Reasonability of interest paid to persons covered under section 40A(2)(b)

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IN THE ITAT DELHI BENCH ‘G’

DCIT v. Sports Station (India) (P.) Ltd.

IT Appeal Nos. 2936, 3256 & 3262 (Delhi) of 2011

[Assessment Years 2007-08 & 2008-09]

MARCH 30, 2012

As is apparent from the impugned order, the Assessing Officer did not bring any material on record for holding that the payment of interest at the rate of 15 per cent per annum to unsecured creditors was excessive and how interest at the rate of 12 per cent per annum was reasonable or represented fair market value for the services and facilities.

A mere glance of the provision of section 40A(2)(a) reveals that the expenditure mentioned therein is in relation to any person referred to in clause (b) of the sub-section and the expenditure has to be considered in relation to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom. The Gujarat High Court observed in Coronation Flour Mills v. Asstt. CIT [2010] 188 Taxman 257 that in relation to the disallowance under the provisions of section 40A(2)(a), a plain reading of the provision reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed, which are independent and alternative to each other. All the three requirements need not exist simultaneously. In a given case, if any one condition is shown to be satisfied the provision can be invoked and applied, if the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section 40A(2)(a) cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable as held in the case of Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC). In the instant case, there is nothing to suggest that the Assessing Officer found the payment of interest excessive having regard to either (a) fair market value of the services or facilities; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. Not a whisper has been made by the Assessing Officer in respect of any of these three ingredients in his assessment orders. There is nothing to suggest that the Assessing Officer ever brought any material on record on this aspect before concluding that interest at the rate of 15 per cent was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the interest on unsecured loans. In view the foregoing, especially when there was no material on record to hold that payment of interest at the rate of 15 per cent per annum to unsecured creditors was excessive, there was no hesitation in upholding the findings of the Commissioner (Appeals).