Rent cannot be increased for mere increase in prices of land

Brief of the Case: In the cited case, ITAT inter-alia held that merely because prices of land has gone up, rent cannot be increased particularly to persons covered u/s 40A(2)(b) of the I.T Act without looking into agreement in respect of rent for the earlier years and for the present year, it cannot be accepted the increase in rent is proper and as per the agreement.

Facts of the Case: The Assessee appealed against three separate orders of CIT (A) dated 24.05.2014 for A.Y.2003-04, dated 29.05.2014 A.Y.2004-05 and dated 23.06.2014 for A.Y.2006-07. All these appeals were heard together and disposed by this common order.

The Ground for appeal:

A.Y.2003-04

• “That the Ld CIT(A)–I has erred in law and on facts while confirming the disallowance of Rs.360,000/- being 50% of the remuneration paid to whole time managing director of the assessee/appellant u/s 40A(2)(b).”
• “That the Ld CIT(A)–I has erred in law and on facts while confirming the partial disallowances of Telephone Expenses, Conveyance Expenses, Travelling Expenses and General Expenses”

A.Y.2004-05

• “That the Ld CIT(A)–I has erred in law and on facts while confirming the disallowance of Rs. 240,000/-being the increase in rent paid to whole time managing director against use of land on which manufacturing plant of the assessee/appellant has been constructed u/s 40A(2)(b).”
• “That the Ld CIT(A) –I has erred in law and on facts while confirming the disallowance of Rs. 164,042/-being the irrecoverable amount written off, which was paid as advance to consultancy agencies for financial advice/consultancy regarding increase in capital base of the company through issue of shares or other modes, by considering the same as capital expenditure.”
• “That the Ld CIT(A)–I has erred in law and on facts while confirming the partial disallowances of Telephone Expenses, Conveyance Expenses, Travelling Expenses and General Expenses”

A.Y.2006-07

• “That the Ld CIT(A)–I has erred in law and on facts while confirming the disallowance of Rs.6,90,000/- u/s 40A(2)(b) of the Income Tax Act,1961, out of total rent of Rs.28,50,000/paid during the relevant assessment year as against Rs.18,00,000/-in previous assessment year paid to whole time managing director against use of land on which manufacturing plant of the assessee/appellant has been constructed.”

Contention of the Revenue: The Revenue contended that:

A.Y.2003-04

• The assessee had nowhere mentioned that the determination of the remuneration to M.D has been approved in AGM of the shareholders. Therefore, the increase in remuneration to M.D in contravention of the provisions of Companies Act.
• These expenses are not fully verifiable.

A.Y.2004-05

• The assessee had not justified the enhanced payment of rent by making comparison of rate with market rent as required u/s 40A(2)(b) and not furnished the copy of agreement in respect of rent for the earlier years and for the present year.
• These expenses were for new business venture under new management and therefore, they were not for expansion of the same business under same management.
• These expenses are not fully verifiable.

A.Y.2006-07

• The assessee has not justified the enhanced payment of rent by making comparison of rate with market rent as required u/s 40A(2)(b) and not furnished the copy of agreement in respect of rent for the earlier years and for the present year.

Contention of the Assessee: The Assessee contended that:

A.Y.2003-04

• Nil
• These are ad hoc disallowances and therefore not justified.

A.Y.2004-05

• The land is in use since 1995 and the price of land has gone up to Rs. 2400/-per sq. mtr. as on 16.06.2006 as against Rs. 600/-per sq. mtr. as on 02.11.1999 and Rs. 1000/- per sq. mtr. as on 18.07.2003 and therefore increase in rent is justified.
• There is no actual capital accretion in the present year and hence, it is not a capital expenditure. Even if it is held that it is capital expenditure, deduction should be allowed u/s 35D.
• These are ad hoc disallowances and therefore not justified.

A.Y.2006-07

• The land is in use since 1995 and the price of land has gone up to Rs. 2400/-per sq. mtr. as on 16.06.2006 as against Rs. 600/-per sq. mtr. as on 02.11.1999 and Rs. 1000/- per sq. mtr. as on 18.07.2003 and therefore increase in rent is justified.

Held by ITAT:

A.Y.2003-04

• ITAT noted that in spite of categorical finding by the A.O in the assessment order, AGM resolution for remuneration to M.D is not made available. Hence, this ground was rejected.
• ITAT noted that these expenses were not fully verifiable. But not even a single instance was given by the A.O about such unverifiable expenses. Hence, in the absence of any instance of unverifiable expenses, such ad hoc disallowance cannot be sustained. This ground was allowed.

A.Y.2004-05

• ITAT noted that in spite of this categorical finding by the A.O. in the assessment order, agreement in respect of rent for the earlier years and for the present year as well as comparison chart of rate with market rent as required u/s 40A(2)(b) were not made available. Hence, this ground was rejected.
• Regarding section 35D, ITAT found that this section is not applicable because the assessee does not fulfill the requirements of this section. Hence, ITAT decline to interfere in the order of CIT (A) on this issue.
• ITAT noted that these expenses were not fully verifiable. But not even a single instance was given by the A.O about such unverifiable expenses. Hence, in the absence of any instance of unverifiable expenses, such ad hoc disallowance cannot be sustained. This ground was allowed.

A.Y.2006-07

• ITAT noted that in spite of categorical finding by the A.O in the assessment order, agreement in respect of rent for the earlier years and for the present year as well as comparison chart of rate with market rent as required u/s 40A(2)(b) were not made available. ITAT held that merely because prices of land has gone up, rent cannot be increased particularly to persons covered u/s 40A(2)(b) of the I.T Act without looking into such agreement in respect of rent for the earlier years and for the present year, it cannot be accepted the increase in rent is proper and as per the agreement. Hence, this ground was rejected.

Thus, in the combined result, appeals for A.Y.2003-04 & 2004-05 were partly allowed and appeal for A.Y.2006-07 was dismissed.