P. J. GORADIA, A. M.: Order These appeals directed against order passed by AAC of IT involve various common grounds and effective grounds are as follows : (1) That ld. AAC of IT A.R. II, Ahmedabad, has grievously erred in confirming disallowance of Rs. 15,830 being commission payment. (2) ld. AAC could not have ignored preceding assessment years and could not have held that said commission was not paid for business consideration of appellant. (3) ld. AAC, has, there, erred in concluding that case of appellant was clearly hit by provisions of s. 40A(2) of Act and in absence of any evidence as to alleged excessive payment, same ought to have been allowed in full as claimed for. 2. facts and decisions of authorities below can be appreciated from para 3 and 4 of appellate order reproduced below: original assessment was completed by ITO on 22nd Dec., 1976 whereby amount of Rs. 15,830 being commission paid was disallowed by him under s. 40A(3) of IT. Act. assessee preferred appeal and ld. AAC vide his order No. IT/M 29th July 1978 dt. 2nd Feb., 1978 set aside assessment. He held that whereas provisions of s. 40A (3) were not applicable ITO should examine applicability of provisions of s. 40(2) in this ease. ITO, thereafter completed fresh assessment on 29th Dec., 1978 for asst. yr. 1974-75 under s. 40A (2) of Act. Similarly commission payment was disallowed by him in asst. yrs. 1975-76 and 1976-77 under s. 40(2) of Act and appellant has come up in appeal against said assessments. appellant is registered firm with three partners shown below : (1) Shri Yogesh Chand Subhodchand (Brother) 50 per cent (2) Shri Harsidaben (sister) 20 per cent (3) Minor Vinit (Brother) 30 per cent firm paid commission of amounts stated above in three assessment years to Subhodchandra Bhogilal Shah, father of three partners. appellant firm was dealing in colours and Chemicals. Commission was paid at rate of 1 1/2 on purchases made from M/s Arvind Panalal and M/s A. Pannalal and Sons who were selling agents of M/s Actul Products Ltd. During asst. yrs. 1975-76 and 1976-77 rate of commission was reduced from 1 1/2 per cent to 1 per cent. It was claimed by appellant that payment of commission was in consideration of Shri Subhodchand standing surety for payment purchases made from two parties viz. M/s Arvind Panalal and M/s A. Panalal & Sons. ITO examined Shri Arvind Panalal partner of a b o v e two firms, Shri Subhodchandra Bhogilal, Shri Yogeshchandra Subhodchand & Shri Shreyank Arvind partner of M/s. Arvind Pannalal. From fact gathered and statements recorded ITO came to conclusion that commission paid to Shri Subhodchand was not payment out of business consideration and hence it was not genuine expenditure. ITO found that Shri Subhodchand aged 60 was formerly wording as accountant in firm of cloth marchant and had no previous experience in line of colours and chemicals. It is also found that all family members including father were staying together in same premises from where business was also carried on. He noted that Shri Yogeshchandra, partner of firm on other hand had previous experience of cluours and chemicals. There was no written agreement with two firms of M/s Arvind Panalal & M/s A. Pannalal & Sons regarding Shri Subhodchand standing as surety on beheld of firm as contended by appellant. He also found that financial condition of Shri Subhodchand was also such that he could hardly in question stand as surety for two concerns. He, therefore, came to conclusion that commission was paid neither fort business consideration nor for business expediency and, therefore, included same in hands of appellant in all three years under s. 40A(2) of Act." 2.1 On appeal AAC gave various findings, briefly (i) for asst. yr. 1973- 74 assessment was completed under s. 143 (1) of Act and therefore, had no relevance, (ii) principle of res judicata did not apply to tax proceedings, (iii) Shri Subhodchand had no previous experience but in fact Yogesh Chandra had because in past he was carrying on business in similar line and, therefore, father was of no use to firm, (iv) there was no written undertaking in respect of stand of surety by father. Besides father had no financial stability (v) two firms of suppliers did not take surety from any other party, (vi) two suppliers had no enforceable right against Shri Subhodchand in event of any default, (vii) father did not make any withdrawals towards household expenses from commission account which was only hawala entry, (viii) in contract for purchase there is no mention of name of Shri Subhodchand and (ix) theory of surety of Subhodchandra is not genuine one as stated in para 9 of his order. 3 . ld. counsel for assessee brought to our notice various factual aspects of case and submitted that earlier against direction by AAC regarding invoking of provision of s. 40 (A) (2) of Act assessee did not prefer appeal and made various submissions regarding case of assessee where business expediency etc. was not needed and authorised below adopted wrong approach right from very beginning. 4. ld. Departmental Representative submitted statement showing net profit, turnover, purchases etc, and stated that in various years amount of commission payment varied between 16 per cent to 25 per cent of net profit of firm and this was diversion of income. father was not carrying on business of standing surety and in fact he was not capable of because even value of residential house belonging to him was not known and he was not wealth-tax payer. 5. We have gone through order of authorities below anxiously. case of Department and from nature of enquiries made and conclusion reached is such that expenditure claimed itself is not genuine one. We than fail to understand how no disallowance can be made under s. 40A(2) of IT Act, Reading provisions of s. 40A(2) (a) it would be seen that crucial words are for market value of goods services or facilities. 40A(2) (a) Where assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of this sub-section, and ITO is of opinion that such expenditure is excessive of unreasonably having regard to fair market value of goods services or facilities for which payment is made or legitimate needs of business or profession of assessee or benefit derived by or accruing to him, therefore, so much of expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction. Therefore, necessary finding shall have to be given in respect of fair market value of services etc. But then this will presuppose that some services are rendered in respect of which expenditure is claimed but amount is found excessive or unreasonable. Therefore, this s. 40A(2) cannot be invoked where transaction itself is treated as sham one or nor genuine one. And such is finding that no expenditure can be said to have been incurred. Therefore, disallowance if any can be made only under some other section of AAC. Looking to legislative history of s. 40A(2), it appears that it is intended as curb on payment to connected persons where to government felt that tax liability is artificially reduced by diverting business profits to relatives in form of excessive payments for goods and services. Hence it is clear that type of disallowance thought of by Revenue can only be under General law where transactions with relatives and associate concerns are proved to be sham or value shown in books was not value paid or transaction itself was not bona fide. We draw support from Ramalnga C. Mills Ltd. vs. CIT (1955) 28 ITR 952 (Mad) and CIT vs. Keshavlal Chandulal (1966) 59 ITR 120 (Guj). 5.1 Neither assessee nor Department come in appeal before Tribunal against decision of first appellate authority directing to apply provisions of s. 40A(3) of Act. Therefore, admittedly it is accepted proposition by Revenue that expenditure is incurred and services are rendered but only thing is that amount paid is excessive or unreasonable having regard to fair market value etc. in light of legitimate needs or business and benefit derives of accrued to assessee. It is pertinent to note that s. 40A (2) (a) casts very heavy burden on ITO to record his finding before making any disallowance under this section. For this purpose he shall have to undertake following procedure. (i) First of all he shall have to satisfy himself whether expenditure itself is genuine or not. (ii) If it is genuine then for purpose of finding out portion of disallowance he shall have to find out fair market value of services and this would response that services are commonly available for which market value can be known. (iii) He shall have to evaluate legitimate needs of business at point of time when services are rendered and this would involved inquiry as business man because in times of dire need services are obtained even at higher cost, ultimate aim being to earn profit or to maintain business relations. (iv) He shall also have to find out what benefit is derived by assessee and this would not necessarily confine to year in question but shall have to take overall picture depending upon facts of each case. (v) Even benefit accruing to assessee shall have to be evaluated. This again may not confine period of accounting year only and again it would not be essential that benefit must be in Revenue field. (vi) Thereafter he shall have to give reasonable opportunity to assessee to rebut his finding and his decision regarding portion proposed to be disallowed and then only he can take decision. All these tests as aforementioned are not at all carried out by ITO and therefore, default on part of authorised below is fatal to stand of Revenue. We therefore, delete disallowance made under s. 40A(2) of IT Act in all years. 6 . order of first appellate authority are modified to extent as above and ITO is directed to pass consequential order in case of firm as also partners. 7. In result, all appeals are allowed. *** BINIT CORPORATION v. INCOME TAX OFFICER