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2020 (11) TMI 735 - AT - Income TaxDisallowance of interest on borrowed capital - HELD THAT:- ICDS II issued on valuation of inventories (though relevant to the subsequent years) also supports the aforesaid claim of deduction of the assessee. As the interest bearing borrowed funds had been raised by the assessee for the purpose of its business, and used for the said purpose, therefore, the interest expenditure pertaining to such borrowed funds was rightly claimed by the assessee and allowed as a deduction by the CIT(A).No infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration uphold his order to the said extent. The Ground of appeal No. 2 is dismissed. Disallowance of directors remuneration u/s 40A(2)(a) - HELD THAT:- Basis for gauging the excessiveness or unreasonableness of such expenditure incurred by the assessee in respect of related parties has to be carried out in the backdrop of the fair market value of the goods, services or facilities for which the payment is made. We find that the A.O by misconstruing the scope and gamut of Sec. 40A(2)(a) had disallowed the entire amount of the directors remuneration. Aforesaid disallowance carried out by the A.O by pressing into service the provisions of Sec. 40A(2)(a), therein principally suffer from two serious infirmities, viz. (i). that the A.O had lost sight of the fact that the disallowance of the related party expenditure u/s 40A(2)(a) could have been made only to the extent the same was found to be excessive or unreasonable; and (ii). that as per the mandate of Sec. 40A(2)(a) the A.O remained under a statutory obligation to benchmark the excessiveness or unreasonableness of the expenditure keeping in view the fair market value of the goods, services or facilities for which the payment was made or was to be made to the specified related party. In the backdrop of our aforesaid observations, we are of the considered view that the A.O had traversed beyond the jurisdiction that was vested with him u/s 40A(2)(a) - remuneration paid by the assessee to its directors can by no means be stamped as exorbitant, and therein disallowed by invoking the provisions of Sec. 40A(2)(a) . As such, finding no infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration, we uphold his order therein vacating the disallowance of ₹ 3.63 crores made by the A.O u/s 40A(2)(A) of the Act. The Ground of appeal No. 1 is dismissed.
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