INCOME TAX ACT, 1961

Section 40A(2)(b)

Business disallowance under section 40A(2)(b) - Excessive or reasonable payment - Interest on unsecured loan paid to related party - AO considered bank rates for comparison purpose

Assessee paid interest on unsecured loans taken from specified person @ 18%. AO took the view that interest rate charged by bank was to be considered as at arm's length and since rates had come down, interest payment @ 12% was reasonable. Accordingly, AO made disallowance under section 40A(2)(b).Held: Unsecured loans taken from related party stood on a totally different footing as compared to secured loan taken from banks, by way of the banks charging interest periodically resulting in compounding of interest and hence higher effective rate of interest, of banks taking guarantee for the loans given, and charging insurance and processing charges for the same, all of which are not found in the case of unsecured loans taken from private parties, thus justifying a higher rate of interest as compared to banks/NBFC; that generally the rate of interest on unsecured loans is BPLR +2 to 4% and that in concerned year the SBI BPLR was 14.5% and also in the preceding year AO had accepted 18% as the market rate of interest on unsecured loans after duly examining the issue, therefore, disallowance of interest made by restricting the rate of interest to 12% under section 40A(2)(b) was not justified.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2016-17

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