2015 (11) TMI 736 - AT - Income Tax

Excess interest paid by the assessee under section 40A(2)(a) - CIT (A) has allowed partial relief to the assessee whereby the interest has been restricted to 13.5% instead of 15% - Held that - It is the consistent view of the Hon ble Supreme Court that the rule of consistency should be followed in respect of assessment proceedings though the principle of res judicata is not applicable. During the course of hearing, it was enquired by the Bench whether the assessee and the person who had given the loan both are assessed to Income-tax at maximum marginal rate or not. To this, it was replied by the assessee that both are taxed at maximum marginal rate. Therefore, it cannot be said that higher rate of interest is paid by the assessee to the lenders to evade income-tax In the present case the matter before the ld. CIT (A) was payment of interest for the A.Y. 2006-07 and also for A.Y. 2008-09. In both the matters, the interest was restricted by the AO to 12% whereas in the matter for A.Y. 2006-07, the CIT (A) has uphold the payment of interest @ 15%. In the assessment year under consideration before us, the ld. CIT (A) has restricted it to 13.5% despite the fact that in the earlier assessment year the payment of interest @ 15% has been upheld. We do not find any justification in the order passed by the ld. CIT (A). The reason given by the AO were also available with him when ld. CIT (A) has passed the assessment order for A.Y. 2006-07. Since there is no material change in the circumstances, therefore, the interest payable cannot be reduced to 13.5%. Therefore, we are of the view that the orders passed by AO and ld. CIT (A) are required to be set aside and we accordingly held that the 15% interest claimed by the assessee for the loan borrowed is allowed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality and justification of disallowance/additions made by the Assessing Officer.
2. Appropriateness of interest rate disallowed under section 40A(2)(b).
3. Consistency in the application of interest rates in previous and current assessment years.

Issue-wise Detailed Analysis:

1. Legality and Justification of Disallowance/Additions:
The appeal filed by the assessee challenges the disallowance/additions made by the Assessing Officer (AO) as being against the law and facts on record. The AO disallowed Rs. 10,26,771/- under section 40A(2)(b), restricting the interest rate on unsecured loans from friends and relatives to 12% instead of the 15% claimed by the assessee. The assessee contended that the interest paid was bona fide and not excessive or unreasonable considering the market value of the facilities for which payment was made.

2. Appropriateness of Interest Rate Disallowed Under Section 40A(2)(b):
The AO's decision was based on the prevailing market rate of 12%, whereas the assessee paid 15% interest to nine related parties. The AO issued a show-cause notice and, unsatisfied with the assessee's response, disallowed the excess interest. The assessee argued that the loans were old, subjected to scrutiny in earlier years, and that the interest rate had not changed. Additionally, the bank's terms restricted the withdrawal of these loans, justifying the 15% interest rate.

The Commissioner of Income Tax (Appeals) [CIT (A)] partially allowed the appeal, restricting the interest rate to 13.5%. The CIT (A) agreed that section 40(b) was incorrectly applied by the AO, as it pertains to partnerships, not companies. However, the CIT (A) deemed the 15% interest excessive compared to the market rate of 13.5%, considering the bank's interest rate and associated costs.

3. Consistency in Application of Interest Rates:
The assessee emphasized that the same interest rate of 15% was upheld by the CIT (A) for the assessment year 2006-07. The principle of consistency was argued, highlighting that both the assessee and the lenders were taxed at the maximum marginal rate, negating any tax evasion motive. The Hon'ble Supreme Court's principle of consistency in assessment proceedings was cited, asserting that in the absence of any material change, the interest rate should remain consistent.

The Gujarat High Court's ruling in CIT vs. Gujarat Gas Financial Services Ltd. was referenced, reinforcing that without substantial change, the revenue should not alter its stance on interest rates. The court emphasized that the rule of consistency should prevail, and the interest rate of 15% should be upheld as it was in the previous assessment year.

Conclusion:
The tribunal concluded that there was no justification for reducing the interest rate to 13.5% when it was upheld at 15% in the earlier assessment year. The orders passed by the AO and CIT (A) were set aside, and the interest rate of 15% claimed by the assessee was allowed. The appeal was thus decided in favor of the assessee, maintaining the interest rate at 15%.

Order Pronounced:
The order was pronounced in the open court on 21/10/2015, allowing the assessee's appeal.