Case Law Details
Heena Parag Chheda Vs ACIT (ITAT Mumbai)
It is settled proposition of law that in order to make a disallowance u/s 40A(2)(b), the AO has to first determine the fair market value/price and then compare the same with the actual expenditure incurred and payment made by the assessee to the specified person. In case, the payment made by the assessee to the specified person is excessive and unreasonable having regard to the fair market value/price, the amount found to be excess or unreasonable is liable to be disallowed u/s 40A(2) of the Income-tax Act. Therefore it is precondition for making the disallowance u/s 40A (2) that the AO has to arrive to the conclusion that the amount paid by the assessee is excessive or unreasonable in comparison to the fair market value/price. In the case in hand, the AO has not carried out such exercise to first determine the fair value of interest rate in question by bringing any comparable instance/case So, naturally and undisputedly it would be for the business purpose only. Therefore, in our considered opinion that lower interest received on loan given to related party for business purpose cannot be subjected to provisions of section 40A(2)(b) of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal has been filed by the assessee against the order dated 05/08/2019 passed by the Commissioner of Income-tax (Appeals)-33, Mumbai for the assessment year 2014-15.
2. The only ground of appeal raised by the assessee is that the Ld.CIT (A) has erred in confirming the disallowance of Rs.19, 06,456/- made by the assessing officer.
3. The facts in brief are that the assessee, an individual, is in the business of trading activities in shares and F&O. In the course of assessment proceedings the assessing officer noticed that the assessee has taken interest bearing loan and also advanced the same on interest. Further, it was also seen that during the year, the assessee has paid interest of Rs 1, 43, 82,624/- and also received the interest of Rs 58, 99,173/-. On perusal of the details of interest paid and interest received, it was found that out of total interest paid, the amount of Rs 1,27,09,707/- was paid to the related parties and the interest was paid @ 15% whereas, the loan was given to the firm, wherein the assessee is a partner @12%. Therefore, the AO enquired from the assessee as to why the excess interest paid to the related parties should not be disallowed. The assessee explained the difference between the rate of interest on loan received and paid and submitted that the assessee being a partner in M/s. Aditya Developers , could not have charged more than 12% as per section 40(b)(iv) of the I.T. Act, 1961. The assessing officer vide order dated: 19-12-2016 did not accept the claim of the assessee and held that the assessee had taken the interest bearing fund from the related parties @ 15% and paid to the firm @ 12%. The A.O. further observed A prudent businessman could not have taken the fund at a higher rate from the related parties and advanced the same to the related parties at lower rate. Accordingly A.O. held that provisions of section 40A (2) (b) of the Act clearly attracted in the case of the assessee. Accordingly, A.O. restricted the payment on account of interest paid to related parties @12% and the excess payment @3% which works out to Rs 19,06,456/- was disallowed and added back to the total income of the assessee.
4. On appeal, the Ld.CIT (A) concurred with the action of the assessing officer.
5. Further aggrieved, assessee is in appeal before the Tribunal.
6. We have considered the rival submissions and perused the materials available on record. The Ld.AR of the assessee before CIT(A) placed reliance on the decision of the Tribunal in the case of M/s Navbharat Potteries P Ltd vs DCIT in ITA No2701/Mum/2011 for the proposition that the lower authorities were not justified in making the disallowance under section 40A (2) (b) without giving any reasons as to how the expenditure incurred was not wholly and exclusively for the business of the assessee. Further, in the case of Subhash Chander & Co 31 SOT 11 Asr) for the proposition that the co-relation of the funds contributed by the partners with the rate of interest on which the money is actually lent by the assessee for making disallowance under section 40A2)(b) is misconceived.
7. The Ld. DR, on the other hand, vehemently relied up on the orders passed by the A.O. and the CIT (A).
8. We find that in the case of Motilal Laxmichand Sanghv vs ACIT in ITA Nos 3110, 3111 3112/Mum/2018, the co-ordinate bench of the Tribunal, vide order dated 26/07/2019 has held that 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 loans to the related party and received interest @12%. According to the assessing officer as the assessee paid interest @15% to the parties from whom the assessee availed loans is at higher side. Here one has to bear in mind that the assessee made loans to the partnership firm in which assessee is a partner and can’t charge more than what is prescribed u/s. 40(b) (iv) of the I.T. Act, 1961. It is settled proposition of law that in order to make a disallowance u/s 40A(2)(b), the AO has to first determine the fair market value/price and then compare the same with the actual expenditure incurred and payment made by the assessee to the specified person. In case, the payment made by the assessee to the specified person is excessive and unreasonable having regard to the fair market value/price, the amount found to be excess or unreasonable is liable to be disallowed u/s 40A(2) of the Income-tax Act. Therefore it is precondition for making the disallowance u/s 40A (2) that the AO has to arrive to the conclusion that the amount paid by the assessee is excessive or unreasonable in comparison to the fair market value/price. In the case in hand, the AO has not carried out such exercise to first determine the fair value of interest rate in question by bringing any comparable instance/case So, naturally and undisputedly it would be for the business purpose only. Therefore, in our considered opinion that lower interest received on loan given to related party for business purpose cannot be subjected to provisions of section 40A(2)(b) of the Act. In the present case, having regard to the facts and circumstances referred to hereinabove, the we have arrived to a conclusion that the Assessing Officer has failed to prove by any comparable case or comparison by market rate that the amount paid by the assessee was excessive or unreasonable.
9. Accordingly, we direct the assessing officer to delete the addition made under section 40A (2) (b) of the Act. Ground raised by the assessee is allowed.
10. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 08th March, 2022.
