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 Bench — T.R. Senthil Kumar (Judicial Member) and Ramit Kochar (Accountant Member)) on 2024-10-20, reported as 2024 TAXSCAN (ITAT) 1252. 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 imported wood and eco-friendly particle boards and filed its return for assessment year 2017-18 declaring income of Rs.1,52,49,840. In scrutiny assessment the Assessing Officer disallowed Rs.43,95,474 of purchases from M/s. Laxmi Enterprises, listed as a sales tax defaulter, and partly disallowed Rs.22,40,000 of monthly rent paid to related-party co-owners of three leased flats.
When section 40A(2)(b) is invoked, the onus to prove unreasonableness lies on the Assessing Officer alone. The partial disallowance of rent could not stand because the officer produced no conclusive evidence that the payments exceeded fair market value.
The Tribunal held that merely identifying the payees as persons related to the assessee within section 40A(2)(b) is insufficient to justify a disallowance. The Assessing Officer must conduct a proper inquiry and establish, through proper comparisons and assessments, that the payment is not at arm's length and exceeds the fair market value of the goods, services or facilities. Here the officer relied on market comparisons without taking into account the specific circumstances of the leased flats, such as location and amenities, and therefore failed to discharge the onus that the statute places on him.
the 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 Bench — T.R. Senthil Kumar (Judicial Member) and Ramit Kochar (Accountant Member)) and bears on section 40A(2)(b) of the Income Tax Act 1961. It is reported as 2024 TAXSCAN (ITAT) 1252. 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 imported wood and eco-friendly particle boards and filed its return for assessment year 2017-18 declaring income of Rs.1,52,49,840. In scrutiny assessment the Assessing Officer disallowed Rs.43,95,474 of purchases from M/s. Laxmi Enterprises, listed as a sales tax defaulter, and partly disallowed Rs.22,40,000 of monthly rent paid to related-party co-owners of three leased flats. The matter was decided on 2024-10-20 by the ITAT (ITAT Ahmedabad Bench — T.R. Senthil Kumar (Judicial Member) and Ramit Kochar (Accountant Member)). On those facts the ITAT held as follows. When section 40A(2)(b) is invoked, the onus to prove unreasonableness lies on the Assessing Officer alone. The partial disallowance of rent could not stand because the officer produced no conclusive evidence that the payments exceeded fair market value.
The Tribunal held that merely identifying the payees as persons related to the assessee within section 40A(2)(b) is insufficient to justify a disallowance. The Assessing Officer must conduct a proper inquiry and establish, through proper comparisons and assessments, that the payment is not at arm's length and exceeds the fair market value of the goods, services or facilities. Here the officer relied on market comparisons without taking into account the specific circumstances of the leased flats, such as location and amenities, and therefore failed to discharge the onus that the statute places on him. In the words reproduced by the source cited on this page: "the onus to prove the unreasonableness is on the Assessing Officer only"
It was decided by the ITAT on 2024-10-20 and is reported as 2024 TAXSCAN (ITAT) 1252. 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. When section 40A(2)(b) is invoked, the onus to prove unreasonableness lies on the Assessing Officer alone. The partial disallowance of rent could not stand because the officer produced no conclusive evidence that the payments exceeded fair market value. It arises in Deductions & Disallowances matters, on section 40A(2)(b) of the Income Tax Act 1961, and was decided by ITAT Ahmedabad Bench — T.R. Senthil Kumar (Judicial Member) and Ramit Kochar (Accountant Member). 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.
Validity check could not be completed. The taxscan report was read and confirms the entry: M/s. Patel Kenwood Pvt. Ltd. v. ITO, ITAT Ahmedabad, 2024 TAXSCAN (ITAT) 1252, Ramit Kochar (Accountant Member) and T.R. Senthil Kumar (Judicial Member), assessment year 2017-18, 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. That report does not give the date of the order, so the date carried in the entry is not corroborated by the only source that could be opened. Later treatment could not be established: the itatonline digest answers a search for the party name with 'did not match any entries', so the decision is not carried on that host and nothing there cites it, and a subscription research database searched in this pass on the party name and on the single distinctive word carries no document for it either, so no citator check is possible there. No appeal to the High Court, no contrary decision and nothing applying it was found, so it cannot be certified as good law. The provision and CBDT enquiries are 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 having proved to be pre-amendment snapshots where they opened at all. That finding was checked against a published source, which is linked on this page, on 2026-08-25. 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.
Only one report of this order was accessible, and the order could not be found in a subscription research database either: three searches were run there - the party name, the name of the supplier whose purchases were disallowed together with the goods traded, and the single distinctive word 'Kenwood' - and none returned it, the thirteen records on the single word being competition law and other unrelated matters. Because that search is conjunctive, a nil result on the two-word name means no document in that corpus contains both words. The only citation this entry carries is a rival publisher's, which is not searchable there. So the citation is unconfirmed against the order and no citator check is possible; the entry remains a single-source, single-publisher record of an Ahmedabad Tribunal order. It follows that the words quoted in this entry have not been checked against any paragraph of the order - they come from that single report - so do not present them as the Tribunal's own language. The date of the order is not given even in that report, so the date carried here is uncorroborated, and the appeal number is not stated on it. Cite it only for the onus point on the rent: the same assessment also involved a separate disallowance of Rs 43,95,474 of purchases from a sales tax defaulter, and the outcome on that limb is not clear from the report. Appeal number not stated on the source page, and the date of the order is not corroborated by it either. Only one source was accessible for this order, and it is not carried in a subscription research database, so no citator check was possible. The outcome on the separate Rs 43,95,474 purchase disallowance is not clear from the report. 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.
When section 40A(2)(b) is invoked, the onus to prove unreasonableness lies on the Assessing Officer alone. The partial disallowance of rent could not stand because the officer produced no conclusive evidence that the payments exceeded fair market value.
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