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Interest Payment at 15% u/s 40A(2)(b) to related parties is not considered to be excessive

Sub Logo - Case LawsCLR Editorial Notes:  This appeal was presented by the assessee for the assessment year 2007-2008 which was directed against the order of the CIT(A)-XXI. The contention of the assessee was that the CIT (A) had erred in confirming the addition u/s 40A(2)(b) of a said amount which was alleged to be an excessive payment of interest by 3%, and also overlooked the submissions tendered during the course of appellate hearing. The assessee said that the CIT(A) should have deleted the addition of the said amount.

On hearing the counsel of the assessee, the Tribunal held:

“The only reason advanced for making disallowance out of the interest paid to two coparceners was that the interest paid to other parties was at 12% per annum. We find that the interest paid to two coparceners at the rate of 15% could not be said to be excessive, considering the prevailing rate of interestduring the relevant assessment year 2007-2008. Once it is found that the rate of interest paid to two coparceners at 15% is not excessive, no disallowance could be made by invoking the provisions of Section 40A(2)(b) of the Act. The loans raised from two coparceners could be safely relied upon by the assessee-HUF as the coparceners may not demandthe amount of loan back in the near future and the level of confidentiality is obviously more with regard to these coparceners. In view of the fact that the interest paid to coparceners at the rate of 15% could not be said to be excessive, we hold that the provision of Section 40A(2)(b) was wrongly invoked in this case. Accordingly, the addition of Rs.42,1 12/- is deleted and the ground of the appeal of the assessee is allowed.”

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Case Details 

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ITAT AHMEDABAD, A BENCH

ITA No.2370/Ahd/2010

[Asstt. Year : 2007-2008]

Shri Hitesh Narendrabhai Shah (HUF) Vs. ITO

Date of Hearing : 04-01-2013

O R D E R

PER G.C. GUPTA, VICE-PRESIDENT: This appeal by the assessee for the assessment year 2007-2008 is directed against the order of the CIT(A)-XXI, dated 14.5.20 10.

2. The only issue in this appeal of the assessee is as under:

1. On the facts and in circumstances of the case and in law, the ld. CIT(A) has erred in confirming the addition u/s.40A(2)(b) of Rs.42,112/- being alleged excessive payment ofinterest by 3% overlooking the submissions tendered during the course of appellate hearing. The ld. CIT(A) out to have deleted the addition Rs.42,112/-.

3. The learned counsel for the assessee submitted that the assessee has paid interest at the rateof 15% per annum to the creditors, whereas the Revenue has allowed interest at the rate of 12% and has added back the difference of 3% interest under Section 40A(2)(b) of the Act. He submitted that the interest paid at the rate of 15% to two coparceners of the assessee-HUF could not be called excessive. The learned DR has relied on the orders of the AO and the CIT(A).

4. We have considered rival submissions and have perused the orders of the AO and the CIT(A). We find that the only reason advanced for making disallowance out of the interest paid to two coparceners was that the interest paid to other parties was at 12% per annum. We find that the interest paid to two coparceners at the rate of 15% could not be said to be excessive, considering the prevailing rate of interest during the relevant assessment year 2007-2008. Once it is found that the rate of interest paid to two coparceners at 15% is not excessive, no disallowance could be made by invoking the provisions of Section 40A(2)(b) of the Act. The loans raised from two coparceners could be safely relied upon by the assessee-HUF as the coparceners may not demandthe amount of loan back in the near future and the level of confidentiality is obviously more with regard to these coparceners. In view of the fact that the interest paid to coparceners at the rate of 15% could not be said to be excessive, we hold that the provision of Section 40A(2)(b) was wrongly invoked in this case. Accordingly, the addition of Rs.42,1 12/- is deleted and the ground of the appeal of the assessee is allowed.

5. In the result, the appeal of the assessee is allowed.

*****

Order pronounced in Open Court on the date mentioned hereinabove.

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