Income Tax Appellate Tribunal

Rajesh Bajaj, Allahabad vs. Deputy Commissioner Of Income Tax, Allahabad

MANU/IW/0008/2020

27.11.2020

Direct Taxation

If transaction of payment of rent is not found bogus then disallowance of expenditure under Section 40A(2)(b) of IT Act is not warranted

The assessee filed its return of income for the assessment year under consideration under Section 139(1) of the Income Tax Act, 1961 declaring total income of Rs.23,10,440. During the course of scrutiny assessment, the AO noted that the assessee has paid rent for various godowns/shops. The Assessing Officer (AO) has made a disallowance of Rs.6,26,811 on account of the excess rent paid to the related party by invoking the provision of Section 40A(2)(b) of the IT Act. The AO has compared the rent paid by the assessee in the preceding year and found that, the rent paid by the assessee for the year under consideration which is more than the reasonable enhancement of 10% is not allowable being excess payment in comparison to the fair market price. The assessee challenged the action of the AO before the CIT(A) but could not succeed.

It is evident from the assessment order that, the AO has made a disallowance on the basis of comparative rent paid by the assessee in the preceding year and in the year under consideration without determining the fair market rent of the properties in question. It is settled proposition of law that in order to make a disallowance under Section 40A(2)(b) of IT Act, the AO has to first determine the fair market value/price and then compare the same with the actual expenditure incurred and payment made by the assessee to the specified person. In case, the payment made by the assessee to the specified person is excessive and unreasonable having regard to the fair market value/price, the amount found to be excess or unreasonable is liable to be disallowed under Section 40A(2) of the IT Act. Therefore, it is pre-condition for making the disallowance under Section 40A(2) of IT Act that the AO has to arrive to the conclusion that the amount paid by the assessee is excessive or unreasonable in comparison to the fair market value/price. The AO failed to conduct the minimum enquiry to ascertain the fair market rent of the properties.

Thus, once the transaction of payment of rent is not found to be bogus or ingenuine then the disallowance of the expenditure under Section 40A(2)(b) of IT Act is not warranted in the absence of a definite finding that the payment made by the assessee is excessive or unreasonable in comparison to the fair market rent. Accordingly, in the facts and circumstances of the case, when the AO has not conducted any enquiry to determine the fair market rent so as to hold that the payment made by the assessee on account godown/shop rent is excessive or unreasonable, the disallowance made by the AO is contrary to the provisions of Section 40A(2) of the IT Act. Appeals of the assessee are allowed.

Tags : Assessment Disallowance Legality

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