Tribunal adjusts interest disallowances, emphasizes fair market rates for tax deductions.

The Tribunal partly allowed the appeal, deleting the disallowance under section 40A(2)(b) for excessive interest payment and reducing the disallowance under section 36(1)(iii) for interest expenses on advances. The Tribunal emphasized the necessity of comparing fair market rates before disallowing payments under section 40A(2)(b) and adjusted the disallowance under section 36(1)(iii) to a proportionate amount.

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Issues:
1. Disallowance of interest payment under section 40A(2)(b)
2. Disallowance of interest expenses under section 36(1)(iii)

Issue 1: Disallowance of interest payment under section 40A(2)(b):
The appeal was against the order disallowing a portion of interest payment made by the assessee to certain parties under section 40A(2)(b). The Assessing Officer disallowed &8377; 5,00,094/- as excessive interest payment. The assessee argued that the disallowance was not sustainable as no comparable case regarding fair market rates was presented by the AO. The assessee cited relevant judgments to support their case. The Tribunal noted that the authorities did not assess the prevailing market rate of interest before disallowing the excess payment. Relying on a Jurisdictional High Court judgment, it was established that before disallowing under section 40A(2)(b), the fair market price comparison is essential. Since this comparison was missing in the lower authorities' orders, the Tribunal deleted the addition.

Issue 2: Disallowance of interest expenses under section 36(1)(iii):
The Assessing Officer disallowed &8377; 6,00,000/- under section 36(1)(iii) as interest expenses on certain advances made by the assessee. The assessee contended that the advances were made for business purposes and were supported by substantial interest-free funds. The Tribunal observed that the assessee had made advances from borrowed funds, and disallowed only a proportionate amount of &8377; 1,90,283/- instead of the entire &8377; 6,00,000/- disallowed by the lower authorities. The Tribunal found that the disallowance under section 36(1)(iii) was not warranted to the full extent and allowed the appeal partially.

In conclusion, the Tribunal partly allowed the assessee's appeal, deleting the disallowance made under section 40A(2)(b) and reducing the disallowance under section 36(1)(iii) to a proportionate amount.

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