The ITAT has partially allowed an appeal concerning the interest charged on an unsecured loan from an unrelated party, ruling that an interest rate of 18% is not unreasonable.
ITAT Partially Allows Appeal on Unsecured Loan Interest
The Income Tax Appellate Tribunal (ITAT) has partially allowed an appeal regarding the assessment of an interest rate of 18% on an unsecured loan received from an unrelated party. The Assessing Officer (AO) had previously raised questions about the reasonableness of the rate.
The ITAT noted that while Section 40A(2)(b) addresses payments to relatives, the same scrutiny may not be warranted for unrelated parties. The Tribunal holds that under the circumstances, an 18% interest rate does not constitute an unreasonable expenditure in respect of the loan.
This decision is important for tax practitioners as it illustrates that interest rates on unsecured loans must be assessed based on commercial standards, particularly when unrelated parties are involved. This approach clarifies the thresholds for what may be considered reasonable expenditure for tax purposes, emphasizing the autonomy of businesses in managing their financing strategies.
Citations
- ITAT (2026) Tax Reporter
