2022 (10) TMI 561 - AT - Income Tax

Disallowance u/s 57(iii) - AO observed that while giving interest the assessee has consistently paid the interest @12% per annum in majority of the cases, whereas while charging interest, the maximum rate of 9% per annum has been charged by the assessee - AO held that interest expenses claimed by the assessee under Section 57(iii) are not allowable to the extent they are attributable to the lower interest charged by the assessee i.e. lesser than 12% per annum on the advanced made - HELD THAT - CIT(A) has taken a reasonable approach by disallowing 1/4th of interest expenses in the instant facts. The assessee has not brought on record any commercial expediency why the assessee took loans at such high interest rates from related parties to give loans. Notably, the assessee has consistently taken loans at the interest rate of 12% per annum in the majority of the cases, whereas while charging interest, maximum rate of 9% per annum has been charged. The assessee has paid interest at the rate of 12% per annum to a son s HUF but has not charged any interest from the son in his individual capacity against whom there was a closing balance of ₹ 3, 94, 82,000/-. In the instant facts, the assessee took unsecured loans from several parties at rates ranging from 6%, 8%, 8.5% and 12% (totaling to rupees 22,67,99,016/-) and the assessee gave loans amounting to ₹ 22,48,00,614/- at rates ranging from 8-9%. In the instant facts, the assessee has not been able to establish the commercial expediency for taking loans at higher rates and giving the same at lower rates. Accordingly, CIT(A) has not erred in facts and in law in restricting the disallowance to 1/4th of such interest paid at the rate of 12% as being excessive and unreasonable under section 58(2) rws 40 A (2) of the Act. Appeal of the assessee is dismissed.

Summary

Issues:
1. Disallowance of interest expenses under Section 57(iii) of the I.T. Act, 1961.
2. Application of Section 40A(2) in disallowance of interest expenses.
3. Condonation of delay in filing appeal due to Covid-19 pandemic.

Analysis:
1. The appeal was filed against the order of the Ld. CIT(A) regarding the disallowance of interest expenses of Rs. 21,13,971 under Section 57(iii) of the I.T. Act, 1961 for the Assessment Year 2014-15. The Ld. Assessing Officer disallowed the claimed interest expenses due to inconsistencies in interest rates charged and paid by the assessee. The Ld. CIT(A) partially allowed the appeal, disallowing 1/4th of the interest paid to related parties at higher rates, amounting to Rs. 21,13,971. The Tribunal upheld this decision, citing lack of commercial expediency for the interest rate differentials, as per Section 58(2) r.w. 40A(2) of the Act.

2. The application of Section 40A(2) was crucial in determining the disallowance of interest expenses. The Ld. CIT(A) noted that loans were taken at higher rates from specified persons under Section 40A(2)(b) compared to loans from others. The absence of commercial expediency for this discrepancy led to the disallowance of 1/4th of the interest paid to related parties. The Tribunal concurred with this interpretation, emphasizing the need for transactions with related parties to be at market rates as per Section 40A(2)(a).

3. The Tribunal also addressed the issue of the appeal being time-barred by 30 days. However, the delay was condoned due to the Covid-19 pandemic, following the Supreme Court's directive to extend the period of limitation for filing appeals during the pandemic. This decision allowed the appeal to be considered despite the initial delay in filing.

In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the disallowance of interest expenses under Section 57(iii) and Section 40A(2) based on the lack of commercial justification for the interest differentials. The decision also highlighted the impact of the Covid-19 pandemic on the timeline for filing appeals, ensuring the case was heard despite the delay.