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Issues Involved:
1. Disallowance of interest to related parties u/s 40A(2)(b). Summary: Disallowance of Interest to Related Parties u/s 40A(2)(b): The only issue in appeal is regarding disallowance of interest to certain related parties covered u/s 40A(2)(b). The assessee, engaged in trading ferrous and non-ferrous metals, paid interest on unsecured loans from six parties. The Assessing Officer (AO) benchmarked 12% as reasonable interest, disallowing interest paid over 12% to related parties as unreasonable u/s 40A(2). The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance for related parties but allowed interest at 18% for unrelated parties. The assessee argued that the loan was for business purposes and the expenditure should be judged on commercial expediency grounds. The revenue cannot decide the reasonableness of the expenditure from a businessman's perspective. Interest at 18% was paid to both related and unrelated parties, thus 18% should not be considered unreasonable. The DR supported the CIT(A)'s findings, stating the appellant failed to justify the 18% interest rate for related parties when one related party was paid 12%. The AO can disallow excessive or unreasonable expenditure u/s 40A(2)(a) based on fair market value. The Tribunal noted that section 40A(2) aims to curb excessive or unreasonable expenditure to close associates. The reasonableness of expenditure should be judged by fair market value, legitimate business needs, and benefits derived. The AO can only disallow the excessive part of the expenditure, not the entire amount. The reasonableness should be viewed from a businessman's perspective, not the revenue's. The Tribunal concluded that since interest at 18% was paid to unrelated parties, it represents the fair market value. Thus, interest paid to related parties at 18% is not excessive or unreasonable. The disallowance of interest by the AO was deleted. In the result, the appeal is allowed.
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