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TMI Blog2016 (1) TMI 128X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 at 'NIL'. Later, the case was taken up for scrutiny and notice u/s 143 (2) of the Act was issued on 23.09.2011. Subsequently, a detailed questionnaire along with notice u/s 142 (1) was issued on 24.08.2012. In response, the assessee filed the written submissions, other details and also produced the books of account, which were test checked. The AO observed that during the year under consideration, the assessee had claimed to have incurred an amount of Rs. 40,51,854/- as interest paid to lenders who had given the assessee unsecured loans as expenditure as per P&L account. He observed that rate of interest in 15 cases was paid @ 18% and in one case, it was paid @ 15%. He also observed that in some of the cases, the interest was also paid @ 8%, 9% and 12%. The AO had given the details of 16 persons who had been paid @ 18% & 15% at page 2 of his order. The AO further observed that as per section 40A(2)(b) of the Act, the rate of interest which is more than 12% on unsecured loans was at higher side and accordingly, asked the assessee to show cause as to why the interest expenditure be not restricted in those 16 cases @ 12% instead of 18% & 15% as the rate of 12% was fair as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses u/s 40A(2)(b) AO has to give his reasoning. After detailed discussion and analyzing the issue in depth I find that interest rate in excess of 12% is not reasonable as per availability of similar service at lower cost. Thus excess interest is disallowed. Total interest @ 18% is Rs. 24,06,583/- and @ 15% is Rs. 1,52,508/-. Disallowance of 6% on Rs. 24,06,583/- against 18% comes at Rs. 8,02,194/- and 3% on Rs. 1,52,508/- against 15% comes at Rs. 30,502/-. Thus total disallowance comes at Rs. 8,32,696/- (802194 + 30502) which is add back." 3.4 Aggrieved, the assessee filed an appeal before the first appellate authority and the ld. CIT (A) confirmed the disallowance by observing as under :- "3.4 I have gone through the rival submission as above. The vary purpose of section 40A(2)(b) is to discourage payment of excessive or unreasonable expenditure to certain class of persons. When the assessee is a company, such person would be any director of the company or any relative of such director. It has not been disputed by the AR that payment of interest has been made to persons specified u/s 40A(2)(b). The AO has given elaborate reasons in his assessment order and has countered ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l security and hence getting any loan from Bank was next to impossible and that was the reason why the assessee had not been able to get any loan from bank. He further submitted that as the assessee was always in need of finance the assessee could not think of returning the loan, as it shall affect the turnover of the business and the average monthly balance of the unsecured loans came to Rs. 3,68,51,230/- and interest paid on these loans was 40,51,854/- which came to 11% only. (ii) He submitted that the assessee paid interest to close relations @ 18% per annum and AO allowed interest @ 12% market rate whereas the ITAT held in various cases that market rate up to 24% was reasonable. In this regard, he relied on the cases relied upon before the ld. CIT (A). (iii) Ld. AR submitted that the interest had been paid at more than 12% to the parties whose deposit were old running from year earlier than AY : 2006-07 and interest @ 18% was paid to them in all the years i.e. AY : 2006-07 to AY : 2010-11. He submitted that the assessments for AY: 2006-07 & AY : 2007-08 were completed under scrutiny u/s 143(3) of the Act and in both the years, the interest was paid @) 18% which was allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t @ 18% was paid to some of the depositors. We also find that in AY 2006-07 and 2007-08, the assessment was completed under scrutiny u/s 143(3) and the interest paid @ 18% was accepted by the department and no disallowance was made in the said assessment years. In this regard, we have also gone through the judicial pronouncements relied by the ld. AR that market rate up to 24% was reasonable. Further, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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