JAYANT N SHETH,MUMBAI vs. ACIT CIRCLE 17 (2), MUMBAI

Grounds of appeal read as under:- 1) The learned CIT(A) has erred in conforming the addition on interest expenses of Rs. 2,21,563/- u/s. 40A(2)(b), when payment of interest in excess of 12% is allowed as deductible expenses.

Brief facts on this issue are that AO noted that assessee has paid interest to related parties u/s. 40A(2)(b) @ 18%. Upon AO’s enquiry, the assessee explained that assessee has paid interest @12% to 18% to outsiders as against interest @6% to 18% to persons specified u/s. 40A(2)(b) and that banks are also charging interest rate of 19% to 21%. The AO did not dispute the submissions, but proceeded to hold that interest payment over 12% to related parties was to be disallowed. The Ld.CIT(A) also confirmed that AO’s action.

Against the above order assessee is in appeal before us.

I have heard the Ld. DR and perused the records. I note that when assessee has paid interest even @ 18% to outsiders, how it can be said that provision of section 40A(2)(b) are attracted. The said provisions are attracted when the payment to related parties is at a higher rate than that prevalent. Since the assessee’s submissions that assessee has also paid interest @18% to others and the authorities below are not disputing at, disallowance u/s. 40A(2)(b) cannot be done for payment to related person.. Hence, I set aside the orders of the authorities below and decide the issue in favour of the assessee.

In the result, this appeal by the assessee stands allowed.