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2012 (8) TMI 801 - AT - Income TaxDis-allowance u/s 40(ba) - interest paid to directors/trustees - assessee, a registered trust, being assessed as AOP - Held that - Whether or not the assessee is assessed in the status of AOP or individual, it does not matter. The dis-allowance u/s 40(ba), can be made only with regard to the interest paid to the members of the AOP. The trustees of the assessee trust cannot be described as members of the AOP. See Shardaben Bhagubhai Mafatlal Public Charitable Trust (2000 (9) TMI 45 - BOMBAY HIGH COURT ). CIT(A) was justified in deleting the said dis-allowance - Decided in favor of assessee Dis-allowance made u/s 40A(2)(b) - interest paid on unsecured loans @ 18% - AO applying rate of 15% based on the lending rate of banks - Held that - It is pointed out that the banks lend money after accepting security and the trustees had given unsecured loans to the trust. Also, Tribunal in various cases has held that interest paid at 24% p.a. cannot be said to be unreasonable. In view of aforesaid, matter restored to file of AO to consider de novo, and contention of the assessee with regard to the fact that the payment of interest at 18% p.a.is not excessive and unreasonable
Issues Involved:
1. Whether the assessee Trust can be assessed as an "Association of Persons" (AOP). 2. Applicability of section 40(ba) of the Income Tax Act, 1961. 3. Applicability of section 40A(2)(b) of the Income Tax Act, 1961. 4. Charging of interest under section 234B of the Income Tax Act, 1961. Detailed Analysis: 1. Whether the assessee Trust can be assessed as an "Association of Persons" (AOP): The Revenue contended that the assessee should be assessed as an AOP, arguing that the CIT(A)'s reliance on the case law Sharadaben Bhagubhai Mafatlal Public Charitable Trust v. CIT was misplaced. The CIT(A) had held that the trustees cannot be treated as members of an AOP, even if the trust is assessed as an AOP for rate purposes. The Revenue argued that the assessee itself filed its return in the status of an AOP and thus should be assessed accordingly. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's ruling in CIT v. K. Shyamaraju, which held that trustees as representative assessees cannot be assessed as an AOP. Therefore, the disallowance under section 40(ba) was not applicable as the trustees cannot be considered members of an AOP. 2. Applicability of section 40(ba) of the Income Tax Act, 1961: Section 40(ba) disallows any payment of interest, salary, bonus, commission, or remuneration by an AOP to its members. The CIT(A) concluded that the trustees cannot be treated as members of an AOP, and thus, the provisions of section 40(ba) were not applicable. The Tribunal confirmed this view, noting that the trustees of the assessee trust cannot be described as members of an AOP. Therefore, the CIT(A)'s order to delete the disallowance under section 40(ba) was upheld. 3. Applicability of section 40A(2)(b) of the Income Tax Act, 1961: The assessee argued against the disallowance under section 40A(2)(b), which pertains to payments made to relatives of the trustees. The Assessing Officer had disallowed interest paid at 18% per annum, deeming it excessive compared to the 14.25% interest paid to banks on secured loans. The assessee contended that the loans from relatives were unsecured, justifying the higher interest rate. The Tribunal noted that the CIT(A) did not consider the assessee's argument that the interest rate was not excessive. The Tribunal thus directed the Assessing Officer to re-examine this issue, taking into account the unsecured nature of the loans and relevant case laws indicating that higher interest rates on unsecured loans are not necessarily unreasonable. 4. Charging of interest under section 234B of the Income Tax Act, 1961: The assessee's cross-objection included a denial of liability under section 234B, which pertains to interest for default in payment of advance tax. However, this issue was not elaborated upon in the Tribunal's order, indicating that it was not a primary focus of the judgment. Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision that section 40(ba) was not applicable. It allowed the assessee's cross-objection for statistical purposes, directing the Assessing Officer to re-evaluate the disallowance under section 40A(2)(b) based on the nature of the loans and relevant judicial precedents.
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