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2009 (1) TMI 357 - AT - Income TaxDisallowance u/s.40A(2)(b) - Addition of excess interest paid to the related parties - difference between the interest paid to related partis and to unrelated parties - AO was of the opinion that payment of 15 per cent interest per annum to related parties was excessive as compared to payment of 12 per cent interest per annum to unrelated parties. HELD THAT - There is no dispute that the payment of interest @ 15 per cent per annum by the assessee was to persons specified in s. 40A(2)(b). As per the provisions of Section 40A(2)(a), disallowance can be made where the AO is of the opinion that the expenditure in respect of which payment had been made to any person referred to in Section 40A(2)(b), is excessive or unreasonable having regard to the fair market value of the goods, services or facilities, for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing therefrom - In the present case, AO was of the opinion that payment of 15 per cent interest per annum to related parties was excessive as compared to payment of 12 per cent interest per annum to unrelated parties. However, the requirement of s.40A(2)(a) is that the opinion of the AO regarding the expenditure for excessive or unreasonable must be having regard to the fair market value of the goods/services/facilities for which the payment is made or the legitimate needs of the business of the assessee or benefit derived by or accruing therefrom. As to under which of these requirements the case of the assessee falls, has not been stated either by the AO or by the ld CIT(A). So far as regards the fair market value, it is undeniable that 15 per cent interest per annum is neither excessive nor unreasonable. Moreover, as held in S.A. Builders Ltd. vs. CIT 2006 (12) TMI 82 - SUPREME COURT , the Revenue cannot justifiably claim to put itself in the armchair of the businessman and assume the role to decide as to how much expenditure is reasonable having regard to the circumstances of the case; no businessman can be compelled to maximize his profit; the IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act; and that the authorities must not look at the matter from their viewpoint, but that of a prudent businessman impelled by commercial expediency. In view of the above, finding merit in the grievance of the assessee, we hereby accept the same. As such, the order of the ld CIT(A) is set aside and disallowance made by the AO and confirmed by the ld CIT(A) is cancelled. Appeal of the assessee is allowed.
Issues: Appeal against addition in income on account of excessive interest disallowed under Section 40A(2)(b) and charging of interest under Sections 234A and 234D of the IT Act.
Analysis: 1. Excessive Interest Disallowed under Section 40A(2)(b): The AO disallowed interest paid by the assessee @ 15% per annum to related parties under Section 40A(2)(b) of the IT Act, deeming it unreasonable compared to interest paid to unrelated parties @ 12%. The assessee argued that the interest rate was based on long-term family loans without security, falling outside Section 40A(2)(b). The AO's opinion lacked justification under Section 40A(2)(a), as it did not consider fair market value or legitimate business needs. Citing precedents, the Tribunal noted that 15% interest was reasonable, emphasizing that authorities must view expenses from a businessman's perspective. Consequently, the disallowance was canceled, and the appeal allowed. 2. Charging of Interest under Sections 234A and 234D: The issue of charging interest under Sections 234A and 234D of the IT Act was deemed consequential to the primary issue of excessive interest disallowance under Section 40A(2)(b). Since the disallowance was overturned, the consequential charging of interest under Sections 234A and 234D was also set aside. Ultimately, the order of the CIT(A) was overturned, and the disallowance made by the AO was canceled, resulting in the allowance of the assessee's appeal.
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