2012 (12) TMI 365 - AT - Income Tax

Disallowance of Excess rent paid - Properties occupied by the assessee and belonging to one of the group concerns Held that - The rent paid by the appellant company in respect of all the five properties were reasonable, thereby warranting no disallowance by following the decision in assessee s own case. Issue decides in favour of assessee Addition on account of interest Excessive rental deposit free of interest made to sister concern Held that - For the years before us also, the facts are identical. Therefore, respectfully following the order of the Tribunal, wherein the Tribunal has deleted the disallowance of interest, for these years also, we delete the disallowance of interest, holding that the deposits were made for taking the premises on rent which was necessitated by business expediency and are based on market rent. Issue decides in favour of assessee

Issues Involved:
1. Deletion of addition of Rs. 54,85,558/- being excess rent paid.
2. Deletion of addition of Rs. 1,84,302/- on account of interest-free rental deposit/advance.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 54,85,558/- Being Excess Rent Paid:

The Revenue challenged the CIT(A)'s decision to delete the addition of Rs. 54,85,558/- made by the Assessing Officer (A.O.) concerning excess rent paid by the appellant to M/s Tiruvengadam Investments Pvt. Ltd. (M/s TIPL). The A.O. had opined that the rent paid was excessive under section 40A(2) of the I.T. Act based on departmental enquiries conducted in Mumbai and Delhi during the assessment proceedings for A.Y. 2002-03. The A.O. compared the rent paid by the appellant with rents of similar properties and determined the excess rent paid was Rs. 54,85,558/-.

The CIT(A) observed that the properties did not fall under the Rent Control Act as the appellant's equity share capital exceeded Rs. 1 crore. The CIT(A) noted that the properties selected for comparison by the department were not identical to those rented by the appellant. The CIT(A) concluded that the rent paid was reasonable and deleted the addition, following the decisions of earlier appellate orders and the ITAT's favorable orders for prior years.

Respecting the Tribunal's earlier decisions, which had consistently ruled in favor of the assessee, the ITAT upheld the CIT(A)'s order, confirming that the rent paid was reasonable and dismissing the Revenue's appeal.

2. Deletion of Addition of Rs. 1,84,302/- on Account of Interest-Free Rental Deposit/Advance:

The Revenue also challenged the CIT(A)'s decision to delete the addition of Rs. 1,84,302/- related to interest-free rental deposits made by the appellant to M/s TIPL. The A.O. had found that the appellant kept substantial interest-free deposits with M/s TIPL and had availed overdraft facilities from banks, incurring an interest burden of Rs. 1,84,302/-. The A.O. presumed that the appellant used borrowed funds for these deposits and disallowed the interest based on judgments from the Kerala High Court and Punjab and Haryana High Court.

The CIT(A) found that the deposits were in line with market realities, where rent and deposits worked proportionally. The CIT(A) noted that the appellant had not used borrowed funds for the deposits but for business purposes, such as paying media dues. The CIT(A) followed earlier appellate decisions and ITAT orders, which had ruled in favor of the appellant, and deleted the addition.

The ITAT, respecting its previous rulings in the appellant's case, upheld the CIT(A)'s order and dismissed the Revenue's appeal, confirming that the deposits were reasonable and the interest disallowance was unwarranted.

Conclusion:

The ITAT dismissed the Revenue's appeal, confirming the CIT(A)'s order to delete the additions of Rs. 54,85,558/- for excess rent and Rs. 1,84,302/- for interest-free rental deposits. The Tribunal followed its earlier rulings, which consistently favored the appellant, affirming that the rent and deposits were reasonable and justified.

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