2018 (6) TMI 1780 - AT - Income Tax

Addition u/s 40A(2)(b) - interest ranging from 12% to 15% - restriction of payment of interest to 12% instead of interest at the rate of 15% paid by the assessee to the persons covered under section 40A(2)(b) - HELD THAT - Rate of interest charged and received by the assessee is justifiable and in commensurate with prevailing market rate - assessee contended that the bank interest was in the range of 15% and in respect thereof, the assessee was required to produce security against such loans, whereas the loans availed by the assessee were unsecured loans. By taking of loans from related persons, it could avoid a lot of formalities. We are of the view that the payment of interest at a little higher rate to the persons even if covered under section 40A(2)(b) cannot be termed as exorbitant when the prevalent market rate of interest is being looked into, and there is no question of undue benefit being given to the related persons. We find no justifiable reasons to restrict the interest rate at 12% by the Revenue authorities. Accordingly, disallowance made by the Revenue is deleted, and the ground of appeal of the assessee is allowed.

Summary

Issues:
- Appeal against restriction of interest payment to related parties under section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
The appellant, a trader in sugar kandsari, contested the restriction of interest payment to 12% instead of 15% to related parties under section 40A(2)(b) of the Income Tax Act, 1961. The assessment was reopened as the AO found excess interest payments to related parties. The appellant argued that interest rates were market-driven and justified by paying 15% to both related and unrelated parties. The AO and CIT(A) restricted the interest rate to 12%. The Tribunal analyzed the case under section 40A(2)(b), which disallows excess payments to closely associated persons. The Tribunal found the appellant's interest rates reasonable, as it paid 15% to an unrelated party and received interest at the same rate. The Tribunal noted that the appellant could avoid formalities by taking unsecured loans from related parties, justifying the slightly higher interest rate. Consequently, the Tribunal allowed the appeal, deleting the disallowance by the Revenue authorities and concluding that the interest payment to related parties was not excessive or unreasonable.

In conclusion, the Tribunal allowed the appeal, emphasizing that the interest payment at a slightly higher rate to related parties, even under section 40A(2)(b), was justified by prevailing market rates. The Tribunal found no undue benefit to related parties and overturned the restriction on interest rate, ruling in favor of the appellant.