2008 (11) TMI 236 - HC - Income Tax

Payment of lease rent group company - excessive and unreasonable payment fair market value section 40A(2) held that - The Assessing Officer observed that two companies were substantially owned by Vijay Mallya, whose United Breweries own the assessee-company. It was also observed by the Assessing Officer, that the lease rent, as paid, gave annual rate of return of 33.6 per cent. Since in his opinion these companies were related to the assessee, hence the provisions of section 40A(2)(a) were applicable It was also considered that the prime lending rates of bank was 15.6 per cent, therefore, he allowed the deduction at 15.6 per cent, and made additions of the remaining amount held that - learned Commissioner (Appeals) and the learned Tribunal had not ignored the relevant considerations which were required to be taken into account in terms of section 40A(2)(a) of the Act deduction allowed fully

Issues:
- Interpretation of section 40A(2)(a) of the Act regarding deletion of additions made by the Assessing Officer.
- Consistency in allowing deductions based on previous assessments.
- Assessment of reasonableness of expenditure in relation to fair market value and business needs.

Analysis:
1. The judgment involved four appeals arising from different Tribunal orders related to the same assessee but admitted on one substantial question of law concerning the deletion of additions made by the Assessing Officer under section 40A(2)(a) of the Act.
2. The Assessing Officer disallowed a portion of lease rent deduction, considering the relationship between the assessee and the lessors, leading to a disagreement on the rate of return and applicability of section 40A(2)(a).
3. The Commissioner (Appeals) deleted the additions, citing consistency in previous assessments and lack of new evidence to warrant a change in the treatment of lease rent payments.
4. The Tribunal upheld the Commissioner's decision, emphasizing the continuity in lease rent payments and the absence of material justifying a departure from past practices.
5. The High Court noted the factual consistency in allowing deductions over the years and referenced the recent Supreme Court judgment in C. K. Gangadharan v. CIT to support its analysis.
6. The Court examined the provisions of section 40A(2)(a) and emphasized that the Assessing Officer's opinion on excessive or unreasonable expenditure is a question of fact, not giving rise to a substantial question of law.
7. Referring to Supreme Court precedents in CIT v. Walchand and Co. P. Ltd. and J. K. Woollen Manufacturers v. CIT, the Court highlighted the need to judge reasonableness of expenditure from a businessman's perspective and not solely from the Revenue's viewpoint.
8. The Court concluded that the deletion of additions was justified, as the relevant considerations under section 40A(2)(a) were duly taken into account by the Commissioner (Appeals) and the Tribunal.
9. Additionally, the Court noted that the lease rent amount was already being taxed as income in the hands of the lessors, further supporting the assessee's position.
10. Ultimately, the Court dismissed the appeals, ruling in favor of the assessee and upholding the decisions of the lower authorities based on the principles of consistency and reasonableness in expenditure assessment.

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