AO Fails To Examine Relevant Material For Determining FMV Of Interest Rate For Availing Unsecured Loans: Mumbai ITAT Remits Matter

The Bench of Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member) observed that “As per section 40A(2)(a), if in the opinion of AO, the payment made by the assessee to any related person is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, so much of the expenditure as is considered excessive or unreasonable by the AO shall not be allowed as deduction”. (Para 9)

As per the brief facts of the case, the assessee, engaged in the business of a freight cargo agency, filed its return declaring a total income of Rs. 83,16,580 and book profit under section 115JB of Rs. 68,65,071/-. The AO observed that the assessee has paid interest of Rs.38,65,583 to its related persons and family members @18%. As the payment was made to related parties, the assessee was asked to justify the rate of interest paid. In response thereto, the assessee submitted that the interest paid @18% is reasonable since the amount of loan was received without any security, and in the current scenario the loans are either quite difficult to obtain or the rates are quite high. The AO however held that the average bank rates are 12% and therefore, rate of interest @18% paid by assessee to the related persons is unreasonable. Accordingly, the AO made disallowance u/s 40A(2)(b) of the Act.

The Bench accepted that the parties to whom assessee has paid interest are related parties within the meaning of section 40A(2)(b), and the AO by considering the rate of interest @18% paid to related persons on unsecured loans as excessive, disallowed the interest paid in excess of 12%.

In the present case, the Bench found that the AO by considering the average interest rates charged by the banks @12% treated the rate of interest @18% paid by the assessee to related persons as excessive and unreasonable u/s 40A(2)(b) of the Act.

The Bench also noted that though the AO considered the rate of interest charged by the bank @12%, however, did not provide the name of such bank and the terms of such loan for comparing the same with the unsecured loans received by the assessee.

Hence, the ITAT granted one more opportunity to the assessee to furnish the relevant material/documents to justify its claim that payment of interest @18% is at fair market value.

Counsel for Appellant/ Assessee: N.H. Gajria

Counsel for Respondent/ Revenue: Manoj Kumar Singh

Case title: Gallant Freight & Travels Pvt Ltd. Verses ACIT

Case Number: ITA no.3964/Mum/2023

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