2010 (5) TMI 823 - HC - Income Tax

Summary

Issues Involved:
The issue involves the interpretation of Section 40A(2)(a) of the Income Tax Act, 1961 regarding the disallowance of excess interest payment made by the appellant company to Sun Pharmaceuticals Industries Limited.

Summary:

(1) Question Raised by Appellant:
The appellant revenue questioned the correctness of the Appellate Tribunal's decision in confirming the deletion of the disallowance of excess interest payment made to Sun Pharmaceuticals Industries Limited under Section 40A(2)(a) of the Act.

(2) Assessment Details:
The Assessment Year in question is 1997-98, with the relevant accounting period ending on 31.03.1997. The Assessing Officer disallowed an amount of Rs. 56,63,331/- as excessive interest payment made to Sun Pharmaceuticals Industries Limited at a rate of 24% compared to interest paid at 18% to 20% to other parties, invoking Section 40A(2)(a) of the Act.

(3) Appellant's Submission:
The appellant contended that the deletion of the addition by the Commissioner (Appeals) and the Tribunal was unjustified as no evidence was presented to substantiate the 24% interest rate.

(4) Commissioner's Decision:
The Commissioner (Appeals) held that Section 40A(2) of the Act was not applicable as there was no direct relationship established between the assessee and the payee company. The interest payment was deemed necessary for the business needs of the company to raise unsecured loans.

(5) Tribunal's Analysis:
The Tribunal noted the lack of evidence regarding market rates but considered the 24% interest rate reasonable based on general market trends. It emphasized that the burden of proof for applying Section 40A(2)(a) lies with the revenue, which was not met in this case.

(6) Findings and Conclusion:
Both the Commissioner (Appeals) and the Tribunal found that the revenue failed to justify the application of Section 40A(2)(a) as interest on unsecured borrowings is typically higher. The interest rate of 24% paid to Sun Pharmaceuticals was deemed reasonable based on commercial practices and evidence on record.

(7) Dismissal of Appeal:
As no substantial question of law was identified, the appeal was dismissed based on the concurrent findings of fact by the Commissioner (Appeals) and the Tribunal, which were deemed legally sound and supported by commercial norms.