2016 (5) TMI 1287 - AT - Income Tax

Disallowance of interest payment to family members by invoking provisions of section 40A(2)(b) - loan from the family members and relatives - Held that - The assessee as well as the relatives, to whom assessee has paid interest are being taxed higher rates, the entire exercise undertaken by the Assessing Officer is neutral exercise as far as the payment of tax is concerned and there is no question of evading of payment of tax by any of the parties. Further, Hon ble Bombay High Court in CIT vs. Gujarat Gas Financial Services Ltd 2015 (7) TMI 743 - GUJARAT HIGH COURT has clearly laid down that CBDT in its circular No.6-P dated 06/07/1968 debars the Assessing Officer from not allowing such payment made to relatives and sister concerns, where there is no attempt to evade the tax - Decided in favour of assessee

Summary

Issues: Disallowance of interest payment to family members under section 40A(2)(b) of the Income Tax Act, 1961.

Detailed Analysis:

1. Background: The appeal by the assessee is against the order of the CIT(A) confirming the disallowance of interest payment to family members under section 40A(2)(b) of the Income Tax Act, 1961.

2. Factual Overview: The assessee, engaged in trading, paid interest @18% on unsecured loans taken from family members. The Assessing Officer restricted the rate of interest paid to family members at 12%, citing an ITAT order in the assessee's own case for the assessment year 2004-05.

3. CIT(A)'s Decision: The CIT(A) upheld the Assessing Officer's decision, emphasizing that the disallowance was not due to the genuineness of the payment but based on the provisions of section 40A(2) regarding excessive or unreasonable expenditure. The CIT(A) referenced the ITAT decision from the previous assessment year.

4. Appellant's Argument: The appellant contended that the interest payment was genuine and necessary for business purposes. They highlighted that the payees had included the interest receipts in their tax returns and paid taxes accordingly. The appellant argued that the interest rate of 18% was justifiable based on commercial considerations and market rates.

5. Revenue's Argument: The Revenue argued that the issue was settled by previous Tribunal orders in the assessee's case for multiple assessment years, and the disallowance was in line with the Act's provisions.

6. Tribunal's Analysis: The Tribunal reviewed the interest payments to family members, noting that the payees had declared the interest income in their tax returns. The Tribunal observed that the interest rates were reasonable considering the commercial transactions and market practices. The Tribunal also considered the decisions of the Hon'ble Bombay High Court and Hon'ble Gujarat High Court, which supported the appellant's position.

7. Decision: Ultimately, the Tribunal allowed the appeal, emphasizing that the interest payments were legitimate, necessary for business operations, and in compliance with market practices. The Tribunal highlighted that the payees were taxed at higher rates, indicating no attempt to evade tax. The Tribunal's decision aligned with the principles outlined in the CBDT circular and previous judicial rulings.

8. Outcome: The appeal of the assessee was allowed, and the decision was pronounced in open court on 18/05/2016.

This detailed analysis provides a comprehensive overview of the judgment, covering the background, factual details, arguments presented by both parties, the Tribunal's analysis, decision, and the final outcome of the case.