Section 40A(2)(b) disallowance on coparcener interest failed where the rate was not shown excessive.

Interest paid by an HUF to two coparceners at 15% per annum was examined under section 40A(2)(b) of the Income-tax Act. The payment was compared with interest paid to other parties at 12% per annum, but the higher rate was found not excessive having regard to the prevailing market rate during the relevant assessment year. As the Revenue did not establish that the interest was unreasonable or excessive, section 40A(2)(b) could not be applied to make a disallowance. The addition was therefore deleted.

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Issues: Whether the disallowance made by invoking section 40A(2)(b) of the Income-tax Act, 1961 in respect of interest paid to coparceners at 15% per annum was justified.

Analysis: The addition was made only because interest paid to other parties was 12% per annum. The rate of 15% paid to two coparceners of the assessee-HUF was found not to be excessive having regard to the prevailing rate of interest during the relevant assessment year. Once the payment was not shown to be excessive, section 40A(2)(b) could not be applied to make a disallowance.

Conclusion: The invocation of section 40A(2)(b) was held to be unwarranted and the addition of Rs. 42,112 was deleted.

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