2016 (1) TMI 449 - AT - Income Tax

Disallowance on account of interest expenses u/s.40A(2)(b) - Held that - In the case in hand, the assessee has paid the interest @18% to the related parties and 15% to unrelated parties. The contention of the assessee is that the interest paid at lesser rate was paid to the unrelated parties, in those cases, the unsecured loan was required to be paid on demand, but in the case of related parties there was no such condition. We are of the considered view that the interest @18% is reasonable, therefore we direct the AO to delete disallowance. - Decided in favour of assessee. Disallowance on account of business development expenses - Held that - The ld.Sr.DR submitted that the ld.CIT(A) has followed the order passed in the AY 2006-07, therefore this ground of assessee s appeal deserves to be dismissed.

Summary

Issues:
1. Disallowance of interest expenses under section 40A(2)(b) of the Income Tax Act for Assessment Years 2008-09 and 2009-10.
2. Disallowance of business development expenses for Assessment Year 2008-09.

Issue 1: Disallowance of Interest Expenses under Section 40A(2)(b) - Assessment Years 2008-09 and 2009-10:

The appeals by the Assessee were directed against separate orders of the Commissioner of Income Tax (Appeals) for the years 2008-09 and 2009-10. The Assessee contested the disallowance of interest expenses under section 40A(2)(b) of the Act. The Assessee argued that the loans from related parties were unsecured, justifying the higher interest rate paid. The Assessee relied on various judicial precedents to support their case. The Senior Departmental Representative opposed the Assessee's contentions, emphasizing the lack of evidence on the reasonableness of the interest rates. The Tribunal examined the facts and legal aspects, noting that the interest paid to related parties was higher than to unrelated parties. Relying on previous decisions and considering the commercial aspects, the Tribunal found the interest rate of 18% reasonable and directed the disallowance to be deleted.

Issue 2: Disallowance of Business Development Expenses - Assessment Year 2008-09:

The Assessee challenged the disallowance of business development expenses made by the Assessing Officer. The Senior Departmental Representative highlighted a similar disallowance in a previous year upheld by the Tribunal. The Assessee's representative conceded to the facts presented. The Tribunal referred to the earlier decision in the Assessee's case for the year 2006-07, where the Tribunal upheld the disallowance of such expenses. Since there were no changes in the facts, the Tribunal dismissed the Assessee's appeal on this ground, following the consistent view taken previously.

In conclusion, the Tribunal partly allowed the Assessee's appeal concerning the disallowance of interest expenses under section 40A(2)(b) for both assessment years, finding the interest rate of 18% reasonable. However, the appeal regarding the disallowance of business development expenses for the year 2008-09 was dismissed based on consistent past decisions.