TaxTMI 
TaxTMI 
2012 (11) TMI 1344
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....see' in short]. It is engaged in the business of 'trading in textiles and garment accessories'. The return of income for the assessment year under consideration was filed on 26/11/2006 admitting a total income of Rs.67,71,080/ -. The assessment was taken up for scrutiny by issuance of notice under section 143(2) of the Act. 3.1. During the course of assessment proceedings, the AO noticed that the assessee had incurred Rs.50,70,893/- as interest expenses on unsecured loans availed from persons who happened to be Directors of the assessee. The Assessing Officer noted that the assessee had also raised secured loans from bank and financial institution for which interest was paid at the rate of 14%. According to the Assessing Officer, since the assessee had paid higher interest rate on loan secured from its Directors, in comparison to interest rates on loans from bank and financial institution, the interest payment to the assessee's Directors was hit by the provisions of section 40A(2)(b) of the Act. Therefore, the Assessing Officer restricted the interest payments on loans secured from the assessee's directors @ 14% and the difference of [Rs.5070893 - 3943565] Rs.1....
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.... with the circumstances of the present case. Though there also exist case laws that hold that the department cannot step into the shoes of the assessee, the present case involves a clear distinction since the involvement of the company's own directors and their relatives as loan creditors detracts from a purely commercially-expedient approach, and allows for discretion in negotiation of the terms of the loans - normatively always keeping in mind the best interest of the company. The risk climate accompanying these loans is easily distinguishable from that which may attend loans from outsiders or purely commercial organizations. Though the appellant strives to include the presence of 'outside persons' to bolster its argument about commercial rates, the fact remains that most of the loan creditors are 'outsiders' only in a physical sense, but are actually relatives of the directors. By simultaneously claiming the non-application of Sec.40A(2)(b), and apparently also keeping an eye on the requirement of Sec.3(1)(iii)(d) of the Companies Act referred to above, the appellant could be reducing himself to having his feet on two boats at the same time, as it were. In vi....
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....orted the stand of the authorities below. She further submitted that the CIT (A) had, in fact, analyzed the issue in depth and arrived at a conclusion that the AO was justified in restricting the payment of interest on unsecured loans at 14%. It was, therefore, pleaded that as there was no any infirmity in the findings of the CIT (A), there was no need for this Bench to intervene at this point of time as claimed by the assessee. 6. We have carefully considered the rival submissions, duly perused the relevant case records and also the paper book furnished by the learned A R during the course of hearing which contained, among others, documentary evidences and copies of case laws. 6.1. It is an undisputed fact that the assessee had during the period under consideration, secured loans of Rs.5.23 crores and unsecured loans to the extent of Rs.2.32 crores and the turnover of the assessee also increased manifold from Rs.20.89 crores as on 31.3.2005 to Rs.46.8 crores as on 31.3.2006 which had undoubtedly resulted in for the assessee to avail loans from all quarters to meet its business requirements. It is also an undeniable fact that there were lot of restrictions in availing the secured....
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....ed loans when compared to 14% being charged for secured loans by the nationalized banks. 6.5. At this juncture, let us turn our attention to analyze the judicial view on a similar issue. (i) SOM DUTT GOEL & SONS v. ITO - (2009) 27 DTR (Del)(Trib)263: The brief facts of the case were that the assessee had taken certain loans from the persons/entities which were covered u/s 40A(2)(b) of the Act and it had paid interest @ 18% on such unsecured loans to the relative. However, the AO came to a conclusion that, after examining the facts of the issue, the market rate of the interest on loans at the relevant time was between 11.5% - 12%, the assessee by paying interest @ 18% on the loans taken from the relative had violated the provisions of s.40A(2)(b) of the Act and, accordingly, disallowed the excess interest rate of 6% which has been restricted to 3% by the CIT (A). When the issue travelled to the Tribunal, the Hon'ble Bench had, after taking into account the rival submissions, recorded its findings thus - "..........Sec. 40A(2)(b) of the Act provides that if an assessee availed any benefit or services from the persons/entities covered by cl. (2) and such services or benefit i....