ITAT sets aside interest expenditure disallowance under section 40A(2)(b), remands transportation charges TDS issue for fresh adjudication

The ITAT Mumbai set aside the AO's disallowance of interest expenditure under section 40A(2)(b) on loans from related parties at 18% interest, remanding the matter for fresh adjudication with opportunity for the assessee to justify fair market value. The tribunal allowed the assessee's appeal regarding notional interest addition on idle bank funds, finding the funds were necessary working capital for airline payments in the freight business and the addition lacked legal authority. The disallowance of transportation charges for non-deduction of TDS was remanded to AO, granting the assessee opportunity to provide transporter's PAN to comply with section 194C(6) exemption.

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Issues Involved:
1. Disallowance of interest expenditure under section 40A(2)(b) of the Income Tax Act, 1961.
2. Addition on account of notional interest on idle bank account funds.
3. Disallowance of transportation charges due to non-deduction of TDS.

Summary:

Issue 1: Disallowance of Interest Expenditure under Section 40A(2)(b)
The assessee challenged the disallowance of Rs. 12,88,528/- (A.Y. 2014-15) and Rs. 19,02,573/- (A.Y. 2015-16) being interest paid to related parties. The AO disallowed the interest above 12%, considering it excessive compared to the average bank rates. The CIT(A) upheld this, citing the assessee's sufficient own funds and the 12% benchmark from section 40(b)(iv). The Tribunal found the AO's comparison with bank rates unsubstantiated and noted the unsecured nature of the loans. The matter was remanded to the AO for fresh adjudication, allowing the assessee to justify the 18% interest rate with relevant material.

Issue 2: Addition on Account of Notional Interest
The AO added Rs. 6,00,000/- for both assessment years as notional interest on idle bank balances, arguing that the assessee unnecessarily borrowed funds while maintaining high bank balances. The CIT(A) upheld the AO's findings. The Tribunal, however, accepted the assessee's explanation that high balances were necessary for timely payments to airlines. The addition was set aside, noting the lack of legal basis for the AO's action.

Issue 3: Disallowance of Transportation Charges
The AO disallowed Rs. 4,35,081/- (A.Y. 2014-15) due to non-deduction of TDS on transportation charges paid to Mr. Jitendra M. Pawaskar. The CIT(A) upheld this partial disallowance. The Tribunal restored the issue to the AO for verification of the transporter's PAN to ensure compliance with section 194C(6). The assessee was given another opportunity to provide the necessary details.

Conclusion:
Both appeals by the assessee for the assessment years 2014-15 and 2015-16 were allowed for statistical purposes, with directions for de novo adjudication by the AO on the disallowance of interest expenditure and transportation charges. The addition on account of notional interest was set aside.

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