1985 (10) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Excessive interest disallowance under section 40A(2) of the Income-tax Act, 1961.
2. Legal competence of the Commissioner (Appeals) to uphold the levy of interest under section 215 of the Act.

Issue-wise Detailed Analysis:

1. Excessive Interest Disallowance under Section 40A(2):

The first issue pertains to the Commissioner (Appeals) disallowing interest paid to Chaudhary Harbans Lal & Sons at a rate of 28%, deeming it excessive and reducing it to 24% based on a prior Tribunal decision. The assessee contended that the IAC (Assessment) did not provide material evidence to justify the disallowance and failed to confront the assessee with the grounds for making the disallowance. The assessee argued that the IAC (Assessment) erroneously compared the interest rate on unsecured loans with the bank overdraft rates, which are secured, and highlighted that in a previous assessment year, a higher interest rate of 31% had been allowed.

Upon reviewing the submissions, the Tribunal found the disallowance unsustainable. The IAC (Assessment) did not refer to the prevalent market rate for unsecured borrowings and improperly relied on bank overdraft rates. Without proper material evidence, the disallowance could not be justified. Additionally, the Tribunal found the assessee's arguments persuasive, noting that an interest rate of 28% six years later in an inflationary economy like India could not be deemed excessive. Furthermore, the ITO had allowed a 31% interest rate in a subsequent assessment year. Consequently, the Tribunal deleted the disallowance sustained by the Commissioner (Appeals).

2. Legal Competence of the Commissioner (Appeals) to Uphold the Levy of Interest under Section 215:

The second issue involves the assessee challenging the Commissioner (Appeals)'s competence to uphold the levy of interest under section 215 of the Act. The IAC (Assessment) had directed the charging of interest under section 217(1)(a) but made an alternative observation regarding section 215. The Commissioner (Appeals) canceled the interest under section 217(1)(a) but sustained it under section 215.

The assessee argued that the IAC (Assessment) did not levy interest under section 215 and merely made an observation, which does not amount to a levy. The Commissioner (Appeals) failed to notice this and upheld the levy of interest on a different basis, which was contrary to law. The assessee further contended that it was not required to file any estimate of advance tax and that the IAC (Assessment) incorrectly interpreted the provisions of section 209A.

The Tribunal found that the IAC (Assessment) did not actually levy interest under section 215 and merely made an observation. The basis for levying interest under sections 217(1)(a) and 215 is different, and the IAC (Assessment) did not record a positive finding for the levy under section 215. Additionally, the Tribunal agreed with the assessee's argument that it was not required to file any estimate of advance tax based on the facts and circumstances of the case. The Tribunal noted that the provisions of section 209A were not applicable, as the income assessed and returned in previous years was below the taxable limit. Consequently, the provisions of section 215 were also not applicable. The Tribunal reversed the order of the Commissioner (Appeals) and canceled the levy of interest under section 215.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal deleting the disallowance of excessive interest and canceling the levy of interest under section 215.