2021 (1) TMI 294 - AT - Income Tax

Disallowance of rental expenses u/s 40A(2)(b) - adopting the annual rental value fixed by the BBMP is not be correct in the context of the provisions of section 40A(2)(b) - HELD THAT - What is important under the relevant provision is the excessiveness of expenditure having regard to the fair market value. Since neither the AO nor the CIT(A) has examined the fair market value of rent of the building in question, we are of the view that the issue needs to be remanded to the AO for consideration afresh. The assessee will furnish evidence to establish the fair market value of the rent for the building in question and the AO will examine the claim in accordance with law, after affording assessee opportunity of being heard. This issue is accordingly set aside to the AO for fresh consideration. Disallowance of expenses under section 14A - suo moto disallowance - non recording of satisfaction - HELD THAT - Assessee on his own has made the disallowance as expenditure incurred in earning exempt income. AO, without rejecting the basis of disallowance made by the AO, applied the provisions of Rule 8D(2) and made a disallowance under section 14A. Under section 14A(2) of the Act, the AO has recorded the satisfaction that the disallowance of expenses made by assessee suo-moto under section 14A of the Act is not correct. Without recording such a finding, he cannot make disallowance under section 14A of the Act by resorting to Rule 8D of the Income Tax Rules, 1962. As relying on RADHA MADHAV INVESTMENTS LTD 2019 (1) TMI 1213 - BOMBAY HIGH COURT we are of the view that the disallowance under section 14A of the Act should be restricted to a sum of ₹ 72,000/- as claimed by the assessee and the addition made by the Revenue authorities is directed to be deleted.

Summary

Issues:
1. Disallowance of rental expenses under section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of expenses under section 14A of the Act.

Issue 1: Disallowance of Rental Expenses under Section 40A(2)(b) of the Income Tax Act:
The appeal was against the disallowance of rental expenses amounting to &8377; 60,89,900/- under section 40A(2)(b) of the Act for Assessment Year 2015-16. The AO disallowed the rent paid to a related person, the daughter of the Managing Director of the assessee company, as excessive. The AO calculated the reasonable rent based on the annual rental value determined by BBMP. The CIT(A) upheld the AO's decision, refusing to admit additional evidence filed by the assessee. However, the Tribunal found the basis of disallowance incorrect as fair market value, not the BBMP valuation, is crucial under section 40A(2)(b). The issue was remanded to the AO for fresh consideration to determine the fair market value of the rent.

Issue 2: Disallowance of Expenses under Section 14A of the Act:
Regarding the disallowance of expenses under section 14A of the Act, the AO made a disallowance of &8377; 10,02,522/- using Rule 8D(2), despite the assessee already disallowing &8377; 72,000/- on its own. The CIT confirmed the AO's decision. However, the Tribunal held that without rejecting the assessee's basis of disallowance, the AO cannot resort to Rule 8D. Citing a Bombay High Court decision, the Tribunal restricted the disallowance under section 14A to the amount originally claimed by the assessee, directing the deletion of the additional disallowance made by the Revenue authorities.

In conclusion, the appeal was partly allowed, with the Tribunal setting aside the issue of rental expenses for fresh consideration by the AO based on fair market value and directing the deletion of the additional disallowance under section 14A, restricting it to the amount claimed by the assessee.