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TMI Blog2014 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... infirmity in same and same is upheld – Decided against Assessee. Disallowance u/s 40A(2) – excessive interest in excess of 12% - Held that:- since company had stopped it operation at Chipri no banker would have financed its business for which borrowing from Directors were inevitable and loans have been taken during impugned assessment year - Loans have been obtained without pledging of any title deed or security and without going through any cumbersome process which is otherwise applicable to loans obtained from banks and other financial institutions - Payment of interest @15% p.a. under facts and circumstances of case cannot be considered as excessive or unreasonable – Decided against Revenue. - ITA No.312,467/PN/2012 - - - Dated:- 10-10-2013 - R S Padvekar And R K Panda, JJ. For the Appellant : Shri Mahendra Mehta For the Respondent : Shri D S Kothari ORDER:- PER : R K Panda These are cross appeals, the first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dated 02-12-2011 of the CIT(A) Kolhapur relating to Assessment Year 2009-10. 2. The assessee s appeal was earlier dismissed by the Tribunal for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. I have considered the submissions of the appellant. It is a fact that the appellant has debited interest pertaining to the previous years relevant to assessment years 2006-07, 2007-08 and 2008-09 along with interest pertaining to the previous year relevant to assessment year 2009-10. It is also a fact that the appellant maintains its books of account on mercantile basis. Therefore, under the normal accounting system, the appellant should have debited these expenses to the profit and loss account during the relevant accounting periods. A person accepts a particular amount of money as loan or deposit either without interest or with interest. The appellant has not been able to bring out any factor which would lead to a conclusion that the aforesaid amounts were interest bearing funds ever since the loans were taken. In fact, in the cases of Shri Atulkumar S. Jain, Ghodawat Industries India Pvt. Ltd., Shri Pankaj S. Jain and Shri Pushpraj S. Jain, the amounts have been outstanding since 1997-98 and no interest was paid to them till this year. Hence, it can be safely concluded that interest which accrues with the passage of time and quantified on a particular date was not chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the impugned assessment year has debited the interest and deducted the tax thereon and deposited the same, therefore, the same should be allowed as deduction in the impugned assessment year. He accordingly submitted that the full interest should be allowed as deduction in the impugned assessment year. 7. The Ld. Departmental Representative on the other hand heavily relied on the order of the Assessing Officer and the CIT(A). He submitted that the assessee is following mercantile system of accounting, therefore, he cannot be allowed to tinker with his accounts and debit the interest of 3 preceding assessment years to the profit and loss account of the impugned assessment year. 8. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. There is no dispute to the fact that the assessee has not debited the interest on unsecured loan in the profit and loss account for the Assessment Years 2006-07, 2007-08 2008-09 even though it follows mercantile system of accounting. We find the assessee has debited interest amounting to Rs.52,80,702/- being interest of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He therefore asked the assessee to explain as to why the interest paid @15% p.a. to the related parties should not be treated as excessive since prevailing market rate is 12% p.a. In response to the same, the assessee replied as under which has been reproduced by the AO in the body of the assessment order : The interest paid to directors and their relative @15% may look unreasonable judging it from the prevailing bank rate of interest etc., but it has also to be born in mind that the entire loan is unsecured it has no charge on any of the assets of the company if the company has not be revived it would have been difficult to pay back even the principle. As the company earned profits in the year 2008-09 it though of paying an interest @15% and further payment of interest @15% has not created any evasion of tax as all the recipients are also chargeable to tax at maximum rate only. The Hon ble Bombay High Court in CIT Vs. Indo Saudi Services (Travel) P. Ltd. 310 ITR 306 has held that in view of CBDT circular No.6-P dated 6th July 1968 no disallowance is to be made in respect of payments to sister concerns where there is no attempt to evade tax. 10. However, the AO was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from any sources is negligible or time consuming. It is under these circumstances that ordinarily unsecured loans are taken at a rate which is higher than the existing bank lending rates. In fact, the PLR i.e. the Prime Lending Rate declared by the banks is never available to the client unless the client is reliable, old, has a proven track record of repayment and does a considerable part of its banking business with that institution. Therefore, even when PLR is 7% or 8%, the actual lending rate hovers around 12% to 13%. It is known that the co-operative banks who have a slightly lenient rule in disbursing loans charge a rate which is not less than 14% to 15%. Instances also abound wherein usufructory rates of interest are charged. Under these circumstances, if the appellant has paid an interest rate of 15% to the directors and shareholders of the company, then the same cannot be disallowed merely because the amount has been paid to the shareholders and directors. One must not lose sight of the fact that these payments were made to the appellant without pledging of any title deed or security and without the appellant going through any cumbersome process of formal compliances whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in appeal before us with the following grounds : 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting of Rs.10,58,035/- made on account of disallowance of interest on unsecured loan which was paid to directors and relatives in excess of 12% when prevailing bank rate is up to 12% which is an indirect attempt of evading tax. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in deleting addition made on account of excess interest paid to directors and relatives when there was no reason what so ever for the assessee to continue such unsecured loans and pay interest at the rate of 15% when substantial funds were in possession of the assessee for liquidating the said loans. 3. Whether on the facts and in circumstances of the case and in law, the Ld CIT(A) was justified in ignoring the fact that beneficiaries are the directors and relatives who have direct control over the assessee company and are at no loss what so ever by lending loans, hence pledging of title deed as security against loan to their own controlled company will not make any difference to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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