Related-party rent and ad hoc telephone expense disallowances fail where business expediency and no material basis are shown.

A nominal increase in rent paid to a related person was treated as a business expenditure supported by commercial expediency, and the disallowance under section 40A(2)(a) was deleted because no rational basis justified the addition. The ad hoc disallowance from telephone expenses was also deleted because the claim was small relative to the scale of business and income, and no adequate material supported a reduction. Both additions were set aside, leaving the assessee entitled to full relief in the appeals.

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Issues: (i) Whether the disallowance of rent paid to a related person under section 40A(2)(a) was justified; (ii) whether the disallowance out of telephone expenses was justified.

Issue (i): Whether the disallowance of rent paid to a related person under section 40A(2)(a) was justified.

Analysis: The increase in rent was nominal and was incurred in the course of business. The amount sustained by the first appellate authority lacked justification in the circumstances, and the increase could be regarded as supported by business expediency.

Conclusion: The disallowance of rent was deleted and relief was granted to the assessee.

Issue (ii): Whether the disallowance out of telephone expenses was justified.

Analysis: The telephone expenditure claimed was small in relation to the scale of business and income, and no adequate basis existed for making an ad hoc disallowance.

Conclusion: The disallowance out of telephone expenses was deleted and relief was granted to the assessee.

Final Conclusion: Both additions were set aside and the assessee succeeded in full in the appeals.

Ratio Decidendi: A nominal and business-oriented expenditure, even where paid to a related person, cannot be disallowed without a rational basis, and an ad hoc disallowance of routine business es is unsustainable absent material justification.

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