2018 (4) TMI 629 - AT - Income Tax

Disallowance u/s.40A(2)(b) - disallowance of interest invoking the provisions of Section 40A(2)(b) of the Act for the reason that to some related parties - assessee has paid the interest at the rate of 12.5%, 12% and 10% and on certain lending to the related parties interest has been charged at the rate of 8% or lower rate - Held that - Since the business of the appellant was of financing, these interest rate keeps on changing depending upon the demand and supply of fund requirements. Since the assessee first has having the surplus funds and there was no demand that is why the surplus funds given to the parties on lower rate of interest. Further also it was argued by the ld. AO that the interest rates depend upon various other factors also like the borrowed/advances are call money or for fixed period. Jurisdictional High Court in the matter of Aaditya Medicals Ltd. vs. CIT 2010 (5) TMI 823 - GUJARAT HIGH COURT wherein, the interest at the rate of 24% to the related parties was treated to be allowable. Thus it does not warrant any disallowance u/s.40A(2)(b) of the I.T. Act. Arguments of Ld. AR that interest depend upon the number of factors such as amount of loan, period of loan, creditworthiness of the parties etc. - Decided against revenue

Summary

Issues: Appeal against disallowance of interest under section 40A(2)(b) of the Income Tax Act for the Assessment Year 2011-12.

Analysis:
1. The Revenue appealed against the Commissioner of Income Tax (Appeals) order concerning the disallowance of interest amounting to ?35,90,804 under section 40A(2)(b) of the Income Tax Act. The Revenue contended that the CIT(A) erred in allowing the appeal without properly appreciating the facts of the case and should have upheld the Assessing Officer's order.
2. During the assessment, it was observed that the assessee had accepted unsecured loans from 34 parties and given loans to 21 parties. The Assessing Officer noted discrepancies in the interest rates charged and paid by the assessee to related and unrelated parties, leading to a net loss from related parties and a net income from unrelated parties.
3. The Assessing Officer calculated the disallowance of interest based on the difference in interest rates charged and paid to related parties. The CIT(A) partly allowed the appeal, leading to the Revenue's appeal before the ITAT.
4. The ITAT considered the arguments presented, including the fluctuation of interest rates based on various factors like loan amount, period, and creditworthiness of parties. The ITAT referred to a High Court judgment where interest at a high rate to related parties was deemed allowable, thus rejecting the disallowance under section 40A(2)(b) of the IT Act.
5. Ultimately, the ITAT dismissed the Revenue's appeal, emphasizing that interest rates are influenced by multiple factors, and in line with the High Court's decision, no disallowance was warranted under section 40A(2)(b) of the IT Act.
6. The judgment was pronounced on 04/04/2018, upholding the CIT(A)'s decision and dismissing the Revenue's appeal.