2008 (1) TMI 642 - AT - Income Tax

Summary

Issues Involved:
1. Determination of fair market value of rent paid by the assessee.
2. Applicability of Section 40A(2)(b) regarding disallowance of excessive or unreasonable expenses.
3. Consideration of previous Tribunal decisions and comparable market rates.
4. Legitimate needs of the business and other factors impacting rent reasonableness.
5. Onus of proof on the Assessing Officer for proving excessiveness of expenses.

Issue-wise Detailed Analysis:

1. Determination of Fair Market Value of Rent:
The assessee, engaged in management consultancy and part of the Hinduja Group, paid Rs. 1,39,83,840 as rent to M/s. Aasia Management & Consultancy Pvt. Ltd. and M/s. Aasia Corporation for an area of 4980 sq. ft. The Assessing Officer (AO) determined that the fair market value of rent was Rs. 160 per sq. ft. per month based on an agreement between M/s. Musheer Finlease and Investments Pvt. Ltd. and M/s. Turner International India Pvt. Ltd. The AO disallowed the excess rent paid at Rs. 47-49 per sq. ft. per month.

2. Applicability of Section 40A(2)(b):
The AO noted that the rent was paid to sister concerns within the meaning of Section 40A(2)(b) and considered the rent excessive and unreasonable. The AO's disallowance was based on the comparison with market rates and previous assessments where Rs. 160 per sq. ft. was deemed fair.

3. Consideration of Previous Tribunal Decisions and Comparable Market Rates:
The Tribunal had previously upheld a fair rent value of Rs. 160 per sq. ft. for the assessment year 1998-99. The CIT(A) partially favored the assessee, deeming Rs. 193 per sq. ft. as fair market value, reducing the disallowance significantly. The revenue appealed, arguing that the Tribunal's previous decision should guide the current assessment.

4. Legitimate Needs of the Business and Other Factors:
The assessee argued that the rent should consider the building's exclusivity for Hinduja Group companies, ease of operations, and high maintenance standards. The assessee also highlighted that no deposit was paid for the premises, which should factor into the rent's reasonableness. The CBDT Circular dated 6-7-1968 was cited, emphasizing fair judgment in applying Section 40A(2) to avoid hardship in bona fide cases.

5. Onus of Proof on the Assessing Officer:
The assessee contended that the AO did not provide a copy of the agreement used for comparison and failed to prove the rent's excessiveness. The Tribunal noted that the AO's determination of Rs. 160 per sq. ft. as fair market rent lacked other comparative instances and did not consider the legitimate business needs and benefits of the group building.

Conclusion:
The Tribunal concluded that the rent paid by the assessee was not excessive or unreasonable compared to the market rate of Rs. 160 per sq. ft. and considering the additional factors and benefits. The Tribunal deleted the entire disallowance, dismissing the revenue's appeal and allowing the assessee's cross-objection.