Per Dixit - In this case, the Commissioner in exercise of his powers under section 263 of the Income-tax Act, 1961 (‘the Act’) directed the ITO to allow rent of Rs. 1,250 per month only instead of Rs. 2,500 paid by the assessee to his HUF in respect of certain construction used by the assessee for his nursing home. The facts are that the assessee is running a nursing home in a building which is owned by him. The terrace covering an area of about 3,000 sq. ft. on the first floor of this nursing home was given by the assessee on lease to his own HUF on an annual rent of Rs. 500 only. The assessee constructed six or seven rooms on this terrace covering area of 1,529 sq. ft. at a cost of Rs. 91,000 to the HUF. The assessee then paid rent to the HUF at the rate of Rs. 2,500 per month for a period of 8 months and claimed the total amount of Rs. 20,000 in respect thereof as a deduction from his income.

2. The Commissioner’s order, in brief, is that the rent paid to the HUF by the assessee was too high and the rent received from the HUF by the assessee was too low with the result that there was a large gap by which the assessee actually diverted his own income to the HUF. He has stated that the transactions with the HUF are not transactions between the strangers or persons at an arms length. They were not bona fide business transactions and were motivated to perpetually benefit the HUF in which the assessee was vitally interested.

3. Before us the assessee’s counsel put forward a number of arguments but the most important of them all is that the Commissioner had not considered, inter alia, that the assessee had pointed out in his reply to the show-cause notice as follows :

"It should also be noted that the ITO, Valsad, itself is paying the monthly rent of about Rs. 7,195 for its rented premises admeasuring 5,724 sq. ft. which is situated on Dharampur Road, Valsad, since 5-11-1978. The rent of the income-tax office is to be revised after every five years. Being a drawing and disbursing officer, as Shri B.P. Patel, the then ITO in whose time the above Income-tax Officer premises was rented (sic). All these facts were within the knowledge of the ITO who framed the assessment orders in the case of Dr. A (HUF) and Dr. A (Individual) for the assessment year 1981-82 on 17-1-1982 and 18-1-1982.

As such it is not correct to hold that the ITO had not made proper enquiries in this respect. It was within the knowledge of Shri B, the then ITO who was working there at Valsad since about 1975, about the prevailing rental rates of the building occupied by the LIC, Income-tax office and rent charged by the Municipality for office accommodation (sic)."

The assessee’s counsel argued that if the rent paid by the income-tax office which works out at 1.26 sq. ft. for premises not so centrally situated as the assessee’s premises, could it be said that the rent for the assessee’s premises, which worked out at Rs. 1.60 per sq. ft. was excessive ? He further pointed out that no comparative cases were cited by the Commissioner.

4. On the other hand, the learned departmental representative argued that the fact that the ITO was drawing and disbursing officer, was not relevant and further that the rent should be based on the cost of construction.

5. It is true that the gap between the rent paid to the HUF and the rent received from the HUF is wide and that may benefit the assessee by reducing his income but what we have to consider here is a reasonability of the rent paid. On that aspect failure on the part of the Commissioner to take into account the rent paid by the income-tax office itself is fatal to the revenue’s case. It was not contested before us that the assessee’s premises are not more centrally situated than those of the income-tax office. That being so, it cannot be said that the rent paid by the assessee to the HUF is excessive. On that very count perhaps the rent paid by the HUF to the assessee might be low but operative part of the Commissioner’s orde