Disallowance of interest paid on unsecured loan

[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???any favourable case laws u/s 40A(2) on above issue??

[DEV KUMAR KOTHARI]

You need to establish reasonableness of interest paid on the basis of totality of facts and circumstances and difference in terems and conditions, you can also establish reasonableness based on other offeres for loan on the day when loan was taken @ 18%. The 12% loans may b taken earlier and at that time facts may be different. It is more a case of facts and not legal issue. The element of unreasonable amount is to be acertained on the day when transaction took place.

[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

Reasonableness of interest under section 40A(2) can avoid disallowance by proving market terms and contemporaneous offers. Assessing officer disallowed interest under section 40A(2) by treating the excess rate on unsecured loans from relatives as unreasonable; reasonableness must be judged on the transaction date from total facts and circumstances, including differing loan terms, timing, and contemporaneous market offers, and contemporaneous evidence of commercial necessity and genuine terms is central to contesting the disallowance.