Notional rent and related-party salary adjustments need credible evidence and reasoned findings before disallowance.

Notional rental income additions require credible, locality-specific evidence; a fair market rent estimate based on a different city or an uncorroborated inspector's report was insufficient, so the addition was deleted. Salary paid to a family member in a business context was also held allowable where services were rendered, the payment was longstanding, business turnover and profits increased, and the amount was taxed in the recipient's hands; the disallowance was therefore deleted. The stated principle is that neither notional rent nor related-party salary can be rejected without a reasoned finding, supported by evidence, that the amount is unreasonable on the facts.

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Issues: (i) Whether the addition for alleged under-statement of rental income from the business premises by substituting an estimated fair market rent was justified. (ii) Whether the disallowance of salary paid to the assessee's son as bogus expenditure was justified.

Issue (i): Whether the addition for alleged under-statement of rental income from the business premises by substituting an estimated fair market rent was justified.

Analysis: The rental income disclosed by the assessee was compared by the Assessing Officer with rent of a similar property at a different city and on the basis of an inspector's report. The record showed that the premises were situated at Amravati, the standard rent under the municipal reckoner was far lower than the rent actually received, and no credible evidence was brought to show that the same locality fetched a higher rent. The tenant and the assessee were both taxable at the highest rate, and the disclosed rent had remained consistent.

Conclusion: The addition for under-statement of rental income was not sustainable and was deleted in favour of the assessee.

Issue (ii): Whether the disallowance of salary paid to the assessee's son as bogus expenditure was justified.

Analysis: The salary payment was examined in the context of the family-run business, the services rendered in the business at more than one location, the long-standing nature of the payment, the increase in turnover and profits, and the fact that the amount was taxed in the recipient's hands. The disallowance rested mainly on a selective reading of the recipient's statement, without addressing the overall business requirements and past conduct.

Conclusion: The salary expenditure was held to be allowable and the disallowance was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive additions and the assessee obtained relief on both disputed issues, resulting in a partial allowance of the appeal.

Ratio Decidendi: An addition for notional rental income or disallowance of related-party salary cannot be sustained without credible, locality-specific evidence and without a reasoned finding that the expenditure or rent is unreasonable in the facts of the business.

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