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

Debate on Disallowed 18% Interest on Unsecured Loans to Relatives Under Section 40A(2); Proving Reasonableness Urged A discussion on a tax forum addressed the disallowance of interest paid on unsecured loans to relatives at 18% by the Assessing Officer (AO) under Section 40A(2), while interest to others was at 12%. The loans from relatives were necessary due to a bank's refusal to extend credit. One response suggested demonstrating the reasonableness of the interest rate based on the circumstances when the loan was taken. Another response referenced a relevant court case and agreed that the issue is factual, emphasizing the need to prove the genuineness of the interest rate for favorable consideration.