AO can’t import definition of ‘Relative’ from section 56 to invoke section 40A(2)

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 AO can’t import definition of ‘Relative’ from section 56 to invoke section 40A(2)

Recently, Allahabad bench of the Income Tax Appellate Tribunal (ITAT) in an important ruling said that tax authority cannot invoke provisions of section 40A(2) in respect of a transaction of payment of rent to persons who are not falling in the definition in term of ‘relative’ provided under section 2(41).
In the present case, Assessee was an individual dealing in paper in the name and style of M/s. Bajaj Pratisthan. The assessee filed the return of income on September 30, 2013 declaring total income of Rs. 23,10,440.
During the course of scrutiny assessment, the AO noted that the assessee has paid rent for various godown/shops amounting to Rs. 21,00,000 to the persons specified under Section 40A(2). The AO has made a disallowance of Rs. 6,26,811 on account of the excess rent paid to the related party (sister-in-law) by invoking the provision of section 40A(2)(b) of the Income-tax Act.
Assessee contended that the person to whom rent was paid, i.e., his sister-in-law, do not fall within the definition of relative as provided under Section 2(41). Thus, the provision of section 40A(2) couldn’t be invoked in respect of the rent paid by the assessee.
The assessee challenged the action of the AO before the CIT(A) but could not succeed.
Thereafter, assessee preferred an appeal with the ITAT.
ITAT observed as under :
The definition of the term “relative” provided under section 2(41) does not cover the sister-in-law of assessee.
 However, sister-in-law of assessee is covered within the definition of the term “relative” as provided under section 56(2). Since the definition provided under 56(2) is only for the relevant clause provided under section 56(2), therefore, the same couldn’t be applied in respect of provisions of section 40A(2) when a general definition of the term “relative” is provided under section 2(41).
Hence, the provisions of section 40A(2) couldn’t be invoked in respect of a transaction of payment of rent to persons who are not falling in the definition in term of ‘relative’ provided under section 2(41).

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