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CS Executive · Tax Laws and Practice · Profits and Gains from Business and Profession

Under the Income-tax Act, 2025 (applicable from the June 2027 session), a firm pays commission to a partner's relative, and the Assessing Officer considers part of it excessive having regard to fair market value of the services. What is the tax treatment of the excess?

Only the portion the Assessing Officer finds excessive or unreasonable, judged against fair market value, business needs or benefit derived, is disallowed. The rest stays deductible. A partner's relative is a specified person for a firm, but the rule does not disallow the entire payment.

  1. AThe whole commission is disallowed because the payee is a specified person
  2. BThe excess considered unreasonable is not allowed as a deduction, and the balance remains allowableCorrect
  3. CThe excess is allowed if TDS has been deducted on the commission
  4. DThe excess is allowed but taxed in the hands of the partner's relative only

Explanation

Section 36(2) disallows only so much of the expenditure paid to a specified person as the Assessing Officer considers excessive or unreasonable by reference to fair market value, legitimate business needs or benefit derived. A partner's relative is a specified person for a firm. Option A is wrong because the entire amount is not disallowed, only the excess portion.

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