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2022 (2) TMI 425 - AT - Income TaxDisallowance of excess interest paid to related persons specified u/s 40A(2)(b) - AO restricted the interest payment @12% p.a. and made the disallowance - HELD THAT - Assessee has paid interest to several parties and paid interest between 11.5% to 18% during this assessment year and assessee has taken loans from specified persons, viz. Dura Tech and Hemali Gada and paid interest to them @15% to 17%, respectively. Since the unsecured loan availed by the assessee from several parties, and agree that the risk to non specified persons is more than the specified persons and Ld.CIT(A) has pegged the rate @15% whereas assessing officer restricted it at 12%. Considering the information available on record, in our considered view, Ld.CIT(A) has pecked @15% which is reasonable when compared to the average rate of unsecured loan for the whole assessment year, it will be more or less 15%. Therefore, we do not see any reason to disturb the findings of Ld.CIT(A). Accordingly, ground raised by the assessee is dismissed. TDS on interest payment - HELD THAT - We observe from the record and submissions made by Ld.AR and have gone through the forms which were filed by the recipients of interest which shows that these forms were filed specifically for assessment year 2014-15. The informations submitted before us indicate all the relevant informations required to make the claim of interest without deducting tax at source. We do not see any reason to reject of the claim of the assessee. Therefore, we direct the assessing officer to allow the claim of the assessee to the extent the amounts are mentioned in the above said form 15G / 15H. Accordingly ground raised by the assessee is allowed. Allowability of Expenditure incurred towards purchase, labour and site expenses - HELD THAT - We observe that assessee has claimed the expenditure in the year of actual addition to the cost of the project. However, the bills were raised in the next assessment year i.e. in F.Y. 2014-15 (AY 2015-16). As a prudent method of accounting adopts the income and expenditure on matching principle. The cost is incurred but the actual bills were raised in the subsequent year. It does not change the character of the expenditure but only timing to record the bills. In actual, all the costs incurred are charged to work-in-progress. It does not make any difference when actual bills are recorded. The important thing is whether the cost is incurred for the project. Therefore, in our considered view, the addition sustained by the learned CIT(A) is not proper and accordingly, the ground raised by the assessee is allowed.
Issues Involved:
1. Disallowance of excess interest paid to related persons under section 40A(2)(b) of the Income Tax Act, 1961. 2. Disallowance for non-deduction of TDS on interest under section 40(a)(ia) of the Income Tax Act, 1961. 3. Disallowance of expenses accounted for on an accrual basis under Site Expenses under the head Business Income. Detailed Analysis: Issue 1: Disallowance of Excess Interest Paid to Related Persons under Section 40A(2)(b) - Facts: The assessee paid interest to two related parties, Dura Tech and Hemali Gada, at rates of 17% p.a. and 15% p.a., respectively. The Assessing Officer (AO) deemed these rates excessive and restricted the allowable interest rate to 12% p.a., resulting in a disallowance of ?26,88,640. - Assessee’s Argument: The assessee contended that the interest rates were reasonable given the market conditions and the unsecured nature of the loans. They cited various case laws to support the claim that the AO should not substitute his judgment for that of the businessman regarding the necessity and reasonableness of the expenditure. - CIT(A) Decision: The CIT(A) found merit in the assessee’s argument, noting that unsecured loans carry higher risks and thus justify higher interest rates. The CIT(A) deemed a 15% interest rate reasonable for both parties, allowing the interest payment to Hemali Gada in full but disallowing 2% of the interest paid to Dura Tech. - ITAT Decision: The ITAT upheld the CIT(A)’s decision, agreeing that a 15% interest rate was reasonable given the average rate of unsecured loans during the assessment year. The ground raised by the assessee was dismissed. Issue 2: Disallowance for Non-Deduction of TDS on Interest under Section 40(a)(ia) - Facts: The AO disallowed ?7,64,567 of interest payments due to the assessee’s failure to deduct tax at source. The assessee argued that the recipients had declared their income below the taxable limit but failed to provide Form 15G/15H. - CIT(A) Decision: The CIT(A) upheld the disallowance, noting that the forms submitted were defective and did not cover the recipients under section 197A of the Act. - ITAT Decision: The ITAT reviewed the forms and found them compliant for the assessment year 2014-15. The ITAT directed the AO to allow the assessee’s claim to the extent covered by the submitted forms. The ground raised by the assessee was allowed. Issue 3: Disallowance of Expenses Accounted for on an Accrual Basis under Site Expenses - Facts: The AO disallowed 25% of the differential expenditure of ?2,04,92,992 due to the assessee’s failure to provide complete supporting evidence for site expenses. The assessee argued that the expenses were legitimate business expenditures and provided partial documentation. - CIT(A) Decision: The CIT(A) noted the arbitrary nature of the AO’s disallowance and provided partial relief. The CIT(A) disallowed ?54,22,325 of site expenses for which bills were raised in the subsequent year but agreed to recompute the closing stock value accordingly. - ITAT Decision: The ITAT found that the expenses were incurred for the project and should be considered part of the work-in-progress, regardless of the timing of the bills. The ITAT allowed the ground raised by the assessee, disagreeing with the CIT(A)’s partial disallowance. Conclusion: The appeal filed by the assessee was partly allowed. The ITAT upheld the CIT(A)’s decision on the reasonableness of the interest rate under section 40A(2)(b) but allowed the assessee’s claims regarding the non-deduction of TDS and the disallowance of site expenses. The order was pronounced on 03/01/2022.
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