2012 (10) TMI 525 - AT - Income Tax

Payment of rent to group concerns - excessive amount u/s 40A(2) - assessee contended that no two properties can be compared with each other, unless they are identical in respect of the location, the facilities available and the period of tenancy, etc. - held that - the rent paid by the appellant company in respect of all the five properties were reasonable, thereby warranting no disallowance. Disallowance of interest - interest-free rent deposits held that - Once it is established that there was nexus between the expenditure and purpose of business which need not necessarily be the business of the assessee itself the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. - the deposits were made for taking the premises on rent which was necessitated by business expediency and are based on marked rent. - in favour of the assessee

Summary

Issues Involved:

1. Deletion of addition made under Section 40(A)(2) of the Income Tax Act in respect of rent paid to a group concern.
2. Deletion of addition on account of disallowance of interest on interest-free deposits made to the group concern.

Issue 1: Deletion of Addition Made under Section 40(A)(2) of the Income Tax Act in Respect of Rent Paid to a Group Concern

The Revenue's first ground of appeal was that the CIT(A) erred in deleting the addition of Rs. 56,05,558/- made under Section 40(A)(2) of the Income Tax Act concerning rent paid to a group concern. The Department argued that the rent paid was excessive compared to the market value, referencing departmental enquiries conducted during the assessment proceedings for earlier years. The Addl. CIT had determined the reasonable rent based on comparable properties and the provisions of the Rent Control Legislation, concluding that the excess rent paid was Rs. 56,05,558/-.

The CIT(A), however, found that the properties in question did not fall under the Rent Control Act due to the appellant's equity share capital exceeding Rs. 1 crore. The CIT(A) also noted that the properties selected for comparison by the Department were not identical in terms of location, facilities, and period of tenancy. The CIT(A) had previously ruled in favor of the appellant in earlier assessment years, finding the rent paid reasonable.

The Tribunal, upon review, upheld the CIT(A)'s decision, noting that the Tribunal had consistently ruled in favor of the assessee in earlier years, and there was no new material evidence presented by the Revenue to warrant a different conclusion. The Tribunal confirmed the CIT(A)'s order, agreeing that the rent paid was reasonable and dismissing the Revenue's appeal on this ground.

Issue 2: Deletion of Addition on Account of Disallowance of Interest on Interest-Free Deposits Made to the Group Concern

The second issue was the CIT(A)'s deletion of the addition of Rs. 4,61,523/- related to the disallowance of interest on interest-free deposits made to the group concern. The Addl. CIT had observed that the appellant had made substantial interest-free deposits with the group concern, which exceeded the owner's investment by a significant margin. The Addl. CIT argued that the appellant did not have sufficient liquid funds and had availed of overdraft facilities, implying that borrowed funds were used for these deposits. The disallowable interest was calculated based on the excess deposits and the market interest rate.

The CIT(A) found that the deposits were in line with market realities and that the appellant had used the overdraft facilities for business purposes, specifically for timely payments to various media, not for making rental deposits. The CIT(A) had previously ruled similarly in earlier assessment years, finding no necessity for the appellant to pay rental deposits exceeding 12 months' rent for certain properties.

The Tribunal reviewed the CIT(A)'s findings and noted that the Tribunal had previously ruled in favor of the assessee on similar issues in earlier years. The Tribunal found no reason to deviate from these earlier decisions, confirming the CIT(A)'s order and dismissing the Revenue's appeal on this ground as well.

Conclusion:

The Tribunal upheld the CIT(A)'s orders for both issues, confirming that the rent paid was reasonable and that the interest-free deposits were justified. Both appeals filed by the Revenue were dismissed, and the Tribunal's decision was consistent with its rulings in earlier years in favor of the assessee.