TaxTMI 
TaxTMI 
2013 (11) TMI 357
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....ng upon him to show cause as to why the interest credited at the rate of 18% on the borrowings from the family be not restricted to 12%. In reply, the assessee contended that these are unsecured loans without any guarantee and taken for long period and earlier this type of interest have been allowed by the department and hence the rate of 18% is allowable expenditure. In support of his claim, he placed reliance on the decision of the Hon'ble Gujarat High Court in the case of Voltamp Transformers (P.) Ltd. v. CIT (1981) 129 ITR105 (Guj) and submitted that interest rate @18% has already been allowed even on the bank loans. In addition to this the assessee also relied upon the order of the Rajkot Bench of the Tribunal in the case of Haren T. Davda v. ACIT [IT Appeal Nos. 33 & 34 (Raj.) of 2007, dated 30-11-2009]. The contentions of the assessee did not find favour of the AO and he framed the assessment u/s.143 (3) of the I. T. Act, wherein he disallowed interest of Rs.3,22,091/- @ 6% u/s.40A(2) (b) of the I.T. Act as excessive as under:- No. Name Relation Interest paid at 18% in Rs. Interest disallowed at 6% in Rs. 1. Bhavik Shirish Ravani Son 3,95,413 1,....
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....& 2003-04, the disallowance of Rs.3,22,091 made by the AO out of interest payment is deleted." 4. In respect of fall in GP, the AO observed that in the previous two assessment years i.e. AY 2006-07 and 2007-08, the assessee has declared GP at the rate of 25.20% and 40.23% respectively. But for the year under consideration the assessee declared GP at the rate of 20.81%. The AO issued show cause notice to the assessee for such decline in the GP rate. In reply, the assessee contended that fall in GP is due to increase in direct export expenses and trade commission in addition to this the assessee also contended that cost for local sales and export sales have been increased comparable to the last two years sales and turnover. The AO rejected the explanation of the assessee and made addition of Rs.12,07,079/- being 5% of total turnover monthly on the ground that G.P. declared in the assessment year under appeal is lower by 7.93% of average profit of last three years. 5. In respect of G.P. addition before ld. CIT(A), assessee contended that details of turnover for the year under consideration and earlier three years are as under:- A. Y. Total Turnover Gross Profit In Pe....
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....r market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." He submitted that cost of loan from the bank is from the higher side whereas, loans from the private parties is available at lower rate of interest. The assessee took the loan at higher rate of interest from family members therefore, AO rightly invoked the provision contained in section 40A(2) of the I.T. Act, 1961 and disallowed excessive interest @6%. 8. With regard to G.P. addition, the ld. D.R. pointed out that there is a sharp fall in G.P. ratio from the previous year. AO asked the assessee to justify the fall in G.P. ratio. Initially, assessee submitted that fall in G.P. ratio was due to increase in direct export where packing expenses and trade commission had increased. When the assessee was confronted that expenditure on these two factors is very comparable to last year figures, then the assessee changed his line of argument and presented a break-u....
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....e looking to the interest paid by the assessee to bank and to supplier, interest @18% paid by the assessee on unsecured loan is neither excessive nor unreasonable. We also find force in the contention of the ld. Counsel for the assessee that it is easy to get funds from the market than from the Banks or Financial Institutions for which if some rate of interest is paid is nothing wrong to satisfy the expediency of funds. In view of the above discussion, we are therefore of the view that ld. CIT (A) is legally and factually correct in deleting the disallowance of interest which was made by AO by invoking the provisions contained in sec.40A(2)(a) of the I.T. Act. We therefore, declined to interfere in the well-reasoned order of the ld. CIT(A). The ground No.1 is rejected. 12. With regard to G.P. addition, from the perusal of para-4 of the assessment order, it can be seen that AO made comparison to figures of last three assessment years and made addition by taking the G.P. rate at 5% of total turnover. The books of account are audited. No defect in the books of account is pointed out by the AO in the assessment order. It is well settled law that no addition can be made merely on the....
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....cepted by the assessee from his own HUF, son and wife. While I concur with the order proposed by my Learned Brother confirming the order of the CIT(A) deleting the addition of Rs.12.07,079/-, I am unable to agree with his order endorsing the decision of the CIT(A) deleting the disallowance of part of interest made by the AO. 3. Perusal of the assessment order shows that the assessee claimed to have taken deposits/loans from his own HUF, wife and son for which he claims to have paid interest to them @18%. It is further seen from the assessment order that the said amounts have been appearing in the books of the assessee for last several years. Keeping in view the prevalent rate of interest in the market, the Assessing Officer held that payment of interest @ 18% was excessive, unreasonable and not guided by business considerations. According to him, the assessee's own HUF, wife and son would not have been able to get interest @ 18% from any source if they had deposited/lent the impugned sums elsewhere. Relying upon the order dated 19-03-2010 passed by this Tribunal in ACIT v. Girdharisingh Rathore ITA No.1139/Rjt/2009, the Assessing Officer considered the rate of interest at 12% as....
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....nt year in Haren T Davda (supra) for AY 2002-03 in which this Tribunal has held as under: "37. We have considered the rival submissions. We hold that the assessing officer has not brought out how rate of interest at 18% is excessive or unreasonable. Section 40A(2)(b) cannot be invoked to make disallowance without establishing that the rate at which interest is paid is excessive or unreasonable. The assessee has brought out factors which influence the rate of interest in unsecured loans arranged from relatives. Further considering the fact that no disallowance was made in earlier year, we do not find any justification for the disallowance..." 7. In a later order involving later assessment year, the same Bench with same quorum has held in its order dated 19.3.2010 in Girdharisingh Rathore (supra) for AY 2006-07 as under: "5. We have carefully considered the finding given by the Assessing Officer and the submission of the AR of the appellant. We find that the assessee has made payment of interest ranging between 9% to 13.50%. As per the provisions of section 40A(2)(b) the excessive or unreasonable interst rate as per the marke....
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....en from family members under Section 40A(2) of the Income Tax Act, 1961 ?" 2. I have carefully considered the above question drawn by the learned Members of the Rajkot Bench and have perused the proposed orders of the learned JM and the learned AM. I have heard the learned CIT-DR and the learned counsel of the assessee. 3. The contentions of learned CIT-DR and the assessee were mainly similar, as advanced by them before the regular Bench and recorded in the proposed orders of the learned JM and the learned AM. 4. The learned CIT-DR submitted that the only issue in dispute in this case is regarding disallowance of interest paid on loans to relatives of the assessee-proprietor under Section 40A(2) of the IT Act. He submitted that the assessee has taken loan of Rs.57.92 lakhs from his wife, son and his own HUF, and the assessee is paying interest at the rate of 18% on the same. He submitted that the AO has observed that prevailing deposit rate with the bank were in the range of 7% to 8%. The AO concluded that the assessee was making excessive payment in respect of the loans taken by him, and was diverting his income to his family members, who were liable to tax at lower rate.....
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....ion filed before the Tribunal in support of the submission that the effective rate of bank interest was 18.44%per annum. He submitted that no similar addition was made in the earlier years, and the loans from the relatives of the assessee were unsecured loans and therefore carries higher rate of interest. He submitted that under the provisions of the Income Tax Act, the government itself is charging 18% interest per annum under Section 201(1A) of the Act. 6. The learned CIT-DR in his rejoinder submitted that charging of interest at 18% under the provisions of the I.T. Act, being penal in nature, is not comparable with the prevailing market rate of interest. He submitted that the ICICI Bank is financing the vehicle loans, which always carries higher rate of interest due to higher risk factor of the bank. 7. I have considered rival submissions and have perused the proposed orders of the learned JM and the learned AM on this issue, and also written note filed by the Revenue. I find that basic facts of the case are not in dispute. The only issue in dispute before me in this case is regarding the disallowance of interest paid on loans to family members of the assessee-proprietor u....
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....evenue. I find that the assessee has filed copy of the bank statement from ICICI Bank to establish that it has paid interest at the effective rate of 18.44% per annum during the period for the secured loan. The bank rate suggested by the learned CIT-DR at the rate of 10.73% is patently wrong since has been worked out on the basis of the balance in the account as on the last date of accounting period. It is a matter of common knowledge that the interests on unsecured loans are normally higher than the interest payable on the secured loans. In order to get a secured loan from the bank, assessee has to undergo a number of formalities and to give security and collateral securities to the satisfaction of the bank, whereas this impediment do not normally exists in the case of unsecured loans obtained by the assessee. The learned CIT-DR's submission that the interest charged under Section 201(A) of the Act at 18% by the Government is not relevant, since is of penal in nature, is also not relevant to the issue before the Tribunal. The decisive factor for the applicability of section 40A(2) of the Act is whether the payment made by the assessee is excessive or unreasonable considering the p....