2016 (1) TMI 128 - AT - Income Tax

Tribunal overturns disallowance under Section 40A(2)(b) of Income Tax Act

M/s Ajanta Handtex Pvt Ltd, C/o. M.L. Dhawan And Co. Versus Income Tax Officer, Ward-1 (1), Meerut

M/s Ajanta Handtex Pvt Ltd, C/o. M.L. Dhawan And Co. Versus Income Tax Officer, Ward-1 (1), Meerut - TMI Issues Involved:1. Confirmation of disallowance of Rs. 8,32,696/- out of interest paid under Section 40A(2)(b) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Confirmation of Disallowance of Rs. 8,32,696/- under Section 40A(2)(b):The primary issue in this case revolves around the disallowance of Rs. 8,32,696/- out of the interest paid by the assessee to certain persons under Section 40A(2)(b) of the Income Tax Act, 1961. The Assessing Officer (AO) observed that the assessee had paid interest at rates of 15% to 18% per annum on unsecured loans to certain related parties, which was deemed excessive compared to the market rate of 12%.Facts and AO's Observations:The assessee, engaged in trading handloom cloth, filed a return of income at 'NIL'. During scrutiny, the AO noted that the assessee claimed Rs. 40,51,854/- as interest paid to lenders on unsecured loans. The AO found that interest rates varied from 8% to 18%, with 15 cases at 18% and one at 15%. The AO, referencing Section 40A(2)(b), deemed interest rates above 12% excessive and restricted the allowable interest to 12%, resulting in a disallowance of Rs. 8,32,696/-.Assessee's Arguments:The assessee argued that the interest rates of 18% were consistent with earlier years (AY 2006-07 and AY 2007-08) where such rates were accepted under scrutiny assessments. The assessee highlighted the difficulty in obtaining bank loans due to lack of collateral and additional expenses, asserting that the market rate for unsecured loans was between 18% to 20%. The assessee also presented a comparable chart of interest rates from AY 2006-07 to AY 2010-11, showing consistency in interest payments.CIT (A)'s Decision:The CIT (A) upheld the AO's disallowance, emphasizing that Section 40A(2)(b) aims to prevent excessive payments to related parties. The CIT (A) distinguished the case from the judgment in CIT-I vs Northern Electronics Systems Pvt. Ltd., noting that the lenders were individuals related to the directors, not separate business entities. The CIT (A) stressed the non-obstante clause in Section 40A, requiring strict interpretation.Tribunal's Analysis:The Tribunal examined the issue of whether interest rates above 12% were excessive under Section 40A(2)(b). It acknowledged the assessee's consistent payment of 18% interest in earlier years, which was accepted in scrutiny assessments. The Tribunal noted that the assessee lacked immovable property, making bank loans at lower rates unattainable. It emphasized the need for consistency in assessments unless cogent reasons justified a departure.Supporting Case Laws:The Tribunal cited several judicial precedents supporting the assessee's stance:- Birla Gwalior (P) Ltd. Vs. CIT: It is for the assessee to judge the reasonableness of the interest rate.- Omkar Mal Gauri Shanker vs. ITO: Interest rates up to 24% were not deemed excessive.- AC-3, Jamnagar vs. Suresh Magan Lal Ravani: Interest at 18% on unsecured loans was reasonable.- Abbas Wazir (P) Ltd. Vs. CIT: Reasonableness must be judged from the businessman's perspective.- CIT vs. Computer Graphic Ltd.: Similar views on reasonableness.Conclusion:The Tribunal concluded that the CIT (A) erred in confirming the AO's disallowance. It held that the interest rates paid by the assessee were not unreasonable or excessive, considering the consistent historical rates and the lack of collateral for bank loans. The Tribunal allowed the assessee's appeal and ordered the deletion of the disallowance.Final Order:The appeal of the assessee was allowed, and the disallowance of Rs. 8,32,696/- was deleted. The order was pronounced in open court on 26.11.2015.