2016 (4) TMI 43 - HC - Income Tax

Disallowance u/s 40A - Whether the Appellate Tribunal has erred in law and on fact in holding that payment of interest @ 15% and 16% to the persons covered u/s 40A(2)(b) is commensurate with the prevailing market rate? - Held that - Tribunal has recorded a finding of fact to the effect that the interest paid by the assessee to the persons mentioned under section 40A(2)(b) is commensurate with the interest rate prevailing in the open market. In the light of such finding of fact, it is not possible to state that the conclusion arrived at by the Tribunal that the assessee has not extended any undue benefit to the persons covered under section 40A(2)(b) of the Act, suffers from any legal infirmity warranting interference. The said ground of appeal is, therefore, rejected. Appeal admitted on second question of law Whether the Appellate Tribunal has erred in law and on fact in deleting the amount of ₹ 2,63,12,188/- treated by the Assessing Officer as deemed dividend u/s 2(22)(e) of the Act in this case?

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal regarding interest payment under section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961.

Analysis:

Issue 1:
The appellant contested the order of the Income Tax Appellate Tribunal concerning the payment of interest to individuals covered under section 40A(2)(b) of the Income Tax Act, 1961. The appellant raised questions regarding the adequacy of the interest rates paid and whether any undue benefit was extended to the individuals. The Tribunal emphasized that if an assessee provides undue benefits to related parties, the deduction claimed for such benefits should be disallowed. The Tribunal assessed the fair market value of the interest paid by the appellant and concluded that the interest rates were commensurate with prevailing market rates. The Tribunal found that the appellant had not provided any undue benefit to the related parties and rejected the appeal. It was noted that the interest paid was in line with market rates, and the appellant had not violated any legal provisions.

Issue 2:
Regarding the second proposed question, the court deemed it necessary for further consideration. The Tribunal had deleted an amount treated as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The court admitted the question for consideration to determine whether the Tribunal's decision to delete the said amount was justified. The substantial question of law arising for consideration was whether the Tribunal's action in deleting the amount treated as deemed dividend was in accordance with the provisions of the Income Tax Act, 1961. This issue required a more detailed examination by the court to determine the legality and correctness of the Tribunal's decision.

In conclusion, the judgment addressed the challenges raised by the appellant regarding interest payments under section 40A(2)(b) and the deletion of deemed dividend under section 2(22)(e) of the Income Tax Act, 1961. The Tribunal's findings on the interest payments being in line with market rates were upheld, while the court decided to further analyze the deletion of the deemed dividend amount.