2010 (8) TMI 978 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 33,35,500/- out of interest paid to The Sandesh Ltd.

Summary:

Issue 1: Deletion of disallowance of Rs. 33,35,500/- out of interest paid to The Sandesh Ltd.

The Revenue appealed against the order of the Learned Commissioner of Income Tax (Appeals)-XIV, Ahmedabad, dated 22-1-2008, which deleted the disallowance of Rs. 33,35,500/- out of interest paid to The Sandesh Ltd. The brief facts are that the assessee paid interest at 36% to The Sandesh Ltd., amounting to Rs. 66,71,000/-. The assessee justified the high rate of interest citing reasons such as the borrowings were a prudent commercial necessity, temporary and indispensable, and obtained without any security when no other funds were available.

The Learned Assessing Officer (AO) found the interest rate exorbitant and adopted a market rate of 18%, disallowing the differential interest of Rs. 33,35,500/-. On appeal, the assessee argued that the loan was short-term, unsecured, and taken for business purposes, with no security available to obtain a lower interest rate loan from banks. The Learned Commissioner of Income Tax (Appeals) agreed with the assessee and deleted the disallowance, noting that the loan was genuine, used for business purposes, and not subject to u/s 40A(2)(b) as The Sandesh Ltd. was not related to the assessee.

The Learned Departmental Representative supported the AO's order, while the assessee's representative reiterated that the borrowings were necessary, unsecured, and at a commercially reasonable rate. The Tribunal, after hearing both sides, found that the genuineness of the interest payment was not in doubt, the borrowed funds were used for business purposes, and The Sandesh Ltd. was not related to the assessee. The Tribunal held that genuine business expenditure cannot be disallowed merely because the AO considered it excessive. The Tribunal confirmed the order of the Learned Commissioner of Income Tax (Appeals) and dismissed the Revenue's appeal.

In conclusion, the appeal of the Revenue was dismissed, and the order was signed, dated, and pronounced in the Court on the 13th day of August, 2010.