Case Law Details
Shantiniketan Properties Pvt. Ltd. Vs ACIT (ITAT Delhi)
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Delhi in the case of Shantiniketan Properties Pvt. Ltd. vs. ACIT held that higher tax rate of interest payments made under commercial expediency does not attract disallowance under Section 40A(2) of the Income Tax Act. The ruling emphasizes the significance of commercial considerations and the absence of loss to tax revenue in such scenarios.
The case came to the tribunal due to an appeal against the disallowance of interest paid on loans obtained from corporate entities. The assessing officer deemed these not for business purposes and claimed that the interest was excessive in nature. However, the assessee argued that the higher interest rate was paid under commercial expediency and that the alleged excessive payment was based on assumptions and speculations.
The tribunal noted the Bombay High Court’s judgments in similar cases where it was held that if the sister concern is also paying tax at a higher rate, the disallowance of alleged excess payment of interest to the sister concern is not justified. In essence, the tribunal found no plausible reason to disallow interest payments to associate concerns, provided they are also assessed to tax and paying tax at higher rates.
Conclusion: This ruling sets a precedent that payment of a higher rate of interest under commercial expedience does not amount to evasion of tax, and thus does not attract any disallowance. This decision provides clarity on the applicability of section 40A(2) of the Income Tax Act and serves as a significant relief to taxpayers who engage in transactions under similar circumstances. The order sheds light on the importance of considering commercial expediency and the tax status of associated entities in such matters.
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