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TMI Blog2020 (10) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of unsecured loans taken from private parties, thus justifying a higher rate of interest as compared to banks/NBFC; that generally the rate of interest on unsecured loans is BPLR +2 to 4% and that in the impugned year the SBI BPLR was 14.5% and further that the assessee itself had paid interest @ 14.5% on a loan taken from an NBFC. It was also duly demonstrated that in the preceding year the AO had accepted 18% as the market rate of interest on unsecured loans after duly examining the issue during assessment proceedings.None of the aforesaid facts have been controverted either by the Ld.CIT(A) or by the Ld.DR before us. The disallowance of interest therefore made by restricting the rate of interest to 12% under section 40A(2)(b) is therefore directed to be deleted. - Decided in favour of assessee. - ITA No. 1601/Chd/2019 - - - Dated:- 22-10-2020 - SMT. DIVA SINGH, JUDICIAL MEMBER AND SMT. ANNAPURNA GUPTA, ACCOUNTANT MEMBER Assessee by : Shri Tejmohan Singh, Advocate Revenue by : Shri Rishi Kumar, JCIT ORDER Per Annapurna Gupta , Accountant Member The above appeal has been preferred by the assessee against the order of the Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BPLR of SBI during the impugned year was 14.60%, therefore the rate of interest charged by the assessee @18% was the market rate charged on unsecured loans. It was further pointed out that the assessee had been availing unsecured loans / trade advance facility from Hinduja Leyland finance ltd. (NBFC of Hinduja Group) bearing 14.5% rate of interest. Our attention was drawn to the submissions made by the assessee in this regard before the Ld. CIT at para 2.4 and 2.5 of the order as under: 2.4 The loan taken by the assessee is unsecured and there is no level playing field between bank/NBFC borrowings and unsecured loans from private parties. The bank charges interest on monthly basis resulting in compounding of interest which ultimately increases the effective rate of interest. On the other hand, in case of loans from any private person, no such formalities of guaranties / securities are needed and moreover the annual renewal charges, insurance charges and loan case processing charges are not borne by the borrower. The interest is payable on annual basis and not monthly basis. The appellant assessee can avail the facility of loan from a private person without undergoing any proced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The reply filed by the assessee to the same had also been filed before the lower authorities along with the copy of the assessment order showing no addition being made on account of the same. Our attention was drawn to the submissions made by the assessee in this regard before the Ld CIT(A) reproduced at 4 of his order is as under: 4. In response to show cause notice dt. 14.12.2018, appellant company through its A.R. filed reply vide letter dt. 15.12.2018 stating that interest on unsecured loans of specified persons was allowed @18% by his predecessor in office after deliberation while completing assessment for the preceding A.Y.2015-16.Ld. A.O. was requested to follow the principle of consistency in the year under consideration also. Ld. A.O. was also requested to verify the facts from the assessment record for the A.Y.2015-16 before taking any decision. Copy reply dt. 15.12.2018 is placed at page no. 13-15 of the paper book. The sequence of events on the issue of interest to specified persons allowed in the assessment proceedings for the preceding A.Y.2015-16 is as under: a) The predecessor in office of the Id. A.O. had also proposed to restrict rate of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the impugned year also. 4.3 The Ld. Counsel for the assessee further contended that in any case the entire exercise was revenue neutral since the major depositors to whom interest had been paid by the assessee company fell in the highest tax bracket of 30% for the impugned year, therefore it could not be said that the assessee had benefited by making interest payment at rate higher than the market rate to the aforesaid persons. 4.4 The Ld. Counsel for the assessee thereafter contended that the Ld. CIT(A) had upheld the disallowance by merely reiterating the findings of the AO without considering the contentions raised by the assessee as above. He drew our attention to the findings of the Ld. CIT(A) at page 14 and 15 of the order as under: The facts of the case, basis of disallowance/addition made by the AO and arguments of the AR during the course of appellate proceedings have been considered. The AR has argued that in the present case, the assessee has availed loan from the persons covered u/s 40A(2)(b) and paid interest at the rate of 18%. As per the AR, loan taken by the assessee is unsecured loan and there is no level playing field between banks/NBFC borrowings a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified persons as referred in Section 40A(2)(b). The argument about the slab rate of 30% applicable to the depositor has also been duly discussed by the AO and it has rightly been observed that the income accruing needs to be taxed in the hands of that person only. Therefore, the assessee cannot be allowed to shift the profit which is taxable in its hand and pass on the same in the hands of the Directors and other related persons. The tax on income accruing to the assessee has to be paid by the assessee itself. If this argument of the AR is accepted then it will render the provision of section 40A(2)(a) as infructuous. Therefore, this contention of the AR is liable to. be rejected being against the spirit of provision of Section 40A(2). The principle of consistency will not be applicable in this case because the interest rate which were prevailing earlier some time ago cannot be said to be the fair market value as referred in Section 40A(2)(a) of the Income Tax Act, 1961 and the assessee was required to make changes even if a higher rate of interest was charged in the past when the fair market value was higher. With the decline in the interest rate in the market, the assessee was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) had even accepted the findings of the AO that the 12% rate of interest was the fair market value of interest without controverting the submissions made by the assessee as reproduced above before him. He therefore contended that the Ld. CIT(A)'s finding on the issue needed to be dismissed since he had merely upheld the findings of the AO without due application of mind and without properly considering the submissions (factual) before him. He therefore pleaded that the rate of interest paid on unsecured loans taken from specified person @18% be accepted as fair market rate and the disallowance made by restricting the said rate to 12% amounting to ₹ 21,86,197/- be deleted. 5. Ld. DR on the other hand heavily relied on the order of the Ld. CIT(A) 6. We have heard the rival contentions and carefully gone through the orders of the authorities below. 7. We find merit in the contention of the Ld. Counsel of the assessee that its claim of 18% rate of interest, paid on unsecured loans taken from specified persons, as the market rate of interest was justified and hence allowable as per section 40A(2)(b) of the Act. None of the factual contentions of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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