2017 (1) TMI 55 - AT - Income Tax

Addition u/s 40A(2)(b) - interest payments to related parties over and above 13.2% - Held that - the assessee has paid similar rate of interest to non-related parties. When the assessee is having no control over non-related parties and rate of interest is common in both the cases, payment of interest to non-related parties cannot be considered as not prevailing in the open market during such period. Since, the rate of interest paid to related parties is on par with the rate of interest paid to non-related parties, the A.O. was erred in applying the provisions of section 40A(2)(b) of the Act, to hold that interest payment made to relatives is excessive or unreasonable. The CIT(A) without appreciating the facts simply, followed adhoc rate of interest of 15% to restrict the disallowance made by the A.O. towards interest payments to related parties. Therefore, we are of the view that the A.O. was erred in disallowing interest payments to related parties over and above 13.2%. - Decided in favour of assessee.

Summary

Issues:
Disallowed interest payments under section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
1. The appeal was filed against the order of the CIT(A) for the assessment year 2010-11, concerning interest payments made by the assessee to unsecured loan creditors ranging from 13.2% to 24%, which were disallowed by the Assessing Officer (A.O.).

2. The CIT(A) held that disallowance under section 40A(2)(b) was not applicable to interest paid to non-related parties, directing the A.O. to delete such additions. However, for interest payments to related parties, the CIT(A) directed to restrict disallowance to the amount paid in excess of 15%, based on the precedent set in the assessee's own case for the assessment year 2008-09.

3. The assessee argued that the interest paid to related parties was not excessive or unreasonable, as it was in line with the common rate of interest paid to non-related parties. The A.O. applied a uniform rate of interest based on one creditor's rate, which the tribunal found to be incorrect.

4. The tribunal observed that the provisions of section 40A(2)(b) require disallowance if expenditure is excessive or unreasonable compared to fair market values. Since the assessee paid similar rates to both related and non-related parties, the A.O.'s disallowance was deemed incorrect.

5. Citing relevant case laws, the tribunal concluded that unless interest payments were in excess of market rates, paying different rates to various parties did not render the payments excessive or unreasonable. Therefore, the tribunal deleted the additions made by the A.O. towards disallowance of interest under section 40A(2)(b) for related parties.

6. The tribunal allowed the appeal, emphasizing that the A.O. erred in disallowing interest payments over and above 13.2% to related parties, as the payments were not found to be excessive or unreasonable based on market rates and common practices.

This comprehensive analysis covers the issues involved in the legal judgment, the arguments presented by both parties, the reasoning of the tribunal, and the final decision rendered in favor of the assessee.