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2016 (1) TMI 128 - ITAT DELHI

2016 (1) TMI 128 - ITAT DELHI - TMI - Disallowance of interest paid to the persons who comes u/s 40A(2)(b) - whether it as unreasonable and excessive and restricting and confirming the interest payment to them at 12% as against interest paid at 15% to 18% per annaum on their unsecured deposits as being continued to be paid as in earlier years and accepted by the department in earlier years? - Held that:- A perusal of chart shown by the assessee of interest expenditure incurred in this year and e .....

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ans 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 proceedings unless there is cogent reason or justifiable grounds for the Revenue to depart from its earlier decisions made u/s 143(3) of the Act.

We are of the opinion that the ld. CIT (A) was not right in confirming the disallowance made by the AO on account of interest paid to the p .....

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ssee, is directed against the order of CIT (Appeals), Meerut dated 05.06.2015 for the assessment years 2010-11. 2. The only ground is against the confirmation of disallowance of ₹ 8,32,696/- out of interest paid to the persons who comes u/s 40A(2)(b) of Income Tax Act, 1961 (hereinafter the Act') by holding it as unreasonable and excessive and restricting and confirming the interest payment to them at 12% as against interest paid at 15% to 18% per annum on their unsecured deposits as b .....

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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 ₹ 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 .....

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ered the assessee's reply and observed that the same was not acceptable. After observing that as per section 40A(2)(b) and interest rate available on unsecured loan in the market, he observed that unsecured loan was available at the maximum rate of 12% interest during the relevant assessment year. He observed that generally unsecured loans were received by the assessee from relatives viz. wife, father, mother, brother, uncles, nephews, their HUFs, self HUF, aunties, bhabhies, etc. and some o .....

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almost all business families. He was of the opinion that in such conditions, rate of interest of 12% was not in any way was a lesser rate. 3.2 The AO also considered the plea of the assessee that in A.Y. 2006-07 & A.Y. 2007-08, the assessments were completed under scrutiny and interest paid to these persons @18% was accepted and the same should also be accepted as reasonable in this assessment year. The AO observed that comparison could not be made between rate of interest which were three y .....

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ned in earlier year, it did not entitle the assessee to contend that the law should not be applied during current assessment year. 3.3 The AO, after observing the submissions of the assessee in detail, made a disallowance of ₹ 8,32,696/- and added the same to the income of the assessee by observing as under :- "It is settled principle of law that for disallowing expenses u/s 40A(2)(b) AO has to give his reasoning. After detailed discussion and analyzing the issue in depth I find that .....

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eal 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 p .....

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relatives. 3.5 As far as relying on judgment of the Hon'ble Allahabad High Court in the case of CIT-I vs Northern Electronics Systems Pvt. Ltd. (2013) 218 taxman 158 is concerned, the said judgment is distinguishable on facts. In the case decided by the Hon'ble Allahabad High Court, the appellant company had taken loan from its sister concern. Thus, in this case, the loan transactions were between two different business entities which can have different needs for finance. However, in the .....

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sions made before the lower authorities below and concised his submissions as under :- (i) A comparable chart of interest paid on unsecured loans of person who come u/s 40A(2)(b) of the Act in AY: 2006-07, AY : 2007- 08, AY: 2008-09, AY: 2009-10 and AY: 2010-11 was filed before the authorities below. The assessment for AY 2006-07 and AY 2007-08 were completed under scrutiny u/s 143 (3) and the interest paid to these persons was accepted to be reasonable and allowed by the AO. He submitted that t .....

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as collateral 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 ₹ 3,68,51,230/- and interest paid on these loans was 40,51,854/- which came to 11% only. ( .....

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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 and no disallowance was made in both the years. He relied on various judicial pronouncements on which he relied before the ld. CIT (A). (iv) He submitted that the AO has incorrectly compared the provisions of Section 40(b) with the provisions of section 40A(2) (b). He submitted that .....

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loans in AY : 2006-07 & AY : 2007-08 in the scrutiny assessment cannot be accepted as res-judicata as the same is not acceptable in income Tax proceedings in the case of same assessee for different years, the ld. AR submitted that the consistency should be maintained and in this regard, he relied on various judicial pronouncements which he relied upon before the ld. CIT (A). In view of the aforesaid submissions, the ld. AR prayed that the orders of the authorities below be set aside and the .....

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es of the case in hand. We find that the assessee has paid interest varied from 8% to 18% on unsecured loans and out of this, 15 persons were paid @ 18% and one person was paid @ 15%. The AO restricted the interest paid to these persons @ 12% and accordingly, made a disallowance of ₹ 8,32,696 which was confirmed by the CIT (A). The assessee contended that these unsecured loans are running even earlier from AY 2006-07 and a comparable chart of these loans for AY 2006-07 to AY 2010-11 was al .....

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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. Fur .....

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s relied upon by the ld. AR to support our aforesaid view :- (i) Hon'ble Madhya Pradesh High Court in the case of Birla Gwalior (P) Ltd. Vs. CIT - (1962) 44 ITR 847 has stated that, "it is for the assessee to judge as to what rate is reasonable. It is further stated that when the income tax authorities have found that the borrowing transactions are not illusory or colorable and the capital is borrowed by the assessee for purpose of business and the amount of interest is paid, they have .....

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