The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has deleted the disallowance holding that the comparison with fair market value of loan interest was not made while making disallowance under Section 40A(2)(a) of the Income Tax Act 1961.
The assessee, Genxt Mobile LLP was a wholesale and distributor of mobile phones and accessories. For the year under consideration, the assessee filed its return of income on 05/09/2014 declaring a total income. The return filed by the assessee was selected for scrutiny and statutory notices under Section 143(2) as well as Section 142(1) of the Income Tax Act were issued and served on the assessee.
During the assessment proceedings, inter-alia, upon perusal of details of unsecured loans and interest paid on such loans, it was observed that the assessee had paid interest @ 9% to 18%. It was further observed that the assessee had paid interest @ 18% to SM Edible Pvt. Ltd. on an unsecured loan taken and repaid during the year.
It was further found that the said company was a related party covered under Section 40A(2)(b) of the Income Tax Act. After considering the submissions of the assessee, the Assessing Officer (AO) vide order passed under Section 143(3) of the Income Tax Act by drawing an analogy from the provisions of section 40(b)(iv) of the Income Tax Act, which restricted allowance of payment of interest to the partner of the firm to 12% per annum, held that interest payment in excess of 12% to related parties, especially the sister concern, was squarely hit by the provisions of Section 40A(2)(a) of the Income Tax Act.
Accordingly, in view of the specific provisions of Section 40A(2)(a) of the Income Tax Act, interest payment in excess of 12% was disallowed and the difference was added to the total income of the assessee.
Hemant Shah appeared on behalf of the assessee and Ram Krishna Kedia, appeared on behalf of the revenue
The two-member Bench of Prashant Maharishi, (Accountant Member) and Sandeep Singh Karhail, (Judicial Member) observed that as per Section 40A(2)(a) of the Income Tax Act, if in the opinion of the AO, the payment made by the assessee to any related person was excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payments was made, so much of the expenditure as was considered excessive or unreasonable by the AO should not be allowed as deduction
The comparative fair market value of the rate of interest for the loan taken by the assessee, the AO proceeded to make the part disallow by drawing an analogy to the section which does not apply to the facts of the present case. It was evident from the record that the AO had not disallowed the interest of 18% paid to SM Edible Pvt. Ltd. by comparing the same with the interest paid by the assessee to other parties @9% to 18%.
Therefore, the Bench was of the considered view that the AO while partly disallowing the interest paid by the assessee had not followed the provisions of Section 40A(2)(a) of the Income Tax Act, which required comparison with the fair market value of the goods, services or facilities, which in the present case was the loan taken by the assessee.
Accordingly, the appeal filed by the assessee was allowed and disallowance was directed to be deleted.
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