1989 (6) TMI 33 - HC - Income Tax

Summary

Issues Involved:
The issues involved in this case are:
1. Interpretation of u/s 40A(2) of the Income-tax Act regarding the payment of interest to the estate of a deceased relative.
2. Determination of the reasonableness of the interest rate paid by the assessee to the estate of the deceased relative.

Interpretation of Section 40A(2):
The case involved questions related to the application of section 40A(2) of the Income-tax Act concerning the payment of interest by the assessee to the estate of a deceased relative. The Income-tax Officer disallowed a portion of the interest payment, considering it excessive and invoking the provisions of section 40A(2). The Commissioner of Income-tax (Appeals) later determined that interest at 18% would be reasonable, restricting the disallowance to the excess amount. The Tribunal upheld the decision, leading to the reference of questions to the High Court for opinion.

Reasonableness of Interest Rate:
The interest paid by the assessee to the estate of the deceased relative was at a rate of 24% per annum. The Commissioner of Income-tax (Appeals) found 18% to be a reasonable rate after considering various factors, including the prevailing bank interest rates. The High Court concurred with this determination, stating that the interest rate of 18% was justifiable and that the assessee was not entitled to a higher rate. Consequently, the Tribunal's decision on the excessiveness of the 24% interest rate was upheld.

Conclusion:
In conclusion, the High Court held that section 40A(2) was applicable to the interest payment made by the assessee to the estate of the deceased relative. Additionally, the Court agreed with the Tribunal's decision that the 24% interest rate was excessive, and only interest at the rate of 18% was deemed reasonable. Therefore, both questions were answered in favor of the Revenue and against the assessee.