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2022 (3) TMI 384 - AT - Income TaxDisallowance u/s 40A2)(b) - Addition of excess interest paid to the related parties - difference between the rate of interest on loan received and paid - 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. 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. In the present case, having regard to the facts and circumstances referred to hereinabove, the we have arrived to a conclusion that the Assessing Officer has failed to prove by any comparable case or comparison by market rate that the amount paid by the assessee was excessive or unreasonable. Accordingly, we direct the assessing officer to delete the addition made under section 40A (2) (b) - Decided in favour of assessee.
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