2021 (6) TMI 341 - AT - Income Tax

Addition u/s 40A(2) - assessee has paid interest to certain related parties and treated interest rate @ 15% reasonable and disallowed excess rate paid to related parties u/s.40A(2) - HELD THAT - When a person takes a loan from anyone it depends upon time and circumstances on which interest rate can be determined. In case if anyone to swipe credit card from an ATM and withdraw money out of ATM he has to pay interest rate between 30% to 36% and at a same time, if he approaches credit card issuing bank/NBFC though it takes 2 to 3 days time in that case credit card holder is liable to pay interest rate @ 15% to 24% however different banks/NBFC s are having different interest rates for business loan if any one require loan in emergency from local money lenders then in that case one has to pay interest rate between 48% to 60%. So in our considered opinion in this case difference of interest which was received by the assessee or paid by it is just 1.25% per annum so same cannot be termed as unreasonable. We allow appeal of the assessee.

Summary

Issues:
1. Disallowance under section 40A(2) of the Act
2. Addition under section 40A(2) without determining fair market rate of interest
3. Alleged breach of law and Principles of Natural Justice by lower authorities
4. Levying of interest under section 234A/B/C of the Act
5. Initiating penalty under section 271(1)(c) of the Act

Issue 1: Disallowance under section 40A(2) of the Act
The Assessing Officer (AO) found that the appellant had shown unsecured loans and total interest payments, asking for proofs regarding the lenders' identity, genuineness, and creditworthiness. The AO disallowed an amount as excessive interest under section 40A(2) without proper justification, leading to the addition of ?34,79,788 to the appellant's total income. The first statutory appeal before the CIT(A) upheld the AO's decision due to the appellant's failure to justify the higher interest rate paid to certain parties.

Issue 2: Addition under section 40A(2) without determining fair market rate of interest
The appellant challenged the addition made by the AO in a second statutory appeal. The ITAT observed discrepancies in the AO's claim that the appellant agreed to the disallowance amount. The appellant contended that it never accepted the addition and provided details of interest paid to different parties. The ITAT found that the appellant paid interest at varying rates and justified the payments based on market rates, leading to the dismissal of the revenue's appeal.

Issue 3: Alleged breach of law and Principles of Natural Justice by lower authorities
The lower authorities were accused of not properly appreciating facts, ignoring submissions, and breaching Principles of Natural Justice. However, the ITAT found in favor of the appellant after considering the appellant's justifications and the Gujarat High Court judgment, which emphasized that different interest rates to different parties do not necessarily indicate excessive or unreasonable payments.

Issue 4: Levying of interest under section 234A/B/C of the Act
The CIT(A) confirmed the AO's action of levying interest under sections 234A/B/C of the Act. However, the ITAT's decision focused on the disallowance under section 40A(2) and the justifications provided by the appellant regarding the interest rates paid to related and unrelated parties.

Issue 5: Initiating penalty under section 271(1)(c) of the Act
The CIT(A) also confirmed the AO's decision to initiate a penalty under section 271(1)(c) of the Act. However, the ITAT's judgment primarily revolved around the disallowance under section 40A(2) and the appellant's arguments regarding the reasonableness of the interest rates paid.

In conclusion, the ITAT allowed the appeal filed by the Assessee based on the justifications provided regarding the interest rates paid to different parties, emphasizing the relevance of market rates and the absence of excessive or unreasonable payments.