2013 (12) TMI 1684 - AT - Income Tax

Summary

Issues involved: Appeal against disallowance of interest rate difference u/s.40A(2)(b) for AY 2006-07.

Grounds of appeal:
1. Disallowance of interest rate difference confirmed by CIT(A).
2. CIT(A) not proving higher interest rate than market rate.
3. Sec.40A(2)(b) inapplicable to interest receipts.
4. Directors taxed at higher rates, no tax evasion.
5. Non-compliance with CBDT circular.
6. CIT(A) ignoring relevant facts.
7. CIT(A) disregarding appellant's reply and judicial precedent.
8. Request for amendment of grounds of appeal.

Judgment details:
The Assessee's appeal challenged the disallowance of Rs. 1,430,681 for interest rate difference in lending and borrowing loans u/s.40A(2)(b) for AY 2006-07. The AO added the amount based on the difference in interest rates, which the CIT(A) upheld. The Assessee argued that the interest recipients paid tax at the maximum rate, citing CBDT Circular No.6-P and a Bombay High Court decision. The Sr.DR supported the lower authorities' decisions, referencing a previous ITAT ruling against the Assessee for AY 2005-06.

The ITAT Ahmedabad noted that the Assessee failed to prove in AY 2005-06 that interest recipients paid tax at the maximum rate. However, for AY 2006-07, evidence showed recipients paid the maximum marginal rate, indicating no tax evasion. Transactions were between related parties u/s.40A(2)(b), with the Assessee paying 15% interest but receiving 10%. The AO's addition was based on the excessive payment of interest without commercial expediency. Following the Bombay High Court decision, the ITAT directed the AO to delete the addition, as no tax evasion was evident, and the payments were not unreasonable or excessive.

Therefore, the Assessee's appeal was allowed, and the addition was deleted.