 592 (Mad.).
Selling commission paid to interested person having no education or business training is disallowable - Where the assessee-firm paid selling commission to the wife of one of its partners, despite the fact that she was uneducated and untrained in business, and the Tribunal disallowed the amount so paid on the ground that it failed the test of commercial expediency, the conclusion of the Tribunal was unassailable - Ganesh Soap Works v. CIT  161 ITR 876 (MP).
Payment of aggregate remuneration of Rs. 5,000 per month on turnover of over Rs. 23 lakhs cannot be treated as excessive - Where the assessee, having two producing centres and several distributing centres, had turnover ranging between Rs. 23.66 lakhs to Rs. 30.86 lakhs, whereas its total expenditure at the head office, including the remuneration and commission paid to the four directors and the personal assistant worked out to about Rs. 5,000 per month, no disallowance would be warranted or justified on the ground that the payments to directors were excessive or unreasonable - CIT v. Edward Keventer (P.) Ltd.  115 ITR 149 (SC).