2016 (7) TMI 1452 - AT - Income Tax

Disallowance in respect of interest paid on borrowings u/s. 40A(2)(b) - assessee has paid interest to unrelated parties at varying rates of 6% 12% and 16% - Held that - Solely because assessee had paid interest at different rates to different parties that itself could not be a ground to come to the conclusion that payment of interest to related parties at rate other than that paid to other party was excessive and unreasonable. Our view is fortified by the decision of the Hon ble Jurisdictional High Court of Gujarat given in the case of Sarjan Realities Ltd. 2014 (8) TMI 206 - GUJARAT HIGH COURT In so far as the rate of interest at 18% considered to be excessive the Co-ordinate Bench in the case of Vipul Y. Mehta (2010 (7) TMI 1051 - ITAT AHMEDABAD) has held that the payment of interest @ 18% per annum to the relatives on unsecured loans cannot be said to be excessive or unreasonable. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of interest paid on borrowings under section 40A(2)(b) of the Act for assessment years 2008-09 and 2009-10.

Analysis:
1. The Assessee filed two separate appeals against orders of the CIT(A) for AYs 2008-09 and 2009-10 regarding disallowances of interest paid on borrowings under section 40A(2)(b) of the Act.
2. Both appeals were heard together due to common grievance, focusing on disallowances totaling ?31,10,556/- for AY 2008-09 and ?41,60,927/- for AY 2009-10.
3. The Assessing Officer (A.O.) disallowed the interest difference between related and unrelated parties' rates, considering 18% excessive compared to the market rate of 12%.
4. The Assessee defended the 18% interest rate as reasonable, but the A.O. made additions for both years, leading to unsuccessful appeals at the CIT(A) level.
5. The Assessee argued before the ITAT, citing precedents like Asian Mills Pvt. Ltd. and Vipul Y. Mehta cases to support the 18% interest rate.
6. The ITAT analyzed the A.O.'s basis for disallowance and referenced the Sarjan Realities Ltd. case, emphasizing that varying interest rates to different parties do not make related party interest excessive.
7. Referring to the Vipul Y. Mehta case, the ITAT concluded that 18% interest on unsecured loans to relatives is not excessive, overturning the CIT(A)'s decision.
8. Considering judicial precedents and the totality of facts, the ITAT directed the A.O. to delete the disallowances, thereby allowing both appeals of the Assessee.

This judgment clarifies the criteria for determining excessive interest payments to related parties under section 40A(2)(b) of the Act, emphasizing the importance of market rates and judicial precedents in assessing reasonableness.