In order to determine whether the expenditure is not sustainable, the AO has to first return a finding that the payment made is excessive u/s 40-A (2)

"In order to determine whether the expenditure is not sustainable, the AO has to first return a finding that the payment made is excessive u/s 40-A (2). If it is found to be so, then the AO has to determine what constitutes the fair market value of the services rendered and disallow the difference between what is claimed and what is such value determined (as fair market value). I
n the absence of such exercise, an ad hoc method of disallowance is not permissible. Also, the revenue cannot place itself in the arm chair of businessman or in the position of the Board of Directors and assume the role of deciding what is the reasonable expenditure having regard to the circumstances of the case."

Recently held by DHC in CIT vs. Modi Revlon Ltd .