Tribunal allows adhoc disallowance for rent but deletes interest on security deposits

The Tribunal partially allowed the appeals by permitting a 20% adhoc disallowance for rent paid to the director's wife for a guest house leased for business purposes, citing established business nexus. The disallowed interest on security deposits paid to the director's wife was deleted as the Tribunal found the deposits were made from interest-free funds and were a normal business practice.

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Issues:
1. Disallowance of rent paid to director's wife.
2. Disallowance of interest proportionately on security deposits paid to director's wife.

Analysis:
1. The appeals arose from the order of the Commissioner of Income Tax (Appeals) against the assessment order passed by the Assistant Commissioner of Income Tax. The primary issue was the disallowance of rent paid to the director's wife for a guest house taken on lease for business purposes. The Assessing Officer disallowed the entire rent amount, suspecting personal use. The appellant argued that the property was used for business purposes, enhancing employee morale and customer relations. The Tribunal found the business nexus established and allowed 20% adhoc disallowance for potential personal usage, reducing the disallowed rent amount.

2. Additionally, the appellant had paid a security deposit to the director's wife for the leased property. The Assessing Officer disallowed interest on the deposit, suspecting non-business purposes. The appellant contended that the deposit was made from interest-free funds. The Tribunal held that the security deposit for the business property was a normal practice and not for non-business purposes. Therefore, the interest disallowance was directed to be deleted.

In conclusion, the Tribunal partly allowed both appeals, allowing the rent disallowance at 20% and directing the deletion of the interest disallowance.

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