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Income Tax Appellate Tribunal, ‘SMC‘ BENCH
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal in A.Y.2015-16 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-28, Mumbai in appeal No.CIT(A)-28/ITBA-10289/ITO-17(2)(1)/2017-18 dated 11/06/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 17/11/2017 by the ld. Income Tax Officer, Ward 17(2)(1), Mumbai (hereinafter referred to as ld. AO).
The only effective issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the disallowance of interest made by the ld. AO u/s.36(1)(iii) of the Act in the facts and circumstances of the instant case.
We have heard rival submissions and perused the materials available on record. We find that assessee firm is a builder and had filed its return of income for the A.Y.2015-16 on 22/08/2015 declaring total income of Rs. Nil. The ld. AO on perusal of the Work-In-Progress (WIP) account of the assessee observed that assessee has included interest of Rs.25,41,60,323/- to the said WIP account. The assessee was asked to furnish the complete details of interest paid, which was duly furnished by the assessee. The ld. AO observed on perusal of the same that assessee had paid interest on unsecured loans to the tune of Rs.10,53,92,553/-. The assessee also furnished the party wise details of interest payment together with rate of interest paid thereon. The ld. AO observed that rate of interest paid by the assessee to all the related parties were at 12%.The rate of interest to a non- related party i.e. Bharat Mining and Engineering Company was at 18%. The ld. AO also observed that assessee has paid interest @16% to M/s. Chittaranjan Housing Company Pvt. Ltd., and 12% to M/s. Prateek Apparels Pvt. Ltd., both being unrelated parties of the assessee. This goes to prove that assessee has paid interest at varied rates ranging from 12% to 18% to different parties. Based on this, the ld. AO concluded that reasonable rate of interest on unsecured loans paid to outsiders would be 16% and hence, the excess interest of 2% paid by the assessee on certain loans at 18% is disallowable u/s. 40A(2)(b) of the Act r.w.s. 36(1)(iii) of the Act and accordingly, arrived at the disallowance figure of Rs.18,27,530/-. This sum of Rs.18,27,530/- was reduced by the ld. AO from the closing work-in-progress figure. This action of the ld. AO was upheld by the ld. CIT(A).
3.1. It is not in dispute that interest paid to related parties by the assessee was only at 12%. It is not in dispute that the interest paid by the assessee @18% was paid to a non-related party. Once, the interest is paid to non- related party, the primary applicability of provisions of Section 40A(2)(b) of the Act fails as the payment is not made by the assessee to any specified persons being relatives thereon. We find that assessee had borrowed unsecured loans from various parties at varied rates of interest. The rate of interest charged by various lenders is always market driven based on demand and supply and urgent need of money for the assessee. There cannot be standard rule which should be set that assessee should borrow only at prescribed rate, more so, when the loan borrowed is unsecured. Hence, we hold that there is absolutely no case for the Revenue to make disallowance of interest @2% amounting to Rs.18,27,530/- by reducing the same from closing work-in-progress on the ground that it is excessive. Moreover, we find that the Revenue had not disputed the fact that borrowings have been utilised by the assessee for the purpose of its business upto interest rate of 16%. We find that the Revenue is disputing only the alleged excess portion of 2% as not meant for business, which, in our considered opinion, is totally unwarranted in the facts and circumstances of the instant case for the reasons detailed hereinabove. Accordingly, the grounds raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 26/ 11/2021 by way of proper mentioning in the notice board.