Interest paid @ 18% on unsecured loans from parties covered u/s 40A(2)(b) is reasonable:

AO found that the assessee had paid interest @ 18% on unsecured loans obtained from persons covered u/s 40A(2)(b) as against interest @ 12% to other parties. Hence, he disallowed interest in excess of 12%. Hon’ble ITAT observed that the said loans from unsecured persons were received in earlier years and interest @ 18% on such loans was accepted in earlier years by the revenue. It was further observed that the parties to whom interest @ 18% was paid were falling in the highest tax bracket and hence, there was no loss to the revenue. Hon’ble ITAT was of the view that such unsecured loans were obtained to meet the business requirements and to ensure that the assessee’s movable and immovable assets remain free from any encumbrances. Further, such loans involve huge risks and are generally not required to be repaid at a short notice. In light of the above, it was held that interest @ 18% was reasonable.

[SOUTHERN INDIA BIDI WORKS PVT. LTD. Vs. ACIT – ITA Nos.1847/Ahd/2011 and 1113/Ahd/2012]