Clarification on rent agreement with relative of office bearer where rent is waived / Not Actually Paid

[Banna]

Clarification is required regarding the appropriate accounting and compliance treatment of an office premises arrangement involving a related party.

An organisation is operating from a property owned by the father of an office bearer / Secretary / Governing Body member. A rent agreement exists between the organisation and the property owner for a nominal monthly rent, such as ₹1,800 or ₹5,000. However, the property owner, as a matter of support to the organisation, does not wish to actually receive the rent amount. In this situation, the organisation wishes to ensure that the arrangement is recorded in a transparent, compliant, and audit-friendly manner, without creating any artificial or incorrect accounting entries.

Clarification is therefore required on the following points:

1. If rent is not actually paid by the organisation, can the organisation still recognise the rent amount as an expenditure in its books?

2. Would it be appropriate to record the same amount as a donation/contribution from the property owner and also record a rent payment to the property owner, even where no actual cash or bank transaction has taken place?

3. Since the property owner is the father of an office bearer / Governing Body member, what related-party disclosure, conflict-of-interest declaration, or Governing Body approval should be maintained?

4. What would be the safest and most transparent accounting treatment where the organisation is using the premises for office purposes, but no rent is actually being paid?

[Sharad]

@Banna

Clarification is therefore required on the following points:

1. If rent is not actually paid by the organisation, can the organisation still recognise the rent amount as an expenditure in its books?
2. Would it be appropriate to record the same amount as a donation/contribution from the property owner and also record a rent payment to the property owner, even where no actual cash or bank transaction has taken place?
3. Since the property owner is the father of an office bearer / Governing Body member, what related-party disclosure, conflict-of-interest declaration, or Governing Body approval should be maintained?
4. What would be the safest and most transparent accounting treatment where the organisation is using the premises for office purposes, but no rent is actually being paid?

Thanks Banna for your question. Our response on each of your above points is below

Points 1 and 2

The organisation will need to recognise the waived rent as income by way of contribution received in kind and corresponding amount as rental expense in its books. The rent agreement may stay as such because a deed without consideration is null and void, but a rent waiver letter should be obtained from landlord to keep the transaction straight. Such income can be reported in Form 10BD as in-kind contribution but will not be eligible for 80G (section 354 ITA 2025) benefits for the landlord.

Point 3

Since there is no benefit that is being provided by the organisation as per Section 13(2), no disclosure is required in Audit Report in 10B-sl. No. 42/10BB-sl. No 29. Advisable to insert a Note in Notes to Accounts of your financial statements as disclosure. Also, the Board may consider the matter and pass a resolution for recognising the transaction and disclosure of interest of the parties.

Point 4

The accounting treatment would be to credit the rent amount as donation/other income and debit the same amount as rent expense every month during the rental period.

Hope it clarifies.

CS Sharad Bhargava