2012 (7) TMI 627 - AT - Income Tax

Disallowance of interest expenses - CIT(A) allowed it - Held that - The assessee is continuing getting commission income from Pharma Agencies through sub-letting the agency. The loans were taken in earlier years for business purposes. Out of some of the loans given to sister concerns part amount was outstanding due to debtors part has not been recovered during the year due to the financial position of the debtors. The assessee s business is interconnected interlacing inter-dependent and there was one unit thus warrants confirmation of the deletion made by the learned CIT(A) on old loans Excessive rate of interest in case of directors covered u/s 40A (2) (b) - Held that - The rate of interest between 15% to 18% was allowed by the AO in the preceding assessment years which is also reasonable in view of prevailing market rate - As during the year the assessee has taken loan of Rs.12 lacs which was utilized for purchase of raw materials and same is not connected with the old business and also manufacturing has not been started during the year. Therefore the AO is directed to re-calculate the disallowance of interest on Rs.12 lacs only on the basis of interest paid or provided in the loan account - against revenue.

Summary

Issues:
1. Disallowance of interest expenses amounting to Rs.34,34,050
2. Excessive rate of interest in case of directors covered u/s 40A (2) (b) of the IT Act

Issue 1: Disallowance of Interest Expenses
The appeal arose from the order of the CIT(A), Gandhinagar, Ahmedabad regarding the disallowance of interest expenses of Rs.34,34,050 for the assessment year 2008-09. The appellant contended that the interest expenses were not taken up by the Assessing Officer and were allowed on a different footing. The loans were taken from directors and their relatives at a rate of 15% to 18%, which the AO found excessive. The appellant argued that the interest expenses were for business purposes and had been allowed in the past. The CIT(A) allowed the appeal based on the subjective nature of the issue and cited precedents to support the decision. The Tribunal confirmed the deletion of interest on old loans but directed the AO to re-calculate the disallowance on the loan of Rs.12 lacs based on the interest paid. The remaining addition was justified, and the appeal of the revenue was dismissed.

Issue 2: Excessive Rate of Interest in Case of Directors
The second ground of appeal was related to the excessive rate of interest paid to directors and relatives, covered under section 40A (2) (b) of the IT Act. The AO disallowed the interest based on the perceived excessiveness of the rate. However, the CIT(A) and the Tribunal found the rate of interest between 15% to 18% reasonable, considering it had been allowed in the preceding assessment years and was in line with the prevailing market rate. The Tribunal upheld the decision of the CIT(A) to confirm the deletion of interest on old loans and allowed the interest expenses on the loan of Rs.12 lacs, directing the AO to re-calculate the disallowance based on actual interest paid.

In summary, the Tribunal upheld the CIT(A)'s decision to allow the interest expenses and deemed the rate of interest paid to directors and relatives as reasonable. The appeal of the revenue was dismissed, and the order was pronounced on 29-06-2012.