2024 (6) TMI 535 - AT - Income Tax

Disallowance of interest expenses u/s. 40A(2) - Interest paid to 20 unrelated parties - disallowance was made by AO after adopting rate of interest of 11% as Fair Market Value of interest based on the rate of interest charged by the assessee from M/s. Mariya Ship Breaking Pvt. Ltd. - HELD THAT - The primary condition as is that the disallowance can be made only in respect of excessive amount paid to related parties . In this case, as per the contents of the Tax Audit Report only three parties have been reported as related parties viz M/s. Mariya Ship Breaking Pvt. Ltd., M/s. Payal Singhal and Shree Subhadra Steel P. Ltd. Nothing has been brought on record to show/demonstrate the balance parties in respect to whom the provisions of Section 40A(2)(b) of the Act have been invoked are related parties within the meaning of Section 40A(2)(b) of the Act. Therefore, in our considered view, disallowance u/s. 40A(2)(b) of the Act can be made only in respect of relates parties and the said provision cannot be invoked in order to make disallowance in respect to unrelated parties. Therefore, disallowance made u/s. 40A(2)(b) in respect to unrelated parties is liable to be deleted. Whether the assessing officer has correctly adopted the rate of 11% as fair market value of interest based on interest rate charged by the assessee from M/s. Mariya Ship Breaking Pvt. Ltd? - As in the instant facts, the Tax Authorities have failed to bring on record any comparable cases as to the fair market value of similar services (i.e. the prevalent rate of interest). As we observe that the AO and CIT(A) have not given any specific finding as to how the aforesaid interest rate paid by the assessee was excessive and unreasonable specially in the light of the facts that the funds obtained by the assessee were without any security, there was no immediate obligation to repay the funds in the near future and such loans were taken without any security. In addition, we note that the assessee had also filed application under Rule 46A, in which the assessee had filed additional evidences in the form of Benchmarking Prime Lending Rate of SBI and Personal loan rates of SBI. However, it is observed that the assessing officer has not given any adverse remark in the remand report. Accordingly, we are of the considered view that the impugned disallowance is not liable to be sustained. Decided in favour of assessee. Addition u/s 68 - unsecured loans obtained - assessee submitted a detailed documentary evidences with respect to funds received from the parties - HELD THAT - As evident that the assessing officer did not make any efforts to further inquire into the genuineness of the parties from whom the amounts had been obtained. CIT(A) while passing the order did not refer to the additional evidences furnished by the assessee, during the course of appellate proceedings and neither any reference to the observations made by the assessing officer in the remand report, while dismissing the appeal of the assessee on this issue. CIT(A) has not given any adverse remark to the documentary evidences placed on record by the assessee with respect to the addition made by the assessing officer u/s 68 of the Act. Accordingly, as assessee has furnished adequate documentary evidences in support of its case and the department has not pointed out any specific infirmity in the supporting evidences filed by the assessee, this ground of the assessee s appeal is allowed.

Summary

Issues Involved:

1. Disallowance of interest expenses u/s 40A(2)(b).
2. Addition of unsecured loans u/s 68.

Summary:

Disallowance of Interest Expenses u/s 40A(2)(b):

The assessee, engaged in trading MS Scrap/Ferrous and Non-Ferrous Scrap, contested the disallowance of Rs. 14,06,585/- u/s 40A(2)(b) made by the Assessing Officer (AO) for interest paid to related parties. The AO adopted an 11% interest rate as the "Fair Market Value" based on the rate charged from M/s. Mariya Ship Breaking Pvt. Ltd., while the assessee paid 15% interest to certain related parties.

The CIT(A) confirmed the addition, noting the excessive payment of interest to related parties compared to the fair market value. The assessee argued that the disallowance should only apply to related parties and that the AO failed to determine the fair market value of similar services. Additionally, the AO did not issue a show cause notice for disallowance to unrelated parties and ignored the high-risk nature of unsecured loans from related parties.

The Tribunal found that the disallowance u/s 40A(2)(b) can only be made for related parties and that the AO and CIT(A) failed to provide comparable cases for the fair market value of interest. Citing various precedents, the Tribunal concluded that the AO did not substantiate the excessive or unreasonable nature of the interest rate and allowed the assessee's appeal on this ground.

Addition of Unsecured Loans u/s 68:

The AO added Rs. 46,79,882/- u/s 68 for unsecured loans from five parties, which was confirmed by the CIT(A) due to incomplete details submitted by the assessee. The assessee provided substantial documentary evidence, including confirmations, PAN details, ITR acknowledgments, and bank statements, to prove the identity, genuineness, and creditworthiness of the lenders.

The Tribunal observed that the AO did not conduct any independent inquiry to verify the genuineness of the transactions and that the CIT(A) did not consider the additional evidence submitted during appellate proceedings. The Tribunal found the assessee's evidence adequate and concluded that the department did not point out any specific infirmity. Therefore, the addition u/s 68 was deleted, and the assessee's appeal was allowed.

Order pronounced in the open court on 10-06-2024.