ITAT rules in favor of the assessee on interest-bearing loan
The assessing officer had argued that the case fell under the Income Tax Act
ITAT rules in favor of the assessee on interest-bearing loan The assessing officer had argued that the case fell under the Income Tax Act The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the interest received on a loan given to a related party for business purposes cannot be subjected to provisions under the Income Tax Act, 1961. The assessee, an...
ITAT rules in favor of the assessee on interest-bearing loan
The assessing officer had argued that the case fell under the Income Tax Act
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the interest received on a loan given to a related party for business purposes cannot be subjected to provisions under the Income Tax Act, 1961.
The assessee, an individual, is in the business of trading activities in shares and Futures and Options (F&O). During the course of the assessment proceedings, the assessing officer (AO) noticed that he had taken an interest-bearing loan and had also advanced the same on interest. The AO held that the case fell under the IT Act.
The assessee cited the decision of the tribunal in an earlier case. He contended that the lower authorities were not justified in making the disallowance under the IT Act without giving any reason how the expenditure incurred was not wholly and exclusively for the business.
Relying on another such decision, he added that the correlation of the funds contributed by the partners with the rate of interest on which the amount was actually lent by him for making disallowance under the IT Act, was flawed.
ITAT allowed the assertions of the assessee and ruled, "It is a settled proposition of law that in order to make a disallowance under the IT Act, the AO has to first determine the fair market value/price. Thereafter, he can compare it with the actual expenditure incurred and payment made to a specified person. In case, the payment made by the assessee is excessive and unreasonable, that amount is liable to be disallowed under the IT Act."
The tribunal quashed the impugned order stating, "It is a pre-condition for making the disallowance under the IT Act and the AO has to arrive at a conclusion that the amount paid by the assessee is excessive or unreasonable in comparison to the fair market value/price. But the AO has not carried out such an exercise. So, naturally and undisputedly, it would be for business purposes only. Therefore, it cannot be subjected to provisions under the IT Act."