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Can interest paid in excess of 12% be disallowed ?

Abhijeet Mehendale (General manager) (109 Points)

28 January 2008

Dear All

Can somebody tell me if the interest in excess of 12% be disallowed ? The case is as follows

One of our client has taken the loans in past three four years from the private parties at the rates higher than 12%. This was need based financing as the client was unable to get the loans from the bank. In such case he had no option but to borrow at whatever rate and repay the loans.He has borrowed at the rates of as high as 27% p.a.

Now the ITO has disallowed this claim saying that the interest is paid in excess of 12% which he assumes to be the bank rate. Now what should be my stand as the representative of client before the Income Tax Officers.

Abhijeet

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2 Replies

Late CA Sampat Jain (Chartered Accountant) (4772 Points)
Replied 28 January 2008

The AO can not sit in the chair of businessman and direct him how to conduct business. Section 40(A)(2)(b) which empowers him to disallow excessive ecpenditure is confined to relatives. Whether transaction was prudent/judicious/indispensable/necessary, is not relevant - In the absence of fraud, the question whether a transaction had the effect of reducing the assessee’s taxable income or whether it was prudent or judicious or whether it was indispensable or necessary for the assessee to enter into the transaction, are all irrelevant in determining whether the expenditure relating to the transaction should be allowed under section 37 - Narsingdas Surajmal Properties (P.) Ltd. v. CIT [1981] 127 ITR 221 (Gauhati). Quantum of expenditure cannot be reduced, unless provided so under law - Unless there is a limitation put by the law on the amount of expenditure, a lesser amount than the amount expended cannot be allowed merely because the assessing authority thinks that the assessee could have managed by paying a lesser amount as a prudent businessman - Jamshedpur Motor Accessories Stores v. CIT [1974] 95 Taxman 664 (Pat.).