Interest on unsecured loan disallowed

[satbir singhwahi]

AO HAS U/S 40A(2) DISALLOWED INTEREST PAID TO RELATIVES @18% AND OTHERS @ 12%.I.E 6% HAS BEEN DISALLOWED.INTEREST PAID TO BANK 14.25% AND UNSECURED LOAN FROM RELATIVES WAS TAKEN TO TIDE OVER THE CRISIS AS BANK HAS REFUSED LIMITS AS MAJOR DEBTOR HAD GONE TO BIFR.WHETHER AO ACTION RIGHT???

[Rama Krishana]

You may visit the following case: 2009 TMI - 32197 - PUNJAB AND HARYANA HIGH COURT. In addition i am fully in agreement with the view of the Mr. Kothari that it is an issue of facts. If the facts shows that the interest paid to relatives is genuine, you would get the justice at the appropriate forum.

AI Summary

Related-party interest scrutiny under section 40A(2) may disallow excessive rates absent evidence of commercial justification. AO applied Section 40A(2) to disallow part of interest paid to relatives as excessive relative to bank rates; the core question is whether higher interest to related parties was commercially justified when unsecured loans were taken to address a credit restriction, and the matter is primarily a factual inquiry requiring evidence to show the genuineness and reasonableness of the payments.