9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2016 (1) TMI 128 - AT - Income TaxDisallowance of interest paid to the persons who comes u/s 40A(2)(b) - whether it as unreasonable and excessive and restricting and confirming the interest payment to them at 12% as against interest paid at 15% to 18% per annaum on their unsecured deposits as being continued to be paid as in earlier years and accepted by the department in earlier years? - Held that - A perusal of chart shown by the assessee of interest expenditure incurred in this year and earlier years, we notice that the assessee has not increased the rate of interest to any depositor and in some of the case; the rate of interest has been reduced and paid at a lesser rate as mutually agreed by the depositors. Therefore, as regards the contention of the assessee that the consistency is to be maintained while completing the assessment, we find force in his argument. Further, we find that the assessee is not having any immovable property without which the banks would not lend any loans at a lesser rate as this is one of the primary requirements for taking loans from the banks. Further, we are of the opinion that the consistency should have been followed in completing the assessment proceedings unless there is cogent reason or justifiable grounds for the Revenue to depart from its earlier decisions made u/s 143(3) of the Act. We are of the opinion that the ld. CIT (A) was not right in confirming the disallowance made by the AO on account of interest paid to the persons u/s 40A(2)(b) by holding it unreasonable and excessive and also restricting the interest payment to them @ 12%. Accordingly, we allow the ground of appeal taken by the assessee and order deletion of the same. - Decided in favour of assessee.
Issues Involved:
1. Confirmation of disallowance of Rs. 8,32,696/- out of interest paid under Section 40A(2)(b) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Confirmation of Disallowance of Rs. 8,32,696/- under Section 40A(2)(b): The primary issue in this case revolves around the disallowance of Rs. 8,32,696/- out of the interest paid by the assessee to certain persons under Section 40A(2)(b) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee had paid interest at rates of 15% to 18% per annum on unsecured loans to certain related parties, which was deemed excessive compared to the market rate of 12%. Facts and AO's Observations: The assessee, engaged in trading handloom cloth, filed a return of income at 'NIL'. During scrutiny, the AO noted that the assessee claimed Rs. 40,51,854/- as interest paid to lenders on unsecured loans. The AO found that interest rates varied from 8% to 18%, with 15 cases at 18% and one at 15%. The AO, referencing Section 40A(2)(b), deemed interest rates above 12% excessive and restricted the allowable interest to 12%, resulting in a disallowance of Rs. 8,32,696/-. Assessee's Arguments: The assessee argued that the interest rates of 18% were consistent with earlier years (AY 2006-07 and AY 2007-08) where such rates were accepted under scrutiny assessments. The assessee highlighted the difficulty in obtaining bank loans due to lack of collateral and additional expenses, asserting that the market rate for unsecured loans was between 18% to 20%. The assessee also presented a comparable chart of interest rates from AY 2006-07 to AY 2010-11, showing consistency in interest payments. CIT (A)'s Decision: The CIT (A) upheld the AO's disallowance, emphasizing that Section 40A(2)(b) aims to prevent excessive payments to related parties. The CIT (A) distinguished the case from the judgment in CIT-I vs Northern Electronics Systems Pvt. Ltd., noting that the lenders were individuals related to the directors, not separate business entities. The CIT (A) stressed the non-obstante clause in Section 40A, requiring strict interpretation. Tribunal's Analysis: The Tribunal examined the issue of whether interest rates above 12% were excessive under Section 40A(2)(b). It acknowledged the assessee's consistent payment of 18% interest in earlier years, which was accepted in scrutiny assessments. The Tribunal noted that the assessee lacked immovable property, making bank loans at lower rates unattainable. It emphasized the need for consistency in assessments unless cogent reasons justified a departure. Supporting Case Laws: The Tribunal cited several judicial precedents supporting the assessee's stance: - Birla Gwalior (P) Ltd. Vs. CIT: It is for the assessee to judge the reasonableness of the interest rate. - Omkar Mal Gauri Shanker vs. ITO: Interest rates up to 24% were not deemed excessive. - AC-3, Jamnagar vs. Suresh Magan Lal Ravani: Interest at 18% on unsecured loans was reasonable. - Abbas Wazir (P) Ltd. Vs. CIT: Reasonableness must be judged from the businessman's perspective. - CIT vs. Computer Graphic Ltd.: Similar views on reasonableness. Conclusion: The Tribunal concluded that the CIT (A) erred in confirming the AO's disallowance. It held that the interest rates paid by the assessee were not unreasonable or excessive, considering the consistent historical rates and the lack of collateral for bank loans. The Tribunal allowed the assessee's appeal and ordered the deletion of the disallowance. Final Order: The appeal of the assessee was allowed, and the disallowance of Rs. 8,32,696/- was deleted. The order was pronounced in open court on 26.11.2015.
|
