2009 (6) TMI 992 - AT - Income Tax

Summary

Issues involved: Appeal against order of learned CIT(A) regarding disallowance u/s 40A(2)(b) of the Act for assessment year 2005-06.

Summary:
The appellant appealed against the order of the learned CIT(A) regarding the disallowance made under section 40A(2)(b) of the Act for the assessment year 2005-06. The appellant had taken loans covered under the said section and paid interest at 18%, which the Assessing Officer (AO) found to be higher than the market rate of 11.5% to 12%. The AO disallowed the excess interest but allowed it at 12%. On appeal, the CIT(A) reduced the disallowance to 3% and allowed interest at 15%. The appellant argued that the loans were taken in the past at 24% interest, and by borrowing from relatives, they avoided paperwork and collateral requirements. The appellant cited relevant tribunal decisions in support. The Departmental Representative supported the CIT(A)'s order, stating that 15% interest already allowed covered the excess. The Tribunal noted that under section 40A(2)(b), excess amounts paid for services/benefits from covered entities are not deductible. Considering the lack of security for the loans, the flexibility in repayment, and the difficulties in obtaining bank loans, the Tribunal allowed the appeal and deleted the disallowance.

In conclusion, the appeal of the assessee was allowed, and the disallowance u/s 40A(2)(b) was deleted.