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TMI Blog2010 (8) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ .3,67,271/- under section 40A(2)(b) of the Act. It is submitted that it be so held now and disallowance as confirmed by the Learned Commissioner of Income Tax (Appeals) be deleted. (ii) The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the loan availed from relatives on which interest is paid are unsecured loans for which normally the rate of interest is higher than the rate of interest paid to banks on unsecured loans and are also of permanent nature as compared to loans from outsiders which are for short term duration only and hence also disallowance should not have been confirmed. 3. The brief facts of the case are that the Learned Assessing Officer noted that the assessee has paid interest @ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial year 2003-04 was 11% to 12%. (v) Onus lies on the assessee to prove that interest paid to relatives is not excessive; (vi) There was no difference in the quality of loans obtained from, the outsiders to whom interest of 12% was paid and loans from specified related persons to whom 18% interest was paid. 4. On appeal, the assessee submitted that Bank rate is the real yardstick of rate of interest prevailing in the market on the borrowed funds. The rate of interest charged by the Naroda Nagrik Sahkari Coop. Bank Ltd. was 16.5% per annum which is payment on monthly basis which is 17.81% per annum on annualized basis. It has been stated that Learned Assessing Officer has failed to appreciate that interest rate has been charged @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or facilities or legitimate business needs of the assessee s business or benefit derived by it or accruing to the assessee from the payments. The appellant has claimed that in his case, the expenditure is not excessive or unreasonable looking to the above criterias. 5. After considering the submissions of the assessee the Learned Commissioner of Income Tax (Appeals) has held as under :- I have carefully considered the contentions of the appellant and has also carefully gone through the assessment order. The three criterias laid down by the Act are the reasonableness of the expenditure or fair market value of the goods and services, legitimate business need and benefit derived by the assessee from the payments. In the appellant s c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has shown sales of ₹ .28.52 crores and has shown Gross Profit. Of 1.06 crores at the rate of 3.74%. The net profit will even be less than this. So even, by this criteria of benefit derived by the assessee from the loan does not go in favour of the appellant. Moreover, the Learned Assessing Officer has also pointed out that prime lending rate during the period under consideration was 11% to 12% in the various nationalized banks. In view of above facts, it is clear that excess interest of 6% was paid to the specified person which is disallowable. Similar disallowance has been upheld in the case of Anandji Shah vs. Commissioner of Income Tax (1990) 81 ITR 171 by the Hon'ble Kerala High Court on account of excess interest pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative of the assessee argued that the rate of interest paid to the bank by the assessee in respect of secured loan was more than 16.5% and the Learned Assessing Officer was not justified in observing that rate of interest in respect of bank loan was less than 10%. He further submitted that no material was brought on record by the Revenue to show that the rate of interest @ 18% on unsecured loan is so high so as to warrant any disallowance out of the same by invoking the provisions of Section 40A(2) of the Act. He also pointed out that as rate of interest in respect of secured loan to bank was more than 16.5% the rate of interest @ 18% in respect of unsecured loan cannot be held as excessive. 9. The Learned Departmental Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsecured loan @ 18% cannot be held as excessive or unreasonably higher than the market rate. Further, simply because the assessee could make a better bargain with some parties and could secure unsecured loan at a lower rate of interest, it does not imply that the market rate of interest was lower. In the instant case market rate of interest in respect of secured loan is evident by the bank loan taken by the assessee on which interest @ 16.5% was charged in respect of actual borrowing and therefore interest of 18% in respect of unsecured loan cannot be held as excessive or unreasonable than the market rate so as to warrant any disallowance by invoking provisions of Section 40A (2) of the Act. In view of the above, we delete the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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