Interest payment to related parties @ 18% and AO allowing only 12%: Validity of the disallowance of 6%

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Interest payment to related parties @ 18% and AO allowing only 12%: Validity of the disallowance of 6%

Disallowance of interest duringthe course of assessment is one of the most common thing in the assessment of business class assessee. There are also cases where the deduction towards interest is restricted if the AO believes that it is a t a higher rate.

Here was one such case before ITAT Delhi wherein Assessee has paid interest 18% to related parties but AO restricted to 12%, as under:

 M/s. R R M Trading Co.

Vs.

 ACIT, 1st March 2022 ( Delhi ITAT)

 

The case was decided in favour of Assessee with following observation:

We find that AO has restricted the payment of interest to the related parties @ 18% to 12% on the ground that it is excessive and unreasonable looking at the fact that assessee has paid interest to the partners @ 12% which is in accordance with the Partnership deed.

However, nowhere AO has tried to establish that having regard to the fair market value, such an interest payment is excessive or unreasonable without bringing any comparable instances that unsecured loan in the market are less.

Apart from that, we agree with the submission of the ld. Counsel for the assessee that bank rates may be 12%, however such bank loans are subject to hypothecation of goods, collateral security, mortgage and guarantor and various other paper formalities.

Since bank loans are secured loans that is why it is always less than the unsecured loans in the open market.

Without there being any adverse material on record that the interest rate paid by the assessee are not in consonance with the fair market value in the open market, we do not find any justification for making such disallowance because onus is on the AO u/s 40A(2)(a) with regard to interest paid to four related parties being excessive and unreasonable having regard to the fair market value in the open market.

Accordingly, disallowance sustained by the ld. CIT (A) of Rs.8,25,723/- is deleted.

1 Comment

  1. June 28, 2022
    Rajiv Javeri

    Very good judgment…Thanks

    Reply

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