Motilal Laxmichand Sanghavi Vs ACIT (ITAT Mumbai)
A reading of the provision of section 40A(2) of the Act as a whole makes it clear that if in the opinion of the Assessing Officer, the expenditure claimed by the assessee in respect of payment made to any related party/associated concern is excessive or unreasonable having regard to the fair market value, disallowance has to be made under the said provision.
Therefore, before making any disallowance under the said provision, two conditions have to be satisfied. Firstly, the payment in respect of which deduction has been claimed must have been made to a related party and secondly, such payment must be excessive and unreasonable having regard to the market rate.
Therefore, the Assessing Officer must form an opinion objectively on the basis of material brought on record to demonstrate that the payment made by the assessee is excessive and unreasonable having regard to the market rate. No doubt, in the facts of the present case, the first condition of section 40A(2) of the Act has been fulfilled as the assessee has made the payment to the related parties.
However, as regards the second condition relating to unreasonableness of the payment made, on a perusal of the impugned assessment order it is noticed that the Assessing Officer has not brought any material on record to demonstrate that the payment made is excessive and unreasonable having regard to the market rate.
Simply stating that the rate of interest paid on unsecured loan is higher than the fixed deposit interest rate, the Assessing Officer has restricted the rate of interest on unsecured loans to 12% per annum. The Assessing Officer has not brought any comparable case to demonstrate that the market rate of interest on unsecured loan is 12%. The Assessing Officer cannot equate the rate of interest on bank fixed deposit with unsecured loan as unsecured loans are without any security, hence, the lender always carries the risk of not being able to recover the money.
Therefore, the rate of interest is always little higher compared to the rate of bank interest. The decisions cited by the learned Authorised Representative also support this view.
Therefore, in the facts of the present case, in our considered opinion, the payment of interest @ 15% per annum on unsecured loans availed from related parties cannot be considered to be excessive on unreasonable to invoke the provisions of section 40A(2)(b) of the Act. Accordingly, we delete the disallowances made by the Assessing Officer in all the assessment years under appeal. Grounds are allowed.
FULL TEXT OF THE ITAT JUDGEMENT
