No disallowance u/s 40A(2) on payment made to sister-in-law as she isn’t relative as per sec. 2(41): ITAT

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No disallowance u/s 40A(2) on payment made to sister-in-law as she isn’t relative as per sec. 2(41): ITAT

Rajesh Bajaj v. DCIT – [2021] 124 taxmann.com 69 (Allahabad – Trib.)
Short Overview:
Assessee was engaged in the business of dealing in the paper.
He filed his return of income and his case was selected for scrutiny. During scrutiny assessment, Assessing Officer (AO) noted that assessee had paid rent for various go downs and shops to the persons specified under Section 40A(2).
AO made disallowance on account of the excess rent paid to the related party by invoking the provision of section 40A(2)(b).
AO compared the rent paid by assessee in the preceding year and found that the rent paid by him for the current year was more than the reasonable enhancement of 10%.
Thus, AO held that same was not allowable as it was more than the fair market price.
CIT(A) upheld the order passed by AO.
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.
On appeal, Allahabad ITAT held that 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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