Can interest paid in excess of 12% be disallowed ?

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.).

AO has no power to do so. 12% is the interest limit laid down when a firm pays interest to its partners.