The Tax Publishers2020 TaxPub(DT) 2305 (Del-Trib)

INCOME TAX ACT, 1961

Section 40A(2)(b)

Section 40A(2)(b) does not envisage complete disallowance of expenditure unless it is proved to be excessive or unreasonable having regard to the fair market value. In instant case, no such finding with regard to the excess payment had been established by AO while invoking the provisions of section 40A(2)(b). Hence, the disallowance under section 40A(2)(b) was liable to be deleted.

Business disallowance under section 40A(2)(b) - Excessive or unreasonable payment - Interest on loans - No finding with regard to excess payment being established by Revenue

During the year, assessee paid interest to two persons, his HUF and his mother. AO found that the loans given by those two persons were, in fact, the amounts given by the assessee himself. He found that there was transfer of funds from the proprietary concern of assessee to the assessee's personal account and then to the firm, wherein assessee was a partner and from the partnership firm, the amounts had been transferred to the HUF and to the mother's account and finally the amounts had been received from the account of the mother and the HUF to the proprietary concern of the assessee. Therefore, AO held that the loan parties received the amounts from the assessee himself in a circuitous route. He further held that the transactions had been made up with an intention to lower the tax liability of the assessee and also to build up capital for the HUF and for the mother. Accordingly, the AO concluded that the loans were not for genuine business purpose and hence, the interest on those loans had to be disallowed under section 40A(2)(b). Held: It was not a case where the borrowed funds had been diverted to interest-free advances without any commercial expediency. The case of AO was that the interest expenses were claimed only to reduce the tax liability of the assessee and to aid in increased capitalization of the loan parties. There was no dispute about the payment of the interest and the utilization of the loans received by the business entity. The invocation of section 40A(2)(b) by AO was on a wrong interpretation/application of the provisions. The provisions of section 40A(2)(b) entitles disallowance on account of any expenditure being excessive are unreasonable having regard to the fair market value. In instant case, the amounts had been received from the partnership firm by the loan parties and if at all any disallowance was to be made, the same was needed to be considered in the hands of partnership firm but not in the proprietary concern. Further, section 40A(2)(b) does not envisage complete disallowance of expenditure, unless it is proved to be excessive or unreasonable having regard to the fair market value. No such finding with regard to the excess payment had also been established by AO while invoking the provisions of section 40A(2)(b). Hence, the disallowance under section 40A(2)(b) was deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :


INCOME TAX ACT, 1961

Section 14A read with Rule 8D

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