Tribunal rules in favor of assessee, directing deletion of interest disallowance under Income-tax Act

The Tribunal ruled in favor of the assessee, allowing all six appeals and directing the Assessing Officer to delete the disallowance of interest paid in excess of 12% per annum. The Tribunal emphasized that the interest rate from individuals should not be compared to bank rates due to the informal nature of such transactions. The decision highlighted the lack of legal basis for the disallowance under Section 40A(2)(b) of the Income-tax Act, ultimately finding the Assessing Officer's actions legally unsustainable.

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Issues:
- Disallowance of interest paid at 18% in relation to borrowing made from specified persons under Section 40A(2)(b) of the Income-tax Act.
- Justifiability of disallowance of interest paid in excess of 12% per annum.

Analysis:
1. The appeals involved a common issue where the assessee contested the disallowance of interest paid at 18% from specified persons under Section 40A(2)(b) of the Income-tax Act. The Assessing Officer argued that payments should be restricted to 12% per annum, similar to market rates from banks. The assessee explained the interest rate was based on negotiation and market rates, distinct from bank loans that involve additional requirements. The Assessing Officer deemed the interest excessive without valid justification, leading to disallowances.

2. The assessee appealed to the CIT(A), who upheld the disallowance, citing contrary decisions from High Courts. Despite Co-ordinate Bench rulings favoring the assessee's position, the CIT(A) disagreed, referring to judgments from the Kerala and Allahabad High Courts. The CIT(A) justified the disallowance under Section 40A(2)(b) of the Act.

3. The matter was further appealed before the ITAT. Despite the absence of the assessee, the Tribunal reviewed the case and referred to a Co-ordinate Bench decision supporting the assessee's stance. The Tribunal emphasized that the rate of interest from individuals should not be benchmarked against bank rates, considering the informal nature of such transactions. The Tribunal found the Assessing Officer's disallowance legally unsustainable.

4. The Tribunal noted that despite Co-ordinate Bench decisions supporting the reasonableness of 18% interest per annum, the CIT(A) disregarded them based on High Court judgments. However, the High Courts' decisions did not contradict the Co-ordinate Bench rulings. The Tribunal criticized the CIT(A) for superficially rejecting the Co-ordinate Bench decisions.

5. Additionally, the Tribunal highlighted that the tax rate on interest income for recipients was the same, following a jurisdictional High Court judgment. The Tribunal emphasized that the disallowance under Section 40A(2) could not be justified. Given the findings and precedents, the Tribunal directed the Assessing Officer to delete the disallowance of interest paid in excess of 12% per annum.

6. Consequently, the Tribunal allowed all six appeals, emphasizing the reasonableness of the interest rate and the lack of legal basis for the disallowance. The judgment was pronounced on December 26, 2016, in favor of the assessee.

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