2017 (9) TMI 571 - AT - Income Tax

Disallowance of interest expenses u/s 40A(2)(b) - amount received being unsecured loan - Held that - As both the authorities below have not commented upon as to how Sh. Udai Kant Mishra would be covered under the provisions of sec.40A(2)(b). However, having seen the pattern of shareholding, and after taking into consideration the totality of facts and judicial pronouncements, we are of the considered view that the reasonable rate of interest ought to have been adopted at 14% against 12.5% as adopted by the AO in view of the fact that the amount so received being unsecured loan. Moreover, the AO has not given any finding with regard to the market value of the interest which is sine qua non for making disallowance under sec.40A(2)(b). In view of the above observation, the AO is hereby directed to re-compute the disallowance. The ground of the assessee s appeal is partly allowed for statistical purposes

Summary

Issues:
1. Disallowance of interest expenses under section 40A(2)(b) of the Income Tax Act, 1961.

Analysis:
The appeal in this case was filed against the order of the ld. CIT (A)-4, Jaipur pertaining to the assessment year 2012-13. The appellant raised several grounds of appeal challenging the addition made by the Assessing Officer (AO) under section 40A(2)(b) of the Act. The primary contention was that the interest payment was not excessive or unreasonable under the specific circumstances of the case. The appellant argued that the interest payment was in line with prevailing industry norms, and there was no justification for invoking section 40A(2). The AO had disallowed the interest expenses, leading to the addition of ?26,811, which was confirmed by the CIT (A). The appellant further contended that the AO's decision to disallow the interest payment lacked commercial expediency and was contrary to the provisions of section 40A(2)(b) of the Act.

Upon hearing the arguments from both sides, the Tribunal examined the facts and the orders of the lower authorities. The AO had justified the disallowance by stating that the loans were taken for commercial expediency but at a higher interest rate from related parties, which was not in line with market rates. The CIT (A) upheld the AO's decision, emphasizing the need to establish commercial expediency, which the appellant failed to do. However, the Tribunal observed that the AO did not provide findings on how the related party would fall under the purview of sec. 40A(2)(b). Considering the totality of facts and judicial precedents, the Tribunal found that a reasonable interest rate should have been adopted at 14% instead of 12.5% as determined by the AO. Additionally, the AO did not assess the market value of the interest, a crucial aspect for disallowance under sec. 40A(2)(b). Consequently, the Tribunal directed the AO to re-compute the disallowance, partially allowing the appellant's appeal for statistical purposes.

In conclusion, the Tribunal partially allowed the appeal, emphasizing the need for a comprehensive assessment of commercial expediency and adherence to market rates in determining interest expenses under section 40A(2)(b) of the Income Tax Act, 1961.