BHAVARLAL MANGILAL JAIN,MUMBAI vs. ACIT 19 (1), MUMBAI

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-60, Mumbai [in short ‘the CIT(A)’], dated 15/02/2019 for the assessment year 2012-13.

Shri Nimesh Chothani appearing on behalf of the assessee submitted that the assessee in his return of income had wrongly claimed interest expenditure under the head, ‘Income from Other Sources’. Consequently, the 2 आअसं. 2245/मुं/2019 (�न.व 2012-13) (A.Y 2012-13)

On the other hand, Shri Sanjay J. Sethi representing the Department vehemently defended the impugned order. The ld. Departmental Representative submitted that the assessee has taken different stand before the Assessing Officer and the CIT(A) in respect of interest expenditure. The ld. Departmental Representative submitted that the assessee has furnished details of interest paid and interest received. A perusal of the same would show that the assessee has received interest on Partnership Capital Account @12%. Whereas, the assessee has paid interest to some of the parties as high as 24%. The CIT(A) has made disallowance of interest in excess of 12%.

Both sides heard, orders of the authorities below examined. The assessee in present appeal has raised solitary ground assailing disallowance of interest paid on unsecured loans to the extent of Rs.11,09,464/-. The Assessing Officer in assessment proceedings had disallowed assessee’s entire claim of interest expenditure, as the assessee had claimed interest expenditure under the head, ‘Income from Other Sources’. Before the First Appellate Authority, the assessee made a claim that the interest expenditure be treated as business expenditure. The CIT(A) accepted the alternate claim and allowed interest as business expenditure. The Department is not in appeal against the findings of CIT(A) in accepting interest as business expenditure under section 36(1)(iii) of the Act. Thus, the Department accepted that the interest paid by the assessee is a business expenditure.

The CIT(A) while allowing interest expenditure under section 36(1)(iii), restricted the payment of interest @ 12% on the ground that the assessee has received interest on Partnership Capital Account @ 12%, therefore, interest paid to the extent of 12% is allowable. It is observed that the Department has accepted genuineness of the loan transactions and the fact that it is for the purpose of business. Once the CIT(A) has accepted that the payment of interest is business expenditure, the CIT(A) cannot in an arbitrarily manner restrict the interest rate. For disallowing interest beyond a certain rate, the CIT(A) has to show that the interest paid by the assessee is unreasonable or for extraneous consideration. In the absence of any such finding by the CIT(A), restricting interest payment @ 12% is arbitrary and a result of surmises and conjunctures. In the impugned order, a list giving detail of the parties viz. name, amount and rate of interest, to whom interest is paid by the assessee is 4 आअसं. 2245/मुं/2019 (�न.व 2012-13) (A.Y 2012-13)

In the result, the appeal of the assessee is allowed.