2013 (2) TMI 914

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.... action of Deputy Commissioner of Income Tax, Circle 7(1), Mumbai ["the AO"] of disallowing interest of ₹ 13,94,370/- u/s. 40A(2)(b) of the Act on the ground that interest paid by the Appellant was excessive or unreasonable. 2. The Appellant prays that the aforesaid disallowance be deleted. Ground II: General The Appellant craves leave to add, amend, alter and/or delete any/all of the above ground of appeal. 2. Assessee-company, engaged in the business of warehousing, leasing of property, development of real estate/property and trading, filed its return of income on 29-11-2006 declaring total income ₹ 49,19,238/-. Assessment was finalised by the Assessing Officer (AO) u/s. 143(3) of the Income-tax Act, 1961(Act) deter....

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....be said to be wholly and exclusively for the purpose of business u/s. 37(1) and same also did not fulfil the criteria of reasonableness u/s. 40A(2)(b). 5. Before us, Authorised Representative (AR) submitted that in earlier / subsequent AYs, AO had not dis-allowed the interest paid to Partners / Directors, that the Partners/Directors of the company were paying tax at the maximum marginal rate, that it had revenue neutral effect, that assessment orders for the earlier and subsequent years were passed u/s. 143(3) of the Act, that provisions of Sec. 40A(2)(b) were not applicable in the case under consideration. He referred to Page Nos. 100 to 110 and 29 to 31 of the Paper Book in support of his submissions. AR relied on the cases of M.M. Texti....

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....oted that the Assessing Officer did not allow deduction of interest to partners by relying on Sec. 40A(2) as in his opinion the assessee had diverted its capital as well as interest free unsecured loans for the loans and advances of a much higher magnitude on which no interest was received. Section 40A(2) stipulates that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to clause (b) of this sub-section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business then so much of the expendit....

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....essive under section 40A(2). The co-relation of the funds contributed by the partners with the rate of interest on which the money is actually lent by the assessee, for making disallowance under section 40A(2), is misconceived. We, therefore, hold that the Assessing Officer was not justified in invoking the provisions of Sec. 40A(2)". 7. We also find that ITAT Amritsar Bench has while deciding the issue of disallowance as per the provisions of Sec. 40A(2)(b) has held that 15% interest rate p.a. was neither excessive nor un-reasonable having regard to market rate. In the decision of Subhash Chander & Co (supra) it has been held: There was no dispute in that the payment of interest at the rate of 15 per cent p.a. to related parties by the....