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TMI Blog2014 (1) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... s unwarranted, unjustified and bad in law." 2. Briefly the facts are that the assessee is in the business of manufacture of forging parts. The assessee has declared income of Rs. 21,27,520/- and its accounts are audited. The return was accompanied with the report of auditors. During the course of assessment proceedings, the A.O. found that there is increase in unsecured loans by Rs. 54,65,206/- and outflow of interest paid @ 18% amounting to Rs. 25,02,230/-. All these persons were found covered u/s 40A(2)(b) of the I.T. Act, 1961 (hereinafter referred as the Act). Accordingly vide ordersheet entry dated 13/12/2007, the Assessing Officer raised specific query as under:- "Explain why interest on unsecured loans paid to relatives of director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... athia 216000 144000 72000 8. Kalpesh B Sorathia (HUF) 67500 45000 22500 9. Kamlesh B Sorathia (HUF) 90000 60000 30000 10. Nilesh M Sorathia (HUF) 90000 60000 30000 11. Prafulaben P Sorathia 207000 138000 69000 12. Pravin D Sorathia (HUF) 90000 60000 30000 13. Ramjibhai G Sorathia (HUF) 67500 45000 22500 14. Ranjanben A Sorathia 198000 132000 66000 15. Rekhaben N Sorathia 218250 145500 72750 16. Shantaben B Sorathia 207000 138000 69000 17. Shilpaben K Sorathia 207000 138000 69000 18. Vinod D Sorathia (HUF) 90000 60000 30000 Total 2502230 1668153 834077 The total disallowance, thus, stood made at Rs. 8,34,077/-. 3. The Ld. CIT(A) considering the arguments and the material laid before him, found no merit in the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR 867 (Mad) and the relevant passage, which is reproduced at internal page 8 of his order is as under:- "According to section 40A(2)(b), if the AO is of the opinion that any expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities availed of, for which payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, then so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction." The Ld. CIT(A) for reaching his conclusion also took support from the judgment rendered by the Hon'ble Kerela High Court in the case of Shri Anandji Shah Vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment has been made to the relatives and persons covered u/s 40A(2)(b) of the Act, which not being reasonable is only diversion of income from the company to its own relatives. In case, the higher deduction of interest is allowed, it will set a wrong precedence in subsequent years and legitimate tax will not come to the revenue. 6. Heard parties with reference to material on record and the case laws brought to our notice. The A.O. by finding that the assessee has paid interest @ 10.5% on secured loans and considering the factum of payment of interest at 18% was satisfied that the assessee has made excessive payment of interest to related parties. He, thus, required the assessee to justify his claim. Under such facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) Gandhinagar in assessment year 2006-07 in assessee's own case is reproduced as under:- "6. I have gone through the assessment order and the submissions of the assessee. Considering the facts that the loans from related persons were unsecured loans for which no security is required to be given or property is to be pledged and saves the assessee certain expenses and effort; I hold that payment of interest @ 2 to 3% higher than the rate at which secured loans are available from banks is reasonable. Therefore, in the light of facts of the particular case, payment of interest @ 18% is held reasonable; and the disallowance is deleted." Perusal of this order, reveals that the Ld. CIT(A), though, considered it reasonable to allow deduction @ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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