Interest from Loan given to related party for Business purpose does not attract section 40A(2)(b) of the Income Tax Act: ITAT [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the interest received on loan given to related party for business purpose cannot be subjected to provisions of section 40A(2)(b) of the Income tax Act, 1961.

The assessee, an individual, is in the business of trading activities in shares and F&O. During the course of assessment proceedings the assessing officer noticed that the assessee has taken interest bearing loan and also advanced the same on interest and held that provisions of section 40A (2) (b) of the Act clearly attracted in the case of the assessee.

Relying on the decision of the Tribunal in the case of M/s Navbharat Potteries P Ltd vs DCIT, the assessee contended that for the proposition that the lower authorities were not justified in making the disallowance under section 40A (2) (b) without giving any reasons as to how the expenditure incurred was not wholly and exclusively for the business of the assessee.

The assessee further relied on the decision in Subhash Chander& Co and contended that 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 40A2)(b) is misconceived.

Allowing the contentions of the assessee, the Tribunal held that “It is settled proposition of law that in order to make a disallowance u/s 40A(2)(b), the AO has to first determine the fair market value/price and then compare the same with the actual expenditure incurred and payment made by the assessee to the specified person. In case, the payment made by the assessee to the specified person is excessive and unreasonable having regard to the fair market value/price, the amount found to be excess or unreasonable is liable to be disallowed u/s 40A(2) of the Income-tax Act.”

Quashing the impugned order, the Tribunal held that“Therefore it is precondition for making the disallowance u/s 40A (2) that the AO has to arrive to the conclusion that the amount paid by the assessee is excessive or unreasonable in comparison to the fair market value/price. In the case in hand, the AO has not carried out such exercise to first determine the fair value of interest rate in question by bringing any comparable instance/case So, naturally and undisputedly it would be for the business purpose only. Therefore, in our considered opinion that lower interest received on loan given to related party for business purpose cannot be subjected to provisions of section 40A(2)(b) of the Act.”

To Read the full text of the Order CLICK HERE

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