SHRI NARESH KUMAR LUHADIA,JAIPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the assessee is directed against the order dated 27th July,

2018 of ld. CIT (A)-3, Jaipur for the assessment year 2013-14. The assessee has

raised the following grounds :-

“ 1. On the facts and in the circumstances of the case and law the Commissioner of Income Tax (Appeals)-3, erred in confirming disallowance of Rs. 1,61,782/- out of interest paid to relatives u/s 40a(2)(b) by restricting the rate of Interest @ 15% instead of 18% paid by the assessee.

2 ITA No. 984/JP/2018 Shri Naresh Kumar Luhadia, Jaipur.

income from manufacturing and selling of cattle feed, trading of shares and income

from house property. The assessee filed his return of income on 23.09.2013

declaring total income of Rs. 70,90,920/-. The AO noted that the assessee has

taken loans from related parties @ 18% whereas the other loans were taken from

unrelated parties at lower rates. Accordingly, the AO restricted the payment of

interest to the related parties at 15% per annum and made disallowance of Rs.

1,61,782/- under section 40A(2)(b) of the IT Act. The assessee challenged the

action of the AO before the ld. CIT (A) but could not succeed.

taken loans from 62 parties and paid total interest of more than Rs. 52 lacs. He has

further submitted that interest paid to the related parties is only Rs. 9,70,697/-. The

ld. A/R has further submitted that even otherwise in case of 18 unrelated parties the

assessee has taken loans @ 15% and 12% which are less than the rate of 18%

whereas for the remaining unrelated parties which is the majority of the cases the

loans were taken @ 18%. Therefore, the AO has picked up only the selected cases

where the loans were taken at less than 18% to compare with the loans taken from

the related parties instead of considering the complete facts of loans taken by the

assessee from the unrelated parties as well as the related parties. The ld. A/R has

further contended that even otherwise the loans taken from the unrelated parties

involve other costs, like processing fee, security etc. and further the repayment is as

per schedule whereas in case of loans taken from the related parties, there is no

other expenditure and repayment is as per the convenience of the assessee and not

as per the fixed schedule as in case of unrelated parties. The ld. A/R has relied

3 ITA No. 984/JP/2018 Shri Naresh Kumar Luhadia, Jaipur. upon the decision of Ahmedabad Bench of the Tribunal dated 9th July, 2010 in case

of Vipul Y. Mehta vs. ACIT in ITA No. 869/Ahd/2010 as well as decision of Coordinate Bench of this Tribunal dated 25th June, 2018 in the assessee’s own case

in ITA No. 64/JP/2018. Thus the ld. A/R has submitted that the addition made by

the AO of 3% under section 40A(2)(b) of the Act is not justified when in the

majority of the unrelated parties loans were taken @ 18%.

below and submitted that there is no dispute that the assessee has paid interest to

the related parties @ 18% whereas the interest was paid to the unrelated parties @

15%. Therefore, the AO has rightly invoked the provisions of section 40A(2)(b) of

the Act and determined the fair rate of interest at 15% and disallowed the 3% of

interest paid to the related parties.

record. We note that the assessee has debited the total interest of Rs. 46,26,990/-

in the Profit & Loss account. The list of the parties, the amount of interest and rate

of interest are produced by the ld. CIT (A) at pages 3 to 7 as under :-

Sl. No. Name of the party Interest TDS Total Rate of Amt. Amt. Amt. interest. 1 Assam Edible Oils Ltd. 67500.00 7500.00 75000.00 15% 2 Mushkan Vinimay Pvt 129600.00 14400.00 144000.00 15% Ltd. 3. Alok Kumar Paharya 17025.00 1892.00 18917.00 15% 4. Laxmipat Paharya 7350.00 817.00 8167.00 15% 5. Shanta Bengani 22050.00 2450.00 24500.00 15%

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Thus it is clear that there are 56 parties from whom the assessee has taken loans @

15% and @ 18% except in couple of cases where the rate of interest was 12%. We

further note that the assessee given the details wherein it was explained that out of

56 parties, only in case of 18 parties the interest was paid less than 18% i.e. 15%

and 12% in case of 3 parties. The remaining 38 parties have given the loans to the

assessee @ 18%. Thus the AO has considered the fair interest rate by selecting

these 18 cases and ignoring the remaining 38 parties. The interest paid to the

related parties is only about 10 cases and, therefore, comparing these 10 cases of

interest paid @ 18% against the selected parties where the interest was paid @

15% is not justified when the other 28 parties were paid the interest @ 18%.

Therefore, when there are comparable cases of unrelated parties at least in case of

28 parties to whom the assessee paid interest @ 18%, then instead of adopting the

rate of interest on charry fixed basis, the AO should have considered the complete

facts of payment of interest by the assessee to unrelated parties. We find that when

in the majority of the unrelated parties are paid by the assessee at 18%, then the

payment of interest to the related parties @ 18% is not unreasonable or excessive

having regard to the fact that there are various advantages of having the loans from

the related parties for repayment of loans as well as no collateral or other security is

required. Undisputedly, in case of unrelated parties, the repayment has to be made

strictly as per the schedule or agreement between the parties whereas in case of

related parties the repayment of loan is as per the convenience of the assessee and

there is an advantage of flexibility of repayment schedule. Accordingly, in view of

the fact that in the majority of unrelated parties the interest rate was 18%, this case

8 ITA No. 984/JP/2018 Shri Naresh Kumar Luhadia, Jaipur.

would not fall in the category of excessive or unreasonable interest paid to the

related parties, hence we delete the addition made by the AO in this regard.

Order is pronounced in the open court on 26/10/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 26/10/2018. Das/

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

9 ITA No. 984/JP/2018 Shri Naresh Kumar Luhadia, Jaipur.