The AO disallowed rent I pay to relatives just because they are related. Is that enough?
No. When s.40A(2)(b) is invoked the onus to prove unreasonableness lies on the Assessing Officer alone, and identifying the payee as a related person does not discharge it. The partial disallowance of rent fell because the officer produced no conclusive evidence that the payment exceeded fair market value.
Decided by the ITAT (ITAT Ahmedabad - Shri Ramit Kochar (Accountant Member) and Shri T.R. Senthil Kumar (Judicial Member); order delivered by T.R. Senthil Kumar, JM; ITA Nos. 60 & 61/Ahd/2024; AYs 2017-18 and 2018-19) on 2024-10-09, reported as ITA Nos. 60 & 61/Ahd/2024 (Ahmedabad Trib.); AYs 2017-18 and 2018-19; 2024 TAXSCAN (ITAT) 1252 - the order itself prints no law-report citation. It bears on section 40A(2)(b) of the Income Tax Act 1961, in Deductions & Disallowances matters.
Related-party disallowances are routinely made on the relationship alone, with a round-figure cut and no comparison on record. On this reasoning the officer has to conduct a proper inquiry and establish through proper comparisons that the payment is not at arm's length and exceeds fair market value. The Tribunal also rejected market comparisons that ignored the specific circumstances of the property, such as location and amenities, which is the usual weakness in a rent disallowance.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, a company importing wood and eco-friendly particle boards, filed its return for assessment year 2017-18 on 4 October 2017 declaring income of Rs 1,52,49,840. In scrutiny assessment under s.143(3) the Assessing Officer disallowed Rs 43,95,474 of purchases from M/s Laxmi Enterprises, shown as a defaulter on the State VAT department's portal; and on rent of Rs 22,40,000 paid for three flats near VIP Road, Vesu, Surat, to co-owners covered by s.40A(2)(b) at Rs 1,60,000, Rs 1,44,000 and Rs 1,44,000 a month, he checked rental values on 99acres.com and other rental websites, determined excess rent of Rs 20,19,750 and disallowed it. The Commissioner (Appeals), by order of 21 November 2023, confirmed the purchase disallowance and restricted the rent disallowance to 50 per cent on an ad hoc basis. A connected appeal for assessment year 2018-19 raised a single ground, a disallowance of Rs 2,40,000 of purchases from the same supplier.
Both appeals were allowed. On the rent, the Tribunal held that for invoking section 40A(2)(b) the onus to prove unreasonableness is on the Assessing Officer only, who must first ascertain the fair market price and the services and facilities available in the society; it noted that rent depends on location and amenities, that the flats were fully furnished and were used for the assessee's customers and for the residential accommodation of senior staff, that both authorities below had failed to make the requisite enquiries, and that the same Assessing Officer had made no such disallowance in the regular assessment under s.143(3) for the following year, and it deleted the 50 per cent disallowance confirmed by the CIT(A) (para 11). On the purchases, it held that the additions were made without proper verification of facts and on suspicion, surmise and unverified information, that the invoices carried the date, time and mode of transport with vehicle number, the purchase order number and the VAT charged, and that payment was made through banking channels, and it deleted the addition of Rs 43,95,474 following CIT v. M.K. Brothers 163 ITR 249 (Guj.) and CIT v. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Guj.) (paras 9 to 10.1). The identical disallowance of Rs 2,40,000 in the assessment year 2018-19 appeal was deleted on the same reasoning (para 14).
The Tribunal held that merely identifying the payees as persons related to the assessee within section 40A(2)(b) does not carry a disallowance. The onus to prove unreasonableness rests on the Assessing Officer alone, and he must ascertain the fair market price and the services and facilities available before disallowing anything. Here the comparison was drawn from property websites without regard to what makes one property unlike another - location, garden, club house, gymnasium and common amenities - and without regard to the fact that the flats were fully furnished and were used for the assessee's customers and senior staff. Neither authority below had made the enquiries the matter required. The Tribunal also pointed to the Revenue's own conduct: the same Assessing Officer had made no such disallowance in the regular assessment for the following year.
For invoking section 40A(2)(b)of the Act, onus to prove the unreasonableness is on the Assessing Officer only.
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Handle my notice → Ask a CA on WhatsAppNo. When s.40A(2)(b) is invoked the onus to prove unreasonableness lies on the Assessing Officer alone, and identifying the payee as a related person does not discharge it. The partial disallowance of rent fell because the officer produced no conclusive evidence that the payment exceeded fair market value. This was decided by the ITAT (ITAT Ahmedabad - Shri Ramit Kochar (Accountant Member) and Shri T.R. Senthil Kumar (Judicial Member); order delivered by T.R. Senthil Kumar, JM; ITA Nos. 60 & 61/Ahd/2024; AYs 2017-18 and 2018-19) and bears on section 40A(2)(b) of the Income Tax Act 1961. It is reported as ITA Nos. 60 & 61/Ahd/2024 (Ahmedabad Trib.); AYs 2017-18 and 2018-19; 2024 TAXSCAN (ITAT) 1252 - the order itself prints no law-report citation. Related-party disallowances are routinely made on the relationship alone, with a round-figure cut and no comparison on record. On this reasoning the officer has to conduct a proper inquiry and establish through proper comparisons that the payment is not at arm's length and exceeds fair market value. The Tribunal also rejected market comparisons that ignored the specific circumstances of the property, such as location and amenities, which is the usual weakness in a rent disallowance. If it applies to you, the first step is this: Ask the officer in writing to state the comparables he relies on and how he arrived at fair market value, and put his failure to do so on record before the appeal.
The assessee, a company importing wood and eco-friendly particle boards, filed its return for assessment year 2017-18 on 4 October 2017 declaring income of Rs 1,52,49,840. In scrutiny assessment under s.143(3) the Assessing Officer disallowed Rs 43,95,474 of purchases from M/s Laxmi Enterprises, shown as a defaulter on the State VAT department's portal; and on rent of Rs 22,40,000 paid for three flats near VIP Road, Vesu, Surat, to co-owners covered by s.40A(2)(b) at Rs 1,60,000, Rs 1,44,000 and Rs 1,44,000 a month, he checked rental values on 99acres.com and other rental websites, determined excess rent of Rs 20,19,750 and disallowed it. The Commissioner (Appeals), by order of 21 November 2023, confirmed the purchase disallowance and restricted the rent disallowance to 50 per cent on an ad hoc basis. A connected appeal for assessment year 2018-19 raised a single ground, a disallowance of Rs 2,40,000 of purchases from the same supplier. The matter was decided on 2024-10-09 by the ITAT (ITAT Ahmedabad - Shri Ramit Kochar (Accountant Member) and Shri T.R. Senthil Kumar (Judicial Member); order delivered by T.R. Senthil Kumar, JM; ITA Nos. 60 & 61/Ahd/2024; AYs 2017-18 and 2018-19). On those facts the ITAT held as follows. Both appeals were allowed. On the rent, the Tribunal held that for invoking section 40A(2)(b) the onus to prove unreasonableness is on the Assessing Officer only, who must first ascertain the fair market price and the services and facilities available in the society; it noted that rent depends on location and amenities, that the flats were fully furnished and were used for the assessee's customers and for the residential accommodation of senior staff, that both authorities below had failed to make the requisite enquiries, and that the same Assessing Officer had made no such disallowance in the regular assessment under s.143(3) for the following year, and it deleted the 50 per cent disallowance confirmed by the CIT(A) (para 11). On the purchases, it held that the additions were made without proper verification of facts and on suspicion, surmise and unverified information, that the invoices carried the date, time and mode of transport with vehicle number, the purchase order number and the VAT charged, and that payment was made through banking channels, and it deleted the addition of Rs 43,95,474 following CIT v. M.K. Brothers 163 ITR 249 (Guj.) and CIT v. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Guj.) (paras 9 to 10.1). The identical disallowance of Rs 2,40,000 in the assessment year 2018-19 appeal was deleted on the same reasoning (para 14).
The Tribunal held that merely identifying the payees as persons related to the assessee within section 40A(2)(b) does not carry a disallowance. The onus to prove unreasonableness rests on the Assessing Officer alone, and he must ascertain the fair market price and the services and facilities available before disallowing anything. Here the comparison was drawn from property websites without regard to what makes one property unlike another - location, garden, club house, gymnasium and common amenities - and without regard to the fact that the flats were fully furnished and were used for the assessee's customers and senior staff. Neither authority below had made the enquiries the matter required. The Tribunal also pointed to the Revenue's own conduct: the same Assessing Officer had made no such disallowance in the regular assessment for the following year. In the words reproduced by the source cited on this page: "For invoking section 40A(2)(b)of the Act, onus to prove the unreasonableness is on the Assessing Officer only."
It was decided by the ITAT on 2024-10-09 and is reported as ITA Nos. 60 & 61/Ahd/2024 (Ahmedabad Trib.); AYs 2017-18 and 2018-19; 2024 TAXSCAN (ITAT) 1252 - the order itself prints no law-report citation. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 40A(2)(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were allowed. On the rent, the Tribunal held that for invoking section 40A(2)(b) the onus to prove unreasonableness is on the Assessing Officer only, who must first ascertain the fair market price and the services and facilities available in the society; it noted that rent depends on location and amenities, that the flats were fully furnished and were used for the assessee's customers and for the residential accommodation of senior staff, that both authorities below had failed to make the requisite enquiries, and that the same Assessing Officer had made no such disallowance in the regular assessment under s.143(3) for the following year, and it deleted the 50 per cent disallowance confirmed by the CIT(A) (para 11). On the purchases, it held that the additions were made without proper verification of facts and on suspicion, surmise and unverified information, that the invoices carried the date, time and mode of transport with vehicle number, the purchase order number and the VAT charged, and that payment was made through banking channels, and it deleted the addition of Rs 43,95,474 following CIT v. M.K. Brothers 163 ITR 249 (Guj.) and CIT v. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Guj.) (paras 9 to 10.1). The identical disallowance of Rs 2,40,000 in the assessment year 2018-19 appeal was deleted on the same reasoning (para 14). It arises in Deductions & Disallowances matters, on section 40A(2)(b) of the Income Tax Act 1961, and was decided by ITAT Ahmedabad - Shri Ramit Kochar (Accountant Member) and Shri T.R. Senthil Kumar (Judicial Member); order delivered by T.R. Senthil Kumar, JM; ITA Nos. 60 & 61/Ahd/2024; AYs 2017-18 and 2018-19. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document what makes your property or service different — location, amenities, area, terms of the lease — so that any comparison offered against you can be shown to be unlike for unlike. Do not accept that the burden is yours merely because the payee is covered by s.40A(2)(b); say expressly that the statute places the onus on the officer.
Searched for later treatment; none was found. That is not the same as a source affirming it. The date carried in this entry is now corroborated. A later Jaipur Bench order, Jajoo Rashmi Refractories Ltd v DCIT, Circle-4, ITA No. 209/JPR/2025, 6 August 2025, reproduces the citation as 'Patel Kenwood Pvt. Ltd Vs. ITO, ITAT Ahmedabad, ITA Nos. 60 & 61/Ahd/2024, Asst. Years 2017-18 & 2018-19', and Indian Kanoon's own record of the order gives the same date, so the order of 9 October 2024 for assessment years 2017-18 and 2018-19 is fixed from two sources rather than one. The taxscan report, which had been read, confirms the substance: Ramit Kochar (Accountant Member) and T.R. Senthil Kumar (Judicial Member), rent of Rs 22,40,000 for three flats taken at Rs 1,60,000, Rs 1,44,000 and Rs 1,44,000 a month, holding that the onus was on the Assessing Officer to prove unreasonableness and that he must establish that the expenditure is not at arm's length on proper comparisons, without which the disallowance cannot be upheld. On later treatment there is nothing. Indian Kanoon's citator for the order returns no results, and in the Jajoo Rashmi order the citation sits in the assessee's counsel's paper book of authorities, not in the Bench's reasoning; that order in any event decided a s.69C question and was remanded to the CIT(A) without deciding the merits. The itatonline digest carries no entry for the party name. No appeal to the High Court, no contrary decision and nothing applying the order was found. The provision and CBDT enquiries remain untried: no current text of s.40A(2)(b), no check of the Finance Acts after 2024 and no Income-tax Act 2025 successor was obtained, the department's section pages being pre-amendment snapshots where they open at all. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order has now been read in full from the Tribunal's own text and the earlier sourcing cautions are spent. It is a common order in ITA Nos. 60 and 61/Ahd/2024 for assessment years 2017-18 and 2018-19, heard 22 July 2024 and pronounced 9 October 2024 by Shri Ramit Kochar, Accountant Member, and Shri T.R. Senthil Kumar, Judicial Member, the order being delivered by T.R. Senthil Kumar, JM. The date previously carried here, 20 October 2024, was wrong. The sentence quoted in this entry is now the Tribunal's own, taken verbatim from para 11. Two points of substance the single report could not give. The rent figures are that Rs 22,40,000 was paid, that the Assessing Officer determined the excess at Rs 20,19,750 and that the CIT(A) restricted the disallowance to 50 per cent. And the separate disallowance of Rs 43,95,474 of purchases from M/s Laxmi Enterprises was not left hanging: it was deleted at paras 9 to 10.1, as was an identical Rs 2,40,000 disallowance for the following year at para 14. The order still carries no law-report citation and no later decision applying it has been found, so it remains a single Tribunal order on the onus point. The order has now been read in full and the appeal numbers, the assessment years, the bench and the date are confirmed from its own text; the outcome on the Rs 43,95,474 purchase disallowance is no longer open, the addition having been deleted. What remains: the order carries no law-report citation and is not carried in the subscription case-law database searched, so no citator check is possible there and no later decision applying it has been found. Do not confuse it with ITA No. 62/Ahd/2024, a separate penalty appeal of the same assessee decided on 29 October 2024 by a different Bench. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed. On the rent, the Tribunal held that for invoking section 40A(2)(b) the onus to prove unreasonableness is on the Assessing Officer only, who must first ascertain the fair market price and the services and facilities available in the society; it noted that rent depends on location and amenities, that the flats were fully furnished and were used for the assessee's customers and for the residential accommodation of senior staff, that both authorities below had failed to make the requisite enquiries, and that the same Assessing Officer had made no such disallowance in the regular assessment under s.143(3) for the following year, and it deleted the 50 per cent disallowance confirmed by the CIT(A) (para 11). On the purchases, it held that the additions were made without proper verification of facts and on suspicion, surmise and unverified information, that the invoices carried the date, time and mode of transport with vehicle number, the purchase order number and the VAT charged, and that payment was made through banking channels, and it deleted the addition of Rs 43,95,474 following CIT v. M.K. Brothers 163 ITR 249 (Guj.) and CIT v. Nangalia Fabrics Pvt. Ltd. 40 taxmann.com 206 (Guj.) (paras 9 to 10.1). The identical disallowance of Rs 2,40,000 in the assessment year 2018-19 appeal was deleted on the same reasoning (para 14).
TaxSphere, “Patel Kenwood P Ltd v ITO”, https://taxnotice.vittsphere.com/caselaw/case/patel-kenwood-v-ito-40a2b-onus/ (validity last checked 2026-09-16)
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