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TMI Blog2017 (1) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee from individuals who are not carrying on the business of banking. Essentially, a loan taken from the bank not only involves furnishing of securities and documentation but also is advanced after safeguarding the interest of the lenders in a robust manner. Quite unlike such transactions/borrowings from individuals are much less organized and without the cumbersome requirements of documentation and collateral securities etc. In our considered view, the very action of the Assessing Officer in holding that the borrowings from the specified persons at a rate higher than the rate at which bank would lend its loans to the borrowers, would be excessive and unreasonable and the disallowance made by the Assessing Officer was, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings, the Assessing Officer noticed that the assessee has paid interest @ 18% on borrowings from specified persons u/s 40A(2)(b), but, the Assessing Officer was of the view that such payments should be restricted to 12% per annum as is the market rate of borrowings from banks. It was in this backdrop that the Assessing Officer required the assessee to show-cause as to why the amount of interest paid in excess of 12% per annum not be disallowed u/s 40A(2)(b) of the Act. It was explained by the assessee that the interest paid is at the prevailing market rate, based on negotiation, and it cannot be equated with loans from banks and financial institutions, because the assessee has in such a case to give equatable market and collateral s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Kerala High Court in the case of CIT vs. V.I. Baby Co. [2002] 123 Taxman 894 (Ker.) and Hon ble Allahabad High Court in the case of CIT vs. H.R. Sugar Factory (P.) Ltd. [1990] 53 Taxman 63 (All.). Ld. CIT(A) was of the view that the Assessing Officer was justified in disallowing the proportionate interest expenses by applying the provisions of Section 40A(2)(b) of the Act. The assessee is not satisfied and in further appeal before us. 6. At the time of hearing, none appeared on behalf of assessee, but we have heard the ld. DR, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. We find that the question as to whether 18% per annum interest rate can be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest at a marginally higher rate, there is no illegality in accepting the loans and pay a little bit higher interest. The over all position to be seen is as to whether the assessee has earned the profit or not; i.e. whether the assessee is paying interest more than the profit or not. The fact that such loans are from close relatives and friends, in our opinion, is of no use to come to the conclusion that he should not have paid interest on such a higher rate. 6. In the present case, there is doubt that the assessee was paying interest to outsiders @ 12%, but if it had to pay interest @ 18% to the Directors, it cannot be said that the assessee was paying higher interest to the Directors intentionally. The Revenue, in the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red view, the very action of the Assessing Officer in holding that the borrowings from the specified persons at a rate higher than the rate at which bank would lend its loans to the borrowers, would be excessive and unreasonable and the disallowance made by the Assessing Officer was, therefore, devoid of legally sustainable basis. 8. We have noticed that there are Co-ordinate Bench decisions holding that 18% per annum interest is reasonable and it cannot hit the provisions of Section 40A(2)(b) of the Act, yet the CIT(A) declined to follow these decisions on the basis of judgments of Hon ble Kerala High Court in the case of CIT vs. V.I. Baby Co (supra) and Allahabad High Court in the case of CIT vs. H.R. Sugar Factory (P.) Ltd (supra). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket of 30%; at the same rate at which the assessee company at the relevant time was assessed. In fact, the assessee had demonstrated before CIT(Appeals) that the tax liability of the company on such disputed remuneration amount was exactly the same as the tax the four Directors had paid to the Revenue. To these factual aspects, even the Revenue has, at no stage raised any dispute. We may therefore, proceed on the basis that the element of excessive remuneration represents that income of the company which was eventually taxed in the hands of the Directors at the same rate at which; had it not been so distributed; would have been taxed in the hands of the company. In that view of the matter, the question of revenue neutrality would immediatel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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