2024 (2) TMI 1105 - AT - Income Tax

Disallowance of interest expenditure u/s 40A(2)(b) - interest paid to related parties - Addition on the ground that the appellant had the enough funds to pay the debts and the borrowings from the related parties were not necessary - HELD THAT - In the present case, it is pertinent to note that it is not anybody s case that the interest has been paid by the assessee to its partners and rather fact of the case is that the assessee has availed unsecured loans from its related persons at the interest rate of 18% per annum. Thus, we find no merits in the reliance placed by the learned CIT(A) on the aforesaid provision for justifying the rate of interest at 12%. Since, in the present case, the relevant material for determining the fair market value of the interest rate for availing unsecured loans has not been examined, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. In the interest of justice, one more opportunity is granted to the assessee to furnish the relevant material/documents to justify its claim that payment of interest @18% is at fair market value. With the above directions, the impugned order on this issue is set aside and ground no. 1 raised in assessee s appeal is allowed for statistical purposes. Addition on account of notional interest on the amount lying idle in assessee s bank account - HELD THAT - From the perusal of the summary, duly supported by the statements of the bank accounts of the assessee maintained with the Bank of Bahrain and Kuwait as well as HDFC Bank, we find that prior to the payment to various airlines such as Jet Airways, Global Aviation, Cathay Pacific, Air France, etc. assessee s bank accounts are maintaining huge balance, however after the payment to the aforesaid airlines the balance in assessee s accounts even goes down to negative balance. Thus, we agree with the submissions of the assessee that it needs funds for its working capital to run the business. Therefore, we find no merits in the findings of the AO on this issue. Thus as huge funds in assessee s bank account were required for the purpose of working capital and were paid to various airlines during the course of its business as a freight agent - aforesaid addition has been made by the AO without invoking any provision of the Act, and therefore in our considered view, also lacks the authority of law. The impugned addition is set aside. As a result, ground no. 2 raised in assessee s appeal is allowed. Disallowance of transportation charges - Appellant has not deducted TDS thereon as applicable - HELD THAT - During the hearing, the learned AR by referring to the provisions of section 194C(6) of the Act submitted that TDS under this provision is not required to be deducted while crediting or paying a sum to the transporter upon the furnishing of PAN of the transporter to the person paying or crediting such sum. AR submitted that the assessee must have provided the PAN to the AO during the assessment proceedings, however, there is no documentary evidence, at present, regarding the same. In the interest of justice, we grant one more opportunity to the assessee to provide the PAN of the transporter to AO in order to prove the compliance of provisions of section 194C(6) of the Act. Accordingly, this issue is restored to the file of the AO for de novo adjudication.

Summary

Issues Involved:
1. Disallowance of interest expenditure under section 40A(2)(b) of the Income Tax Act, 1961.
2. Addition on account of notional interest on idle bank account funds.
3. Disallowance of transportation charges due to non-deduction of TDS.

Summary:

Issue 1: Disallowance of Interest Expenditure under Section 40A(2)(b)
The assessee challenged the disallowance of Rs. 12,88,528/- (A.Y. 2014-15) and Rs. 19,02,573/- (A.Y. 2015-16) being interest paid to related parties. The AO disallowed the interest above 12%, considering it excessive compared to the average bank rates. The CIT(A) upheld this, citing the assessee's sufficient own funds and the 12% benchmark from section 40(b)(iv). The Tribunal found the AO's comparison with bank rates unsubstantiated and noted the unsecured nature of the loans. The matter was remanded to the AO for fresh adjudication, allowing the assessee to justify the 18% interest rate with relevant material.

Issue 2: Addition on Account of Notional Interest
The AO added Rs. 6,00,000/- for both assessment years as notional interest on idle bank balances, arguing that the assessee unnecessarily borrowed funds while maintaining high bank balances. The CIT(A) upheld the AO's findings. The Tribunal, however, accepted the assessee's explanation that high balances were necessary for timely payments to airlines. The addition was set aside, noting the lack of legal basis for the AO's action.

Issue 3: Disallowance of Transportation Charges
The AO disallowed Rs. 4,35,081/- (A.Y. 2014-15) due to non-deduction of TDS on transportation charges paid to Mr. Jitendra M. Pawaskar. The CIT(A) upheld this partial disallowance. The Tribunal restored the issue to the AO for verification of the transporter's PAN to ensure compliance with section 194C(6). The assessee was given another opportunity to provide the necessary details.

Conclusion:
Both appeals by the assessee for the assessment years 2014-15 and 2015-16 were allowed for statistical purposes, with directions for de novo adjudication by the AO on the disallowance of interest expenditure and transportation charges. The addition on account of notional interest was set aside.