2020 (8) TMI 185 - AT - Income Tax

Addition u/s 40A - Disallowance of payment of rent - Assessee company has paid rent to one of its directors for its registered office - onus is on the Revenue to bring on record comparable instances wherein the rent payment for similar premises are the lower than the rent paid by the assessee-company - HELD THAT - It is not the entire premises which have been taken on rent by the assessee- company rather the premises situated at first floor only which have been taken on rent by the assessee-company for the purpose of its business. The director of the assessee-company is staying at the ground floor and the first floor has been for taken on rent by the assessee company which is clearly specified in the rent agreement. The said premises are used as the registered office of the assessee-company as the every company registered under the Company Act is statutorily required to have a registered office within the jurisdictional limit of the concerned Registrar of Companies where all statutory and other correspondence can be received on behalf of the company. Further, on perusal of the minute books of the assessee- company, it is noted the meetings of Board of Directors and also of the shareholders in terms of annual general meetings are regularly held at this place. Thus said office premises have been used for the purposes of assessee-company s business and it has established the necessary nexus of the rent expenses being incurred for the purpose of its business - rent payments have been made by the assessee company to one of its Directors, however, merely because payment has been made to a related person would not be sufficient to make the disallowance U/s 40A(2)(b) - There is nothing on record which has been brought by the Revenue to hold the payment as excessive. Therefore disallowance so made by AO is hereby deleted and the sole ground by the assessee-company is allowed.

Summary

Issues: Disallowance of rent payment under Section 40A(2)(b) of the IT Act

Analysis:
1. Facts of the Case: The assessee company paid rent of ?2,40,000 to one of its directors for its registered office in Jaipur. The Assessing Officer found that the premises were used only for address purposes, and no business activities were conducted there.

2. Assessing Officer's Decision: The AO disallowed the rent payment, stating that the premises were used solely for address purposes, lacked separate electric and water connections, and no evidence of business activities was provided. The AO invoked Section 40A(2)(b) of the IT Act to disallow the rent payment.

3. Appeal Before CIT(A): The assessee appealed before the CIT(A), who upheld the AO's decision, considering the rent paid unreasonable due to the absence of separate utility connections for the company.

4. Arguments Before ITAT: During the ITAT hearing, the assessee contended that the rented premises were used for business meetings, correspondence reception, and as the registered office. The rent was subject to TDS, and the director receiving the rent was in the highest tax slab, indicating no tax avoidance intention.

5. ITAT's Decision: ITAT observed that the rented premises were used for business purposes, as evidenced by board meetings and correspondence reception. The ITAT found no evidence of excessive rent payment and noted that the AO failed to provide comparable instances to justify the disallowance under Section 40A(2)(b). Consequently, ITAT deleted the disallowance and allowed the appeal of the assessee.

6. Conclusion: The ITAT ruled in favor of the assessee, emphasizing the business use of the rented premises and the lack of evidence supporting the disallowance under Section 40A(2)(b) of the IT Act. The decision highlighted the importance of establishing a nexus between expenses and business purposes to avoid disallowances based on unreasonable expenditure.