Bad Debts and Related-Party Rent Disallowances Deleted: ITAT Ahmedabad

RKC Infrabuilt Private Limited Vs ITO (ITAT Ahmedabad)

Retention Money Written Off Qualifies as Bad Debt; Related-Party Rent Cannot Be Disallowed Merely on Suspicion

Background of the Dispute

The assessee, a works contractor registered in the “AA” category with the State Government’s Roads and Buildings Department, challenged the confirmation of two disallowances: bad debts of ₹36,95,988 and rent expenditure of ₹4,80,000 paid to related companies.

The dispute concerning bad debts arose from amounts retained by the Roads and Buildings Division against contracts executed between 2001 and 2007. These amounts related to extensions sought for completing the projects. The Department ultimately forfeited the retained amounts, whereas the assessee continued pursuing their recovery and carried them as receivables in its balance sheet. During financial year 2019–20, the assessee wrote off the outstanding amount and claimed a deduction.

Retention Money Represented Revenue Already Recognised

The Assessing Officer rejected the bad-debt claim principally because the amounts appeared under deposit accounts, including time deposits, security deposits and miscellaneous deposits. According to the officer, the assessee had not established that these amounts had previously been included in taxable income.

The CIT(A) confirmed the disallowance, observing that the assessee had not substantiated the actual write-off, prior inclusion of the debts in income, or sufficient recovery efforts and irrecoverability.

Before the Tribunal, the assessee explained that it had recognised the entire contract invoice value as revenue. The portion withheld by the customer was transferred to a separate receivable or deposit account. Its presentation in the balance sheet therefore did not mean that it had escaped recognition as income.

The assessee supported this explanation with ledger accounts, a summary identifying the relevant amounts and years, and communications from the Executive Engineer. These included a letter dated 23 May 2024 confirming that the retained amount had been forfeited and remitted to Government revenue in 2007.

Actual Write-Off Determined the Year of Deduction

The Tribunal accepted that the assessee had accounted for the full invoice amounts as income in the respective years and carried the retained portions as receivables. Although the Government had forfeited the amounts earlier, the assessee apparently continued negotiations for their release. The outstanding amount was finally written off during the year under appeal.

The Tribunal explained that, following the amendment to section 36(1)(vii) effective from 1 April 1989, an assessee need not establish that a debt became bad in a particular previous year. Writing off the debt as irrecoverable in the accounts is sufficient for claiming deduction in that year, subject to the applicable statutory conditions.

On the evidence, both prior recognition of the receivable as income and its actual write-off stood established. The Tribunal therefore held that the disallowance was incorrect on facts and in law and deleted the addition of ₹36,95,988.

Related-Party Rent Requires Evidence of Excessiveness

The second issue concerned rent of ₹2,40,000 each paid to Rang Rekha Baroda Private Limited and R. K. Quarry Works Private Limited.

The assessee furnished details of the payments and extracts from the recipient companies’ financial statements showing recognition of the rental receipts. Nevertheless, the Assessing Officer invoked section 40A(2)(b), questioning whether the transactions were revenue neutral. The CIT(A) upheld the disallowance.

The Tribunal found that neither authority had produced comparable instances or other evidence showing that the rent was excessive or unreasonable having regard to the fair market value of the premises.

It explained that the statutory provision permits disallowance of the portion of related-party expenditure considered excessive or unreasonable. A disallowance requires a factual basis supporting that conclusion. The relationship between the parties, by itself, does not establish excessiveness.

Here, the Assessing Officer had not even suggested that the rent exceeded fair market value. The entire expenditure had been disallowed on suspicion and a vague allegation concerning revenue neutrality. The Tribunal consequently deleted the rent disallowance of ₹4,80,000.

Other Grounds and Final Result

The challenge to initiation of penalty proceedings under section 270A was dismissed as premature. The grounds concerning interest under sections 234A, 234B and 234C were treated as academic following deletion of the substantive disallowances and dismissed as infructuous. The general grounds required no adjudication.

The appeal was partly allowed, with both substantive disallowances, aggregating to ₹41,75,988, deleted.

Author’s Comments

The decision highlights the importance of tracing a receivable to its underlying revenue recognition. An accounting label such as “deposit” does not, by itself, determine whether the amount satisfies section 36(2). The relevant enquiry is whether the amount formed part of income previously recognised and whether it was actually written off.

The bad-debt relief should also be understood in its factual setting. The Tribunal accepted the evidence establishing prior income recognition and the subsequent write-off; it did not dispense with those requirements.

On related-party rent, the central principle is that section 40A(2) requires an examination of excessiveness or unreasonableness supported by evidence. Suspicion about group tax arrangements cannot substitute for that examination. The relief rested on the absence of any factual foundation showing excessive rent, rather than on a finding that revenue neutrality alone guarantees deductibility.

Cases Discussed

• T.R.F. Ltd. v. CIT, [2010] 323 ITR 397 (Supreme Court) — Relied upon by the assessee for the principle that, following the amendment to Section 36(1)(vii) effective from 1 April 1989, actual write-off is sufficient without independently establishing irrecoverability in the relevant previous year.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the Assessee against the order of the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (hereinafter referred to as “NFAC”), Delhi (hereinafter referred to as “CIT(A)”), dated 18.03.2026 passed under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2020-21.

2. The assessee has raised the following Grounds of Appeal:

“The Appellant, being aggrieved by the order dated 18 March 2026 passed by the Ld. Commissioner of Income Tax (Appeals) – National Faceless Appeal Centre, New Delhi [“Ld. CIT(A)”] under section 250 of the Income-tax Act, 1961 (“the Act”), arising from the assessment order passed under section 143(3) read with section 144B of the Act for AY 2020–21, hereby prefers an appeal before Your Honour on the following grounds, which are without prejudice to one another:

1. The Ld. CIT(A) erred both in facts and in law in upholding the disallowances made by the Ld. AO without granting the Appellant an opportunity of hearing through video conferencing despite a specific request, thereby violating the principles of natural justice. Consequently, the order passed by the Hon’ble CIT(A) is liable to be quashed as null and void. It be so held now.

Disallowance of Bad Debts amounting to INR 36,95,988/-.

2. The Ld. CIT(A) erred both in facts and in law in upholding the disallowance of bad debts amounting to INR 36,95,988 made by the Ld. AO by alleging that the Appellant failed to substantiate the actual write-off of such debts in the books of account, despite sufficient explanations and documentary evidence furnished by the Appellant. The said disallowance, being contrary to section 36(1)(vii) of the Act, deserves to be deleted. It be so held now.

3. The Ld. CIT(A) erred in facts and in law in upholding the disallowance of bad debts amounting to INR 36,95,988 made by the Ld. AO in assessment order by alleging that the Appellant has failed to satisfy conditions of section 36(2) of the Act regarding such debts having been offered to tax in earlier years. It is submitted that the Appellant has duly established with documentary evidence that said debts have been offered to tax in earlier years and thus fulfils conditions of section 36(2) of the Act. It be so held now.

4. The Ld. CIT(A) erred in facts and in law in upholding the disallowance of bad debts amounting to INR 36,95,988 made by the Ld. AO in assessment order, without considering the letter issued by the customer confirming non-payment of dues to the extent bad debt claimed and other documentary evidence establishing that the said amount had become irrecoverable and thus eligible for deduction under section 36(1)(vii) of the Act. It is prayed that the same be so held and the disallowance be deleted.

5. The Ld. CIT(A) erred in facts and in law in upholding the disallowance of bad debts amounting to INR 36,95,988 made by the Ld. AO in assessment order on the ground that the Appellant has not established that the sufficient efforts were made to recover said amounts. It is submitted that write off of debt in books of account is sufficient to claim deduction of bad debt u/s 36(1)(vii) of the Act and it is not necessary to establish the debt, in fact, has become irrecoverable as held by Supreme Court in case of T.R.F Ltd vs CIT [2010] 323 ITR 397. It be so held now.

Disallowance of Rent payments amounting to INR 4,80,000

6. The learned CIT(A) erred in facts and in law in confirming the disallowance of rent of INR 4,80,000 by alleging lack of genuineness, commercial expediency, and arm’s length nature, without appreciating that the premises were used for business purposes and the rent was neither excessive nor unreasonable having regard to its fair market value. It is prayed that the disallowance be deleted.

7. The ld. CIT(A) erred in facts and in law in upholding disallowance of rent expenses of INR 4,80,000 made by AO in assessment order by alleging that such arrangement of rent payment to related persons as covered by section 40A(2)(b) has been made to reduce overall tax liability of the group and the Appellant failed to prove the arrangement was tax neutral. It is submitted that the Appellant and the related persons to whom rent was paid have opted tax regime u/s 115BAA and liable to tax at same rate of tax and thus there arise no scope of reduction in tax liability at group level and transaction is tax neutral, rendering disallowance untenable. It be so held now.

8. The Ld. CIT(A) erred in confirming the disallowance of rent expenses of INR 4,80,000 u/s 40A(2)(b) by relying on the head of income under which lessors offered such rental income, scale of business activity, and deductions claimed by lessors, which are factually incorrect and also irrelevant for determining the allowability of rent under section 30 in the hands of the Appellant. It be so held now.

9. The Ld. CIT(A) erred in facts and in law in confirming the action of the Ld. AO in initiating penalty proceedings under section 270A of the Act. It is prayed that such initiation be held as unsustainable in law in view of the facts of the case and law and the Ld. AO be accordingly directed to drop the penalty proceedings so initiated. It be so held now.

10. The Ld. CIT(A) erred in facts and in law in confirming the action of Ld. AO in assessment order for levying interest of INR 1,07,584 u/s 234A of the Act without appreciating that there is no delay in filing tax return which may result into interest u/s 234A of the Act. It be so held now.

11. The Ld. CIT(A) erred in facts and in law in confirming the action of Ld. AO in assessment order for levying further interest of INR 7,34,940 u/s 234B of the Act without considering mistake made by ld. AO in computing such interest u/s 234B of the Act. It be so held now.

12. The Ld. CIT(A) erred in facts and in law in confirming the action of Ld. AO in assessment order for levying further interest of INR 73,072 u/s 234C of the Act without considering the fact that the interest u/s 234C is not levied on assessed income but returned income and interest so computed is in accordance with provisions of section 234C of the Act. It be so held now.

13. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above Grounds of Appeal, at any time before or at, the time of hearing, of the appeal, so as to enable your Honour to decide this appeal according to the provisions of the law.”

3. The Grounds of Appeal are taken up issue-wise and decided as under:

Bad Debt: Rs. 36,95,988/-

4. The assessee is a registered works contractor in the approved list of State Government Roads & Building Department in the “AA” category. In response to the notice u/s 142(1) dated 26-11-2021 the Assessee. vide its reply dated 09-12-2021, submitted details of Bad Debts written off amounting to Rs.36,95,988/-. Subsequently, vide letter dated 21-02-2022 the assessee submitted further explanation regarding the nature of these debts, being trade receivables withheld by the R&B Division on account of extensions of time limit for completion of projects. The assessee also submitted copies of the relevant Ledger accounts and accounts certified by the Executive Engineer, (R&B) Division, Vadodara confirming that the aggregate sum of Rs. 36,95,988/- was forfeited and credited to revenue by the R&B Division.

5. The A.O. disallowed the claim holding as under:

“On perusal of the assessee’s submission, it is seen that the amounts claimed by the assessee as bad debts are reflected as outstanding in various deposit accounts viz. Time Deposit, Security deposit, Misc. Deposit. The ledger account of the bad debt written off (named as Time Limit expense) as well as the receivable accounts viz. Time Deposit, Security deposit, Misc. Deposit.

As per the request of Assessee Company, the Video Conference was conducted on 13/09/2022. During the course of personal hearing, the Authorized Representative of the assessee company explained the submissions filed by it in response to show cause notice dt. 21/03/2022. In response, the undersigned pointed out that the document provided by it does not have any date on it vide Annexure 13 in its submission dt. 21/02/2022 from the R&B division claiming that the R&B division has credited this amount to Revenue and has offered to tax to the Government of Gujarat. In this respect, the assessee company was requested to provide the requisite documents with date belonging to Financial Year 2019-20 relevant to A Y 2020-21 under consideration.. The detailed discussion is available in the recordings of the Video conference in ITBA conducted successfully on 13/09/2022 by the undersigned with the Authorized Representatives of the assessee company. However, no such document is furnished by the assessee so far. Further submissions were made by the assessee company in this respect on 12/09/2022 and 14/09/2022. However these submissions could not prove that the bad debts money under consideration was considered as taxable income in any of the relevant previous years.

Thus, it is seen that the assessee had never included the above expenses claimed as bad debts as taxable income in the computation of income and the same were never credited to the profit and loss account. Rather, they were a part of the balance-sheet of the assessee. Thus, the provisions of Section 36(1)(vii) are not satisfied and the assessee is not eligible to claim deduction on account of the bad debts amounting to Rs. 36,95,988/- during the year under consideration.”

6. On appeal, the Ld. CIT(A), NFAC confirmed the disallowance with the following observation:

“The appellant has contended that the bad debts written off are allowable under section 36(1) (vii) read with section 36(2) of the Act.

However, on examination of the assessment records, it is observed that the appellant failed to substantiate the following essential conditions:

That the debts were actually written off as irrecoverable in the books of accounts;

That the said debts had been taken into account in computing income of earlier years as required under section 36(2);

That sufficient efforts were made to recover the said amounts and the same had indeed become irrecoverable.

Merely writing off an amount in the books of accounts does not automatically entitle the appellant to claim deduction unless the conditions prescribed under the Act are fulfilled. The appellant has not furnished adequate documentary evidence to establish the genuineness and irrecoverability of the debts.”

7. Aggrieved by this, the assessee is in appeal before us. We have heard Ms. Amrin Pathan, Ld. A.R. and Shri Amit Pratap Singh, Ld. Sr. D.R. The Ld. A.R, Ms. Amrin Pathan, has drawn our attention to the Ledger accounts, letter dated 01 March, 2007 from the Executive Engineer regarding appropriation of Rs.36,95,988/-, a summary of the different sums retained and the years in which they were included in the income, and a letter dated 23-05-2024 from the Executive Engineer (R&B) Division confirming that the amount of Rs.36,95,988/-, kept as time limit extension deposit, has been forfeited and remitted to Government Revenue in the year 2007.

8. The Ld. Sr. D.R. Shri Amit Pratap Singh emphasized that the assessee had not proven that the income was offered in the relevant years. The facts relating to this claim of bad debts and the accounting for the amounts retained by the Government have been explained in detail in the written submission filed by the assessee before the Ld. CIT(A). For the sake of convenience, we reproduce the said submission, which has been relied upon by the Ld. A.R., hereunder:

”2.9. We wish to submit that during the year under consideration (i.e., FY 2019-20), the Appellant undertook an exercise to follow up for the old receivables and identify amount not recoverable from the respective customers. In this regard, multiple physical visits were conducted to the office of R &B division (one of the customers of the Appellant) to follow up for recovering the amount under consideration (INR 36,95,988).

2.10. During said follows ups, the Appellant was informed that the R&B division had decided to not pay the retention money receivable by the Appellant and issued a document (Form 53-Instruction for passing a journal entry) wherein it was clearly mentioned that the amount of contract revenue withheld by the R&B division (which was receivable by the Appellant) is not to be paid to the Appellant. The said document was also signed by the Sr. Divisional Account Officer, District (R&B ) Division, Vadodara. Copy of the said document is also enclosed herewith, marked as Annexure 7A. On the basis of the said document and communication from R&B divisions, the Appellant had decided to write off the receivable amount under consideration as bad debt in the books of accounts of the previous year.

2.11. In view of the same, the Appellant would like to enclose herewith the letter received from R &B division, wherein R&B division has categorically mentioned that the retention money has been forfeited and remitted to Government Revenue as per AG audit para, marked as Annexure 7B.

2.12. We further submit that the said amount was related to the sum retained by the R &B division with regard to the projects executed by the Appellant from year 2001 to 2007. The said sum was retained in the form of deposits as the Appellant had sought for extension in time limit for execution of various projects. However, extended time limit sought by the Appellant in those years was not granted and as a result, sum retained in the form of deposits were not released by the R &B division.

2.13. Due to non-receipt of money from R&B division, the Appellant had written off the said money as bad debt in the books of accounts as irrecoverable and claimed the same as allowable deduction under section 36(1)(vii) of the Act.

2.14. With respect to the contention of the Ld. AO that non releasing of money retained by the customer is a fine imposed on the Appellant, we wish to submit that having regard to the nature of business carried on by the Appellant, it is a routine and customary practice that vendor/contractor used to retain some part of the contract money to ensure fulfilment of the obligations by the party, as stipulated in terms and conditions of the contract. In case party fails to fulfil the stipulated terms or conditions of the contract, vendor/contractor may retain or forfeit the money receivable by the party. This kind of loss due to non-receipt of money by the Appellant from the vendor/contractor is nothing but a business loss or expenditure incurred in the ordinary course of business.

2.15. We further submit that by no stretch of imagination, this loss or expenditure can be termed as fine or penalty. Further, even if it is in the nature of fine or penalty, the same is towards breach of terms or conditions of contractual agreement which is allowable under section 37(1) of the Act.

2.16. In view of above, we respectfully wish to submit before your Honour that any loss or expenditure on account of breach of contractual terms and conditions is nothing, but an expenditure incurred wholly and exclusively in connection with the business and ought to allow the same as deductible expense. Also, this expense cannot be disallowed under section 37 of the Act or Explanation thereof as the same has not been incurred towards the breach of any law or regulations for the time being in force. Hence, contentions of Ld. AO that amount not received from R&B division is a fine imposed on the Appellant and therefore not allowable as deduction is not tenable having regard to the facts of the case.

2.17. Further, with respect to the contention of Ld. AO that amount under consideration has not been offered to tax in the earlier assessment years and therefore conditions laid down under section 36(1)(vii) read with section 36(2) of the Act have not been satisfied, we wish to draw your goodself’s kind attention on relevant extract of the said provisions which is reproduced as below:

“36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-

……

(vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year”

(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply-

(i) no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or moneylending which is carried on by the assessee.

(ii) the amount ultimately recovered on any such debt or part of debt is less than the difference between the debt or part and the amount so deducted, the deficiency shall be deductible in the previous year in which the ultimate recovery is made;

……”

2.18. From perusal of above provisions, your Honour would appreciate that once the amount is written off as irrecoverable in books of accounts of the previous years, deduction of the same is ought to allow, subject to the condition that said amount has already been offered to tax while computing income of the earlier assessment years.

2.19. In this regard, we wish to submit before your Honour that amount under consideration has already been considered and offered to tax in the computation of taxable income of the earlier assessment years. Further, this amount pertains to projects executed between 2001 to 2007. Hence, it was practically not possible for the Appellant to produce the ledger copies of the revenue account for those years (12 to 18 years old cases), evidencing that amount has already been credited to the income.

2.20. However, despite of such practical difficulties, the Appellant has extracted the sample ledger copies and summary thereof, which was also submitted to Ld. AO during the course of assessment proceedings and also enclosed as Annexure 8, for your ready reference.

2.21. From perusal of the above ledgers, your Honour would appreciate that the customer had withheld the money in the form of deposit, in order to ensure the performance obligations of the Appellant. Further, upon perusal of the said ledgers, it is also clear that the Appellant had recorded gross amount receivable from its customer as a revenue and money retained by the customer has been parked a side separately as receivable item in the balance sheet.

2.22. We also submit before your Honour that the presentation of retention money under the head ‘deposit’ in the balance sheet of the Appellant would not alter the fact that the said amount was already recorded as an income in the financial statements of the earlier years and has also been offered to tax. For the ready reference of your Honour and to substantiate that amount under consideration has already been offered to tax as an income, we wish to explain the accounting treatment in respect of retention money by following illustration:

Journal Entries passed in financial statement-(an illustration)

At the time of recognition of revenue

At the time of receipt of part consideration

Upon retention of part consideration as Deposit by R&B division

Upon forfeiture of deposit/Write off of deposit/receivable

2.23. From the above illustration, your Honour would appreciate that the Appellant had already recorded contractually agreed consideration gross amount as revenue receivable from the customer as an income in the financial statements. Hence, condition laid down under section 36(1)(vii) read with section 36(2) have already been fulfilled in the present case.

2.24. Subsequently, when the balance amount /deposit held by R&B division was not recoverable, it was written off as bad debt in the profit & loss account and deduction was claimed in accordance with the conditions prescribed under section 36(1)(vii) of the Act.

2.25. In view of above, contention of Ld. AO that amount under consideration was never credited to statement of profit and loss and not considered while computing taxable income of the earlier years is not tenable and is without appreciating the facts of the case.”

9. From the submissions of the assessee and from the documents filed in the paper book which have also been submitted before the authorities below, we notice that the Executive Engineer (R&B) Division had retained some part of the bills payable to the assessee on account of extensions of time limit for completion of projects. For its accounting purposes, the assessee included the entire invoice amount as its income and the amount retained was taken to balance sheet as a receivable. Subsequently, when the R&B Division decided to forfeit the amount so retained on account of delay in completion of the projects, the assessee appears to have continued negotiation for release of the said amount with the recoverable amount being shown in balance sheet. Finally, in Financial Year 2019-20 relevant to the Asst. Year under appeal, the assessee has written off this recoverable amount of Rs.36,95,988/-. From the above, two things which are evident from records are, that the assessee had accounted for the receivable in the different years to which the invoices pertained, and finally it has claimed deduction as bad debt in the year the same was actually written off in the accounts. The statutory provision as applicable after amendment to section 36(1)(vii) by the Direct Tax Laws (Amendment) Act, 1987 with effect from 01-04-1989, the assessee is no longer required to establish that the debt has become bad in any particular previous year. Simply the writing off the debt as irrecoverable in the accounts for any previous year is sufficient to claim deduction u/s 36(1)(vii) for that previous year. The finding of the Ld. CIT(A) that the appellant failed to furnish adequate documentary evidence to establish the genuineness irrecoverability of the debts is incorrect in law and also on facts. The disallowance of the claim for bad debts written off, in our view, was wrong on facts and in law. This disallowance is deleted. The assessee’s Grounds of Appeal No. 2 to 5 are allowed.

Disallowance of Rent payment: Rs.4,80,000/-

10. During the relevant previous year, the assessee had paid rent of Rs.2,40,000/- to M/s. Rang Rekha Baroda Pvt. Ltd. and Rs.2,40,000/- to M/s. R. K. Quarry Works Pvt. Ltd. Vide its letter dated 14-09-2022, the assessee had submitted details of the rent payment and also submitted extracts of the Financial Statement of both these companies to show that the rent receipt from the assessee have been accounted by these companies under the category of ‘other income’ in their financial statements. The assessee has also filed details to show that these companies carried out regular work and had significant receipts from the Government Work receipt account. The assessing officer disallowed the expenditure on payment of rent while stating in the assessment order, that no information or evidence was collected on this issue, but an adverse inference has been drawn on the basis of assessee’s failure to submit reasonable explanations. Even after considering the details filed by the assessee, the assessing officer concluded that the assessee did not prove that there was no loss to the Revenue on account of payment of rent to these two companies and that the transactions between the related parties on account of rent were revenue neutral. This disallowance was made by invoking section 40A(2)(b) of the Act. On appeal, the Ld. CIT(A) reiterated the findings of the assessing officer and confirmed the disallowance.

11. In the course of hearing, the Ld. D.R. supported the order of the Ld. CIT(A) and contended that since the parties were related the disallowance under 40A(2)(b) was justified.

12. The Ld. A.R. Ms. Amrin Pathan drew our attention to the evidence provided by the assessee before the authorities below which clearly showed that the companies to whom rent was paid had significant income of their own and the rent receipt from the assessee was accounted as rent in the ‘other income’ category and not as part of the business income. We also note that neither the assessing officer nor the Ld. CIT(A) have brought anything on record to establish, with reference to any comparable instances to contend that the expenditure incurred on rent by the assessee was excessive so as to attract the provisions of Section 40A(2)(b) of the Act. The said provision lays down that where the assessing officer is of the opinion that any payment of expenditure made to related party is excessive or unreasonable having regard to the Fair Market Value of the goods, services or facilities for which the payment is made, so much of the expenditure as is considered to be excessive shall not be allowed as deduction. There is nothing in the said provision that permits an assessing officer to disallow the entire expenditure and to disallow any part of such expenditure without bringing on record some evidence to allege that the expenditure incurred by the assessee was excessive or unreasonable.

13. In the present case, the assessing officer has not even suggested that the expenditure was excessive or unreasonable having regard to the Fair Market Value for the rent of the premises. Merely on suspicion and on a vague allegation of the expenditure not being revenue neutral, the assessing officer has disallowed the entire expenditure. The Ld. CIT(A) has confirmed the same without considering the statutory provision and the glaring absence of any factual foundation. This disallowance is clearly unsustainable and the same is deleted. The assessee’s Grounds of Appeal No. 6, 7 & 8 are allowed.

14. Ground of Appeal No. 9: the assessee has challenged the initiation of penalty proceedings u/s 270A of the Act. This ground is dismissed as being premature.

15. Grounds of Appeal No. 10, 11 & 12 relate to the levy of interest u/s 234A, 234B and 234C of the Act. In view of our decision on merits of the disallowances made in assessment, the question of levy of interest would become academic and the same are not being adjudicated upon. This grounds are dismissed as infructuous.

16. Ground No. 1 and 13 are general in nature and need no adjudication.

17. In the result, the appeal of the Assessee is partly allowed.

This Order is pronounced on 12/10/2026