2019 (5) TMI 1084 - AT - Income Tax

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 ... Disallowance u/s 40A(2)(b) - payment being excessive or unreasonable - disallowing 3% of excess rate of interest paid to the parties @15% on the borrowed funds - HELD THAT:- Before disallowing u/s 40A(2)(b) for such payment being excessive or unreasonable it has to be ascertained that such payment is made to specific person under clause 40A(2)(b) and secondly there must be a clear finding that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, service or facilities for which the payment is made - the opinion of the AO for the expenditure excessive or unreasonable is to be confirmed vis-à vis fair market price for such goods services or facilities. We find that such finding is absolutely missing from the orders passed by the authorities below. Relying upon the said ratio of CIT-vs Sarjan Realities [2014 (8) TMI 206 - GUJARAT HIGH COURT] also passed order deleting addition made by Revenue on excess payment of interest made by the assessee. Since no deliberation has been made by the authorities below so as to compare the rate of interest paid by the assessee with that of the market rate of interest before making addition we delete the addition made by the authorities below. Disallowance u/s 36(1)(iii) being interest at 12% on certain advances made by the assessee - HELD THAT:- AR before us failed to substantiate that the impugned advance to the tune of ₹ 5,00,000/- has been made for business purposes. Apart from that it appears from the balance sheet of the assessee being part of the record before us that the assessee is having capital as own interest free fund of ₹ 34,14,312/- therefore it seems that the assessee made advances of ₹ 15,85,678/- (50,00,000-34,14,312) from the borrowed funds. We, therefore, fail to appreciate as to why disallowance has been made u/s 36(1)(iii) at 12% on the entire investment of ₹ 50,00,000/-. We, therefore, restrict such disallowance to the tune of ₹ 1,90,283/- u/s 36(1)(iii) being 12% of investment of ₹ 15,85,678/- made from the borrowed funds by the assessee.- Assessee’s appeal is partly allowed. 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.