Tribunal directs AO to reconsider rental expenses at fair market value & limits disallowance under section 14A.

The appeal was partly allowed. The Tribunal directed the AO to reconsider the disallowance of rental expenses based on fair market value, not BBMP valuation, under section 40A(2)(b). Additionally, the Tribunal restricted the disallowance under section 14A to the amount originally claimed by the assessee, deleting the additional disallowance made by the Revenue authorities.

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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.

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