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2014 (12) TMI 880 - AT - Income TaxDisallowance of interest paid u/s 40A(2)(b) - excessive claim - borrowed funds from relatives invested in FDRs or not and FDRs could be part of business activity or incidental to business of assessee or not - Held that:- In respect of the disallowance u/s. 36(1)(iii), the reservation of the AO is that the assessee made the FD with the State Bank of India, Chalisgaon to the extent of ₹ 4.25 Crores and earned the lower rate of interest when at the same time the assessee had unsecured loans to the extent of ₹ 4.75 Crores on the date of balance sheet on which the assessee has paid interest @ 12% on the said loans - during the year the salary was also credited to the partner of the HUF and the interest was also credited - There were another transfer entry in respect of same account also as well as withdrawal to the extent of ₹ 1,31,51,907/- the assessee has only borrowed ₹ 26 Lacs. The assessee also explained that there is tedious procedure if the money is borrowed from the bank and even then rate of interest is 14.25% + additional mortgage fee of 1%, documentation processing etc. - assessee also explained that as per the provisions of Sec. 40(b) while computing income of the firm, the interest @ 12% p.a. is allowable on credit balances on the partners’ accounts - the borrowing was made for the purpose of business - merely variation in the rate of interest cannot be the reasons for making the disallowance – thus, the order of the CIT(A) is upheld – Decided against revenue. Addition on difference on rate of borrowing and rate on deposits made in banks deleted – Held that:- In assessee’s own case for the earlier assessment year, it has been held that the addition made by the AO is to be set aside – thus, the decision as delivered is to be followed and the order of the CIT(A) is upheld – Decided against revenue.
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