Case Details: Genxt Mobile LLP vs. ACIT - [2023] 156 taxmann.com 490 (Mumbai-Trib.)
Judiciary and Counsel Details
- Prashant Maharishi, Accountant Member & Sandeep Singh Karhail, Judicial Member
- Hemant Shah for the Appellant.
- Ram Krishna Kedia for the Respondent.
Facts of the Case
The assessee was a wholesale and distributor of mobile phones and accessories. During the assessment proceedings, it was observed that the assessee has paid interest at a rate ranging from 9% to 18% on the unsecured loans. It was further observed that the assessee had paid interest at 18% to a related party as per section 40A(2)(b) on an unsecured loan taken and repaid during the year.
Contending the provisions of section 40(b)(iv), which restricts allowance of payment of interest to the partner of the firm to 12% per annum, the Assessing Officer (AO) held that interest payment above 12% to related parties is squarely hit by the provisions of section 40A(2)(a). Accordingly, interest payment over 12% was disallowed, and additions were made to the assessee’s income.
On appeal, CIT(A) upheld the additions made by the AO. Aggrieved by the order, the assessee filed an appeal before the Mumbai Tribunal.
ITAT Held
The Tribunal held that as per section 40A(2)(a), if, in the opinion of the 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. Therefore, the AO is required first to determine the fair market value of the goods, services or facilities for which the payment was made.
However, in the instant case, the Assessing Officer considered the interest rate as allowed under section 40(b)(vi), wherein payment of interest to any partner is allowed up to 12 per cent, as the fair market value of the rate of interest.
Thus, without finding the comparative fair market value of the rate of interest for the loan taken by the assessee, the AO proceeded to make the part disallowance.
Therefore, while partly disallowing the interest paid by the assessee, AO had not followed the provisions of section 40A(2)(a). Accordingly, there was no basis in upholding the partial disallowance of interest payment made by the assessee, and the same is directed to be deleted.
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