2017 (9) TMI 1231 - HC - Income Tax

Dis-allowance of interest paid to a related concern invoking Section 40A (2) - assessee have availed unsecured loan from the HUF - Held that - Section 40A(2), makes it clear that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in Clause(b) of the Section and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the facilities for which payment is made or the legitimate needs of the business or profession of the assessee, it is open to the Assessing Officer to disallow so much of the expenditure as is considered by him to be excessive and unreasonable. Having regard to the factual finding of the Assessing Officer which have been confirmed by the first appellate authority and the Tribunal, we feel that the deduction is perfectly justified in the light of Section 40A(2). We do not find any questions of law arising in this case to be considered by this Court.

Summary

Issues:
- Interpretation of Section 40A(2) of the Income Tax Act in relation to interest paid to a related concern.
- Justification of disallowance of interest paid to a related concern under Section 40A(2).

Analysis:

Issue 1: Interpretation of Section 40A(2)
The appeals in question challenge the orders passed by the Income Tax Appellate Tribunal concerning the Assessment Years 2009-10 and 2012-13. The primary issue raised is whether the disallowance of interest paid to a related concern by invoking the provisions of Section 40A(2) of the Income Tax Act is justified. The questions of law raised revolve around the interest paid to a Hindu Undivided Family (HUF) where only a few coparceners were partners of the appellant firm. The Assessing Officer found discrepancies in the interest paid to the HUF compared to the maximum interest the firm would have been liable to pay, leading to the addition of the excess interest amount to the total income returned.

Issue 2: Justification of Disallowance under Section 40A(2)
For the Assessment Year 2009-10, the assessee had availed an unsecured loan from the HUF, with a significant portion of the loan amount being transferred by the partners of the firm to the HUF. The Assessing Officer noted that the interest paid to the HUF was higher than what the partners would have earned if the amount remained in their current account. As the firm failed to provide evidence that the interest paid was for the benefit of the business, the Assessing Officer invoked Section 40A to disallow the excess interest amount. A similar situation was observed for the Assessment Year 2012-13, where the Assessing Officer, along with the first appellate authority and the Tribunal, confirmed the justification for disallowing the excessive interest payment under Section 40A(2). The court found no legal questions warranting consideration and dismissed the appeals accordingly.

In conclusion, the High Court upheld the decision to disallow the interest paid to a related concern under Section 40A(2) for both Assessment Years, emphasizing the need for justifiable and reasonable expenditure in line with the provisions of the Income Tax Act.