2016 (8) TMI 1435 - AT - Income Tax

Tribunal rules in favor of assessee on interest disallowance under Income Tax Act

The Tribunal ruled in favor of the assessee, directing the deletion of the interest disallowance/addition under section 40A(2)(b) of the Income Tax Act. ... Addition u/s 40A(2)(b) - assessee to have debited interest in P & L account @ 24% as paid to 3 parties as against that paid in other cases @ 18% - benchmarking assessee’s interest rate paid in other cases @ 18% to disallow 6% excessive rate in case of three payees - HELD THAT:- There is not even iota of discussion in the lower orders about market rate of interest. Nor any exercise in this direction seems to have been carried out. As in CIT vs. Sarjan Realities Ltd [2014 (8) TMI 206 - GUJARAT HIGH COURT] holds that the impugned disallowance cannot be invoked solely because an assessee has made interest payments at different rates to various parties. We repeat that there is no other material discussed apart from adopting interest rate @ 18% as paid to other payees. We accordingly follow hon’ble jurisdictional high court decision to delete the impugned interest disallowance/addition. - Decided in favour of assessee. Issues:- Appeal against section 40A(2)(b) disallowance/addition of interest payment at a higher rate compared to other cases.Analysis:The appeal before the Appellate Tribunal ITAT Ahmedabad involved a dispute regarding the disallowance/addition of interest payment under section 40A(2)(b) of the Income Tax Act, 1961. The case pertained to the assessment year 2008-09, where the Assessing Officer had disallowed an amount of Rs. 6,86,717/- under section 40A(2)(b) due to the assessee debiting interest at a higher rate of 24% paid to specific parties compared to the standard rate of 18% paid to others. The CIT(A) had upheld the Assessing Officer's action, leading to the appeal before the Tribunal.Upon hearing both parties, the Tribunal noted that the lower authorities had invoked section 40A(2)(b) to disallow the excessive interest rate paid to certain parties without considering the market rate of interest or conducting any relevant analysis in this regard. Citing a decision by the jurisdictional high court, the Tribunal emphasized that the mere variance in interest rates paid to different parties was not sufficient to justify the disallowance. Relying on the court's ruling, the Tribunal concluded that the impugned interest disallowance/addition could not be sustained solely based on the varying interest rates without further substantiation.Ultimately, the Tribunal ruled in favor of the assessee, allowing the appeal and directing the deletion of the impugned interest disallowance/addition. The judgment highlighted the importance of considering market rates and conducting a thorough analysis before invoking section 40A(2)(b) to disallow interest payments, especially when different rates are paid to different parties. The decision served as a reminder of the necessity to provide adequate justification and evidence when making such disallowances under the Income Tax Act, ensuring fairness and adherence to legal principles.