2019 (5) TMI 1966 - AT - Income Tax

Disallowance interest expenditure - estimating reasonable rate of interest @ 12% in contrast to actual rate of interest paid @ 15% without finding the reasons for unreasonableness of the interest rate at prevailing market rate - HELD THAT - We find that the AO has disallowed interest expenditure in aggregate paid on loans received from relatives. It is found that the assessee has taken loan from the relatives @15%, whereas similar money has been simultaneously stood invested by way of loans and advances on which interest @ 12% p.a. has been charged. We notice from the concurrent orders of the AO and CIT(A) that no proper justification has been given by the assessee for borrowals at a higher rate and corresponding lending at a lower rate. Clearly the excess interest paid to the relatives qua the loans and advances do not appear to carry attributes of commercial expediency. Therefore, the Revenue authorities were justified in making disallowance of excess interest expenditure. We thus find no infirmity in the order of the CIT(A) and hence, decline to interfere. Penalty u/s 271D - contravention of provisions of section 269SS - matter of accepting unsecured deposit in cash from Wife of the Appellant - HELD THAT - We find that assessee has supported the receipt of cash from wife by way of documentary evidences and bonafides of action. The transaction has been done with spouse and claimed that the assessee was under bonafide belief that transaction with intimate person could not attract mischief of provisions of action u/s 269SS - The aforesaid contention of the assessee pleading bonafide cannot be brushed aside summarily having regard to conventional constructs and postulations which define Indian socio-eco structure. Thus, in the absence of any doubt cast towards bonafides of such small amount of loan, mere breach of section 269SS is to be regarded as technical or venial in nature in the given circumstances. We therefore find adequate justification in the plea of the assessee for setting aside the imposition of penalty u/s 279D of the Act in this regard. AO is likely directed to delete the penalty on this score.

Summary

Issues:
1. Disallowance of interest expenditure on loans from relatives at a higher rate.
2. Imposition of penalty under section 271D for contravention of section 269SS regarding cash deposit received from spouse.

Analysis:

Issue 1: Disallowance of Interest Expenditure
The appellant challenged the disallowance of interest expenditure amounting to Rs.77,907 on loans obtained from relatives at a higher rate of 15% compared to the interest charged at 12% on similar investments. The Assessing Officer and CIT(A) found no commercial justification for the higher borrowing rate and lower lending rate, leading to the disallowance of excess interest payment. The tribunal concurred with the Revenue authorities, stating that the interest paid did not exhibit commercial expediency. Consequently, the tribunal upheld the decision to disallow the excess interest expenditure, dismissing the appellant's appeal.

Issue 2: Imposition of Penalty under Section 271D
The appellant contested the penalty imposed under section 271D for receiving a cash deposit of Rs.50,000 from the spouse, contravening section 269SS. The appellant provided documentary evidence and argued good faith in the transaction, believing that dealings with intimate individuals would not breach section 269SS. The tribunal acknowledged the appellant's genuine belief and the nominal nature of the transaction, considering it a technical or venial breach under the circumstances. Consequently, the tribunal directed the Assessing Officer to revoke the penalty under section 271D. As a result, the appellant's appeal against the penalty imposition was allowed.

In conclusion, both of the appellant's appeals were allowed by the tribunal, with the disallowance of interest expenditure upheld in one case and the penalty under section 271D set aside in the other. The tribunal's decision highlighted the importance of commercial justifications for financial transactions and considered the contextual nuances in determining the applicability of penal provisions under the Income Tax Act.