Law:

Section:

Section 40A(2) of the Income-tax Act, 1961 - Business disallowance-Excessive or unreasonable expenses - Assessment years 1974-75 and 1978-79 - T was wife of managing partner of assessee-firm - On death of T, her estate was divided equally between N and S whose father and husband respectively were all partners of assessee-firm - Assessee-firm paid certain interest at rate of 24 per cent to successors of estate of T and claimed deduction - Whether section 40A(2) was attracted in this case and consequently, payment of interest at rate of 24 per cent by assessee to successors of estate of T was excessive and that only interest at 18 per cent could be said to be reasonable - Held, yes FACTS T was the wife of the managing partner of the assessee-firm. On death of T, her estate was divided equally between N and S whose father and husband respectively were all partners of the assessee-firm. The assessee-firm paid certain interest at the rate of 24 per cent to the successors of the estate of T and claimed deduction. The ITO held the payment was excessive and invoking the provision of section 40A(2) allowed interest only at 12 per cent. On appeal, the Commissioner (Appeals) held that interest at 18 per cent would be reasonable and restricted the disallowance of interest to only the amount in excess of the same. On second appeal, the Tribunal upheld the order of the Commissioner (Appeals). On reference: HELD There was no dispute that the father of N was a partner of the assessee-firm. Interest was paid to N. Similarly, the husband of S was a partner of the assessee-firm. Interest was paid to S. Therefore, the interest payments made to son and wife of two partners respectively were clearly hit by the provision of section 40A(2). Further, the interest paid was 24 per cent per annum. The assessee admittedly paid interest only at 12 per cent per annum on the amounts belonging to the manager. The statement of the ITO that the bank rate of interest was only 15 per cent or less during the relevant time was not shown to be wrong. There was no material to show that the market rate of interest on hundi and demand pronote from Multani Bankers was 29 to 30 percent. Taking all these…

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