ANANDJI SHAH Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) AT the instance of the applicant-assessee, the following questions of law have been referred to this court for opinion by the Income-tax Appellate Tribunal, Cochin Bench ;

(2.) THE questions of law related to the assessment years 1974-75 and 1978-79. THE assessee is a registered firm. During the relevant previous years, the assessee paid interest of Rs. 33,764 and Rs. 10,083, respectively, to the estate of the late Smt. Taramathi S. Shah. THE rate of interest was 24% per annum. In the original assessment for the assessment year 1974-75, the interest paid was allowed. But the assessment was reopened by the Income-tax Officer on receiving information that the late Smt. Taramathi S. Shah was a relative of the partners of the firm. THE payment of interest at the rate of 24% was held by the Income-tax Officer to be excessive and invoking the provision of Section 40A(2) of the Income-tax Act, he allowed interest only at 12% per annum and disallowed the balance. Similar action was taken in the original assessment for the year 1978-79. On appeals, the Commissioner of Income-tax (Appeals) held that interest at 18% will be reasonable and restricted the disallowance of interest to only the amount in excess of the same. THE assessee went in further appeals to the Income-tax Appellate Tribunal. Before the Tribunal, it was contended that payment of interest to the estate of Smt. Taramathi S. Shah will not be hit by Section 40A(2) of the Act. It was also contended that the payment of interest at 24% was not excessive. THE Tribunal rejected both the contentions. It is, thereafter, that the questions of law aforementioned have been referred to this court.

(3.) THERE is no dispute that the father of Nilesh A. Shah, namely, Arunchandra C. Shah, is a partner of the firm. Interest is paid to Nilesh A. Shah, the successor to the estate of Taramathi S. Shah, Similarly, the husband of Smt. Sobha Shantilal, namely, Shantilal C. Shah, is a partner of the assessee-firm. Interest is paid to Smt. Sobha Shantilal who is also a successor to the estate of Taramathi S. Shah. THEREfore, the interest payments made to son and wife of two partners, respectively, are clearly hit by the provision of Section 40A(2) of the Act.