2016 (7) TMI 1657 - AT - Income Tax

Disallowance on account of interest on unsecured loans paid in excess of 18% to the persons specified u/s 40A(2)(b) - Whether AO is empowered to make disallowance by invoking the provisions of section 40A(2)( b)? - HELD THAT - There is no dispute with regard to the fact that the amount was borrowed for the purpose of business and the assessee has claimed payment of interest @ 24% p.a. - AO considering the same as unreasonable and excessive restricted @ 18%. The revenue has not placed any material under the identical facts and circumstances that the fair market rate of interest is lower than what the assessee has claimed. As per section 40A(2)(b) AO has to give a finding having regard to the fair market rate. In the present case no such finding is given. The assessee has placed reliance on the two decisions of the Coordinate Bench of the Tribunal rendered in the case of Ram Avtar Garg 2010 (5) TMI 715 - ITAT JAIPUR pertaining to A.Y. 2005-06 and in assessee s own case in pertaining to A.Y. 2010-11 wherein the Coordinate Benches have allowed the interest @ 24% being fair market rate. The facts of the present case are identical. The revenue has not brought any contrary material on record suggesting that the rate so claimed by the assessee is excessive of the fair market rate as prevalent during the year under appeal. Therefore we hereby direct the AO to delete the disallowance made on account of interest on fair market rate paid in excess of 18% to the persons specified under section 40A(2)( b) - Appeal of assessee allowed.

Summary

Issues involved:
1. Disallowance of interest on unsecured loans paid in excess of 18% under section 40A(2)(b) of the IT Act.
2. Disallowance of interest paid on delayed payment of income tax.

Analysis:

Issue 1: Disallowance of interest on unsecured loans paid in excess of 18% under section 40A(2)(b) of the IT Act:
The appeal addressed the disallowance of Rs. 6,92,942 on interest paid on unsecured loans exceeding 18% to specified persons under section 40A(2)(b) of the IT Act. The AO had initially disallowed the interest, which was upheld by the CIT (A). The Tribunal considered the matter, noting that the AO did not provide any reasoning on the excessive nature of the interest paid. The assessee argued that in similar cases, the Tribunal had allowed interest at 24% as the fair market rate. The Tribunal found no evidence presented by the revenue to suggest that the claimed interest rate was above the fair market rate. Relying on previous decisions, the Tribunal directed the AO to delete the disallowance, concluding that the interest paid was not excessive. The appeal on this ground was allowed.

Issue 2: Disallowance of interest paid on delayed payment of income tax:
The counsel for the assessee decided not to press ground no. 2 of the appeal, which pertained to the disallowance of Rs. 93,668 on interest paid for delayed income tax payment. Consequently, ground no. 2 was dismissed as not pressed. Ground no. 3, being general in nature, required no separate adjudication. Ground no. 4 was rejected due to the absence of arguments. Therefore, the only ground for adjudication remained the disallowance of interest on unsecured loans, as discussed above.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the deletion of the disallowance of interest on unsecured loans paid in excess of 18% as it was found not to be unreasonable or excessive. The judgment provided a detailed analysis of the legal provisions under section 40A(2)(b) of the IT Act and emphasized the importance of determining the fair market rate of interest in such cases.