2021 (6) TMI 135 - AT - Income Tax

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 ... Interest disallowed proportionately u/s.36(1)(iii) in respect of security deposits paid to director’s wife for taking her bungalow on lease - HELD THAT:- Assessee had taken property on lease for the purpose of its business. The said property is situated at Lonavala. The said property belongs to the wife of director of the assessee company. The property has been taken on lease based on a registered lease agreement entered into with the wife of director of the assessee company. We find that Smt. Shweta Rasiwasia had retained some portion of the property for her personal use and had leased out the remaining portion to the assessee company and had derived lease rental income thereon. The said property had been taken on lease by the assessee for housing its staff and business guests who visit Lonavala and which inturn had increased the morale of the employees and assessee was benefitted with good business relations with the customers of the assessee company. Hence, the business nexus of taking that property on lease and using it for the purpose of utilisation by its staff and customers of the assessee had been proved and hence cannot be held to be for non-business purposes. AR before us agreed for an adhoc disallowance of 20% that could be made for the purpose of personal usage in view of common facilities that could be attributed for both personal as well as business purposes. Accordingly, we deem it fit to disallow only 20% of ₹ 28,89,000/- on account of rent. As already held that the said Bungalow situated at Lonavala owned by wife of director had been taken on lease by the assessee company for the purpose of its business. Hence, it is quite normal to pay security deposit for the said property to the landlord. This payment of security deposit cannot be treated as ‘meant for non-business purposes’. Hence, there is no question of making any proportionate disallowance of interest u/s.36(1)(iii) of the Act. Hence, we direct the ld. AO to delete the disallowance made on account of interest - Decided in favour of assessee. 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.