2014 (7) TMI 1184 - AT - Income Tax

Disallowance of interest claimed on personal loan - Held that - There was no payment of interest on personal account. The interest of ₹ 57,330/- was paid on C.C. Limit utilization for assessee s business. Therefore, the ld. CIT(A) has rightly deleted this addition. - Decided in favour of assessee Disallowance u/ 40A - payment of interest to unrelated party was at 6% whereas the assessee paid interest @ 18% to the relatives. - Held that - There is some merit in the arguments of the ld. DR to this effect. The assessee has not disputed in paying interest @ 6% to Shri Bhagat Ram Darak and unrelated party.These borrowings from bank carries rate of interest at 15%.The AO adopted the rate of interest at 15% taking into consideration the higher rate of interest on bank loan. Since the AO has discharged his burden in terms of Section 40A(2)(b) of the Act, we find no infirmity in the order of the AO. Therefore, the rate of interest @ 15% payable to related party is reasonable in terms of Section 40A(20(b) of the Act. Hence, we uphold the order of the AO on this issue and reverse the order of the ld. CIT(A). - Decided in favour of revenue Addition in respect of paddy yield - Held that - The AO has recorded a finding that assessee s books are examined on test check basis. When the books are accepted then the yield cannot be estimated without any material. It is a known fact that depending upon the machinery, quality of the seeds, moisture in paddy, monsoons etc. marginal fluctuation in yield is allowable. Therefore in the absence of rejection of books of account, the yield cannot be estimated. Besides, the AO at the most could have considered the addition on account of valuation of stock in case it was found that qualitywise day-to-day production was not maintained by the assessee deliberately. This is not met out by the AO. In view thereof, we find no infirmity in the order of the ld. CIT(A) deleting the addition in respect of paddy yield.- Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest claimed on personal loan
2. Disallowance of excess interest under Section 40A(2)(b)
3. Addition on account of low yield of rice

Issue 1 - Disallowance of interest claimed on personal loan:
The Revenue appealed against the deletion of disallowance of interest claimed on personal loan. The AO argued that the interest was excessive and unreasonable, applying Section 40A(2) of the Income Tax Act. The AO allowed interest at 15% to relatives instead of the claimed 18%. The CIT(A) deleted the disallowance, stating that the AO failed to establish the expenditure as unreasonable. The DR contended that the CIT(A) erred in this finding, as the AO demonstrated the excessive interest payment to related parties. The Tribunal upheld the CIT(A)'s decision, stating that the interest paid was on a CC Limit for business purposes, not a personal loan.

Issue 2 - Disallowance of excess interest under Section 40A(2)(b):
Regarding the disallowance of excess interest under Section 40A(2)(b), the AO found discrepancies in interest rates between related and unrelated parties. The AO applied a 15% interest rate based on bank borrowings. The CIT(A) deleted the disallowance, citing lack of comparative instances. The Tribunal found merit in the AO's argument and upheld the 15% interest rate, considering the higher bank loan interest rate. The Tribunal reversed the CIT(A)'s decision, allowing the Revenue's appeal on this issue.

Issue 3 - Addition on account of low yield of rice:
The AO made an addition on account of low yield of rice, questioning the decrease in yield compared to the previous year. The CIT(A) deleted this addition, mentioning similar past instances. The DR argued that the CIT(A) did not provide sufficient reasoning for the deletion. The Tribunal noted that each year's yield fluctuates due to various factors and upheld the CIT(A)'s decision, dismissing the Revenue's appeal on this issue.

In conclusion, the Tribunal partly allowed the Revenue's appeal, upholding the disallowance of excess interest under Section 40A(2)(b) while dismissing the disallowance of interest claimed on personal loan and the addition on account of low yield of rice.