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2013 (5) TMI 50 - HC - Income TaxInterest under Section 40A(2) - excessive interest having been paid by the assessee to his relatives - Held that - As decided in CIT v. Oriental Structural Engineers Private Limited 2010 (2) TMI 21 - NEW DELHI HIGH COURT whether expenses claimed by an assessee were excessive or not under the provisions of Section 40A(1) was essentially a question of fact. As decided in Upper India Publishing House (P) Limited v. CIT 1978 (12) TMI 2 - SUPREME COURT that the question whether a particular expenditure or loan was excessive and unreasonable, was essentially a question of fact and did not involve any issue of law. Thus in view of the authoritative pronouncement by the Supreme Court on the issue of expenses being excessive or not in terms of Section 40A(2) the present question sought to be raised by the revenue is not a question of law but is a question of fact which has been determined finally by the Tribunal by virtue of its impugned order. In favour of assessee.
Issues:
Challenge to order under Section 40A(2) of the Income Tax Act for disallowance of interest paid to relatives at a rate exceeding 12%. Analysis: The appeal before the Delhi High Court was against an order passed by the Income Tax Appellate Tribunal concerning the assessment year 2007-08. The issue revolved around the disallowance of interest under Section 40A(2) of the Income Tax Act. The Assessing Officer had added an amount under Section 40A(2) due to excessive interest paid by the assessee to relatives, who qualified as "relatives" under the Act. The crux of the matter was whether the rate of interest exceeding 12% paid to relatives was justifiable. The revenue contended that the excess interest was rightly added by the Assessing Officer, while the assessee argued that unsecured loans from relatives naturally attract higher interest rates, and the rates agreed upon were reasonable given the circumstances. The assessee's counsel referred to a decision by the Delhi High Court in a similar matter, emphasizing that the determination of whether expenses claimed by an assessee were excessive under Section 40A(1) is a question of fact. The counsel also cited a Supreme Court decision stating that assessing the reasonableness of a particular expenditure or loan is a factual inquiry, not a legal issue. The High Court, relying on the Supreme Court's authoritative pronouncement, concluded that the question raised by the revenue was one of fact already decided by the Tribunal in its order. Therefore, the High Court found no grounds for interference and dismissed the appeal, with no order as to costs. In summary, the High Court upheld the Tribunal's decision, emphasizing that the reasonableness of expenses under Section 40A(2) is a factual determination. The Court's analysis focused on the nature of the loans, the rates of interest agreed upon with relatives, and the precedents establishing that such assessments involve factual inquiries rather than legal issues. The appeal was dismissed, affirming the Tribunal's order on the disallowance of interest paid to relatives at rates exceeding 12%.
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