2022 (2) TMI 605 - AT - Income Tax

Disallowance u/s 40A(2) - excessive interest paid to Director of the appellant - AO observed that assessee has paid interest @ 18% to one of its director however it has charged interest from two of the unrelated party @ 15% and @ 11% respectively - HELD THAT - During the course of appellate proceedings before us the ld. Counsel has referred the decision of CIT Vs. Aditya Mediasales Ltd. 2010 (5) TMI 823 - GUJARAT HIGH COURT wherein it is held that interest of unsecured borrowing was always higher than rate of interest paid to the bank or financial institution from where the loan raised were secured loan and accordingly unsecured interest paid to sun pharmaceutical @ 24% per annum as reasonable. Also in KARTEX EXPORTS 2020 (2) TMI 1617 - ITAT MUMBAI in the absence of any material to indicate that the interest rate paid by the assessee is excessive or unreasonable the unsecured loan taken @ 18% or even @ 20% is quite in consonance with the ground reality in business. Issue of tax neutrality - The submission of the assessee of comparatively prevailing bank interest rate of secured loan was not controverted by the ld. CIT(A). Further it is noticed that ld. CIT(A) has simply rejected the submission of the assessee on the issue of tax neutrality stating that no evidences was furnished. In this regard after perusal of the material available in the paper book it is noticed that assessee has filed copy of Income Tax return of Bharat J. Patel for assessment year 2014-15 along with detail of unsecured loan as on 31st March 2014 vide its submission dated 7.11.2016 made before the assessing officer demonstrating that because of showing of higher return of income of Rs. 3, 86, 04, 868/- there was no any attempt to evade tax and the same was tax neutral. In the light of the above facts and circumstances we consider that decision of ld. CIT(A) is not justified therefore this ground of appeal of the assessee is allowed. Disallowance of fees paid towards Investment Advisory Services - HELD THAT - During the year under consideration the assessee could not substantiate with relevant evidences that these expenses were related to loan syndication fees and the same was claimed as Investment Advisory Services without any break up of the detail of loan advances arranged by these two parties. Therefore we do not find any infirmity in the decision of ld. CIT(A) after following the decision of coordinate bench of the ITAT 2019 (2) TMI 1996 - ITAT MUMBAI Appeal of the assessee is partly allowed.

Summary

Issues involved:
1. Disallowance under section 40A(2) out of interest paid.
2. Disallowance of fees paid towards Investment Advisory Services.

Issue 1: Disallowance under section 40A(2) out of interest paid:

The assessee challenged the disallowance of excessive interest paid to a director under section 40A(2) before the ITAT Mumbai. The assessing officer noted that the assessee paid higher interest to its director compared to unrelated parties. The AO restricted the interest rate paid to the director and added the difference to the total income. The CIT(A) upheld the AO's decision. During the appeal, the assessee argued that the interest rate was justified due to the risk factor in unsecured loans. The ITAT referred to precedents where higher interest rates on unsecured loans were considered reasonable. The ITAT found the decision of the CIT(A) unjustified as the assessee demonstrated tax neutrality in the transaction with the director, leading to the allowance of this ground of appeal.

Issue 2: Disallowance of fees paid towards Investment Advisory Services:

The AO disallowed a portion of the fees claimed under administrative expenses for loan syndication, stating that the amount paid to certain parties was for investment advisory services, not loan syndication. The CIT(A) upheld this disallowance. The ITAT reviewed the details provided by the assessee and found that the evidence only supported the payment being for investment advisory services, not loan syndication fees. Referring to a previous case involving the same parties, the ITAT agreed with the CIT(A)'s decision to disallow the claimed amount. Consequently, this ground of appeal was dismissed.

In conclusion, the ITAT Mumbai partially allowed the appeal of the assessee concerning the disallowance under section 40A(2) but dismissed the appeal regarding the fees paid towards Investment Advisory Services.