Partner deemed continued + related-party transactions

Payments to specified related parties (partners / directors / relatives / 20%-owned concerns) in EXCESS of fair market value are disallowed under §40A(2)(b).

Key points

• Under §40A(2)(b), where any expenditure is paid to a SPECIFIED PERSON and the Assessing Officer is of the opinion that the expenditure is excessive or unreasonable having regard to the fair market value of the goods, services, or facilities — or to the legitimate needs of the business — the EXCESS portion is disallowed.
• Specified persons include: (i) any relative of the assessee;
• (ii) any director, partner, or member of HUF of the assessee, plus their relatives;
• (iii) any individual with a substantial interest, defined as ≥ 20% beneficial ownership or voting power;
• (iv) any company, firm, AOP, or HUF having a substantial interest in the assessee, and vice versa.
• The auditor has a specific duty under Form 3CD Clause 23 to report ALL payments to specified persons regardless of disallowance — the AO uses this disclosure to assess reasonableness.
• The Companies Act mirror is §188, which sets out the arm's-length pricing, audit committee, board, and shareholder approval framework for related-party transactions.

Reference: §40A(2)(b), ITA 1961 + §188, Companies Act 2013