2022 (5) TMI 605 - AT - Income Tax

Ad hoc disallowance made out of the interest paid by the assessee - HELD THAT - As noticed that the assessee paid the interest to the relatives and family members of the directors @ 12%. In the preceding years also the interest was paid at the same rate, which had been accepted by the department while framing the assessments u/s. 143(3) for the A.Ys. 2012-13 to 2014-15. Copies of the assessment orders are placed of the assessee's compilation. It is also noticed that the Ld. CIT(A) had not given any calculation for working out interest @ 6.86% on the loan given to different parties. In the present case assessee's compilation is the copy of list of short term loans and advances as on 31-03-2017, it is noticed that most of the entries were related to the trade advances not the loans. In the present case the AO made ad hoc disallowance @ 20% of the interest paid by the assessee, but he had not given any cogent reason for the same. No comparable case was cited, wherein the rate of interest less than 12% was paid to the persons from whom unsecured loan was raised. It is also not the case of the department that the loans received by the assessee were used elsewhere and not for the business purpose. In the instant case, it is an admitted fact that 80% of the payment of interest was considered as genuine by the AO and the remaining amount was disallowed without any basis. We, therefore, considering the totality of the facts are of the view that the CIT(A) was not justified in sustaining the disallowance made by the AO. Accordingly, the same is deleted. Disallowance of car lease paid to the persons covered u/s. 40A(b) - AO disallowed 20% of the said payment by invoking the provisions of section 40A(2)(b) - HELD THAT - In the present case, it is an undisputed fact that similar payment in the preceding years had been accepted by the department while framing the assessments u/s. 143(3) of the Act for the A.Ys 2012 to 2014-15 and the AO did not bring any material on record to substantiate that lease rent paid by the assessee for Innova car was excessive in comparison to the market rate. In that view of the matter, the disallowance made by the AO and sustained by the Ld. CIT(A) is deleted.

Summary

Issues:
1. Disallowance of interest paid to related parties under section 40A(2)(b) of the Income Tax Act.
2. Disallowance of car lease payment to related parties under section 40A(2)(b) of the Income Tax Act.

Analysis:

Issue 1: Disallowance of Interest Payments
The Assessing Officer (AO) disallowed 20% of interest payments made to related parties by the Assessee, totaling Rs. 11,76,655, under section 40A(2)(b) of the Income Tax Act. The Assessee contended that the interest was paid on deposits exclusively used for business purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, noting a diversion of borrowed funds for non-business purposes. The Assessee argued that the interest rate of 12% was market equivalent. The Tribunal found no justification for the 20% disallowance, as no evidence was presented to substantiate a lower interest rate. The Tribunal observed that past assessments accepted the 12% rate, thus deleting the disallowance.

Issue 2: Disallowance of Car Lease Payment
The AO disallowed 20% of the car lease payment made to a director under section 40A(2)(b) of the Act. The CIT(A) upheld the disallowance, citing lack of evidence on the business use of the car. The Assessee argued that similar payments in previous years were accepted by the department. The Tribunal found no evidence of excessive payment compared to market rates and deleted the disallowance. The Tribunal noted that the AO failed to provide grounds for the disallowance, and past assessments supported the Assessee's position.

In conclusion, the Tribunal allowed the Assessee's appeal, deleting both the disallowance of interest payments and the disallowance of car lease payments to related parties under section 40A(2)(b) of the Income Tax Act.