RELIABLE RAINWEAR (FIRM),MUMBAI vs. THE ASSESSING OFFICER WARD 19(3)1, MUMBAI

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ITA 41/MUM/2019Status: DisposedITAT Mumbai13 January 2020AY 2015-164 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Assessing Officer was not justified in disallowing part of the interest paid on private borrowings. It noted that private borrowings are on easier terms compared to bank loans which require collateral and stringent conditions.

What were the facts?

The assessee paid interest at 18% per annum on unsecured loans, a significant portion of which was to family members of partners. The Assessing Officer disallowed interest paid in excess of 12% per annum, citing prevailing bank interest rates.

What were the issues?

Whether the disallowance of interest paid on unsecured loans to related parties at a rate higher than bank interest rates is justified under Section 40A(2)(b) of the Income Tax Act.

Which sections of the Income-tax Act were involved?

Section 40A(2)(b)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “SMC”, BENCH

Before: SHRI R.C.SHARMA

For Appellant: Shri Ramesh K Chheda (AR)
For Respondent: Shri Akhtar H Ansari (DR)
Hearing: 13/01/2020Pronounced: 13/01/2020

Assessee by Shri Ramesh K Chheda (AR) Revenue by Shri Akhtar H Ansari (DR) Date of Hearing 13/01/2020 Date of Pronouncement 13/01/2020 आदेश / O R D E R PER: R.C. SHARMA, A.M. This appeal by the assessee is directed against the order dated 28/09/2018 of ld. CIT(A)-30, Mumbai for the A.Y. 2015-16 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961 (in short, the Act).

2.

In this appeal, the assessee is basically aggrieved for the disallowance of interest paid on the unsecured loans @ 18% on the plea that the interest paid by the assessee to the bank was 13.5%, accordingly, by invoking provisions of Section 40A(2)(b) of the Act

Reliable Rainwear (Firm) Vs A.O. addition was made by the A.O., which was confirmed by the ld. CIT(A), against which the assessee is in further appeal before the ITAT.

3.

I have considered the rival contentions and carefully gone through the orders of the authorities below. From the record I found that the assessee had paid total interest of Rs. 35,23,044/- on unsecured loans out of which sum of Rs. 34,90,249/- has been paid to the family members of the partners of the firm. The same is paid @ 1.5% p.m.

(18% p.a.) (at annual rest) on actual balance in the loan account on day to day basis. The A.O. disallowed impugned interest paid in excess of 12% p.a. amounting to Rs. 11,63,416/-. The assessee vide its letter dated 08/11/2017 [item 8(ii)] filed with the A.O. on 09/11/2017 and letter dated 15/11/2017 [item 6] filed with the A.O. on 15/11/2017 submitted detailed explanation justifying the reasonableness of the rate of interest at 18% p.a. The A.O. observed that the rate of interest @ 1.5% p.m. is too much in the context of present bank interest rate and prevailing market rate (without giving any specific instance). Further, he disregarded the terms, conditions, circumstances etc. associated with the cash credit facility availed by the assessee and interest paid on the same to the Cosmos Co. Op Bank Ltd. by stating that “comparison cannot be made with Co.op Bank” (by ignoring the fact that Co.Op Banks are equally governed by RBO and other laws as applicable to Reliable Rainwear (Firm) Vs A.O. nationalized Banks). The Cosmos Co.Op Bank Ltd. stated that “marginal rate at which payee of interest i.e. lender of unsecured loan pays income tax on income (including interest received from the assessee) has no connection with the rate of interest paid by the assessee” (in fact while considering justification U/s 40A(2), the rate at which the payer of interest saves the tax on allowable expenditure, the marginal rate at which the payee pays income tax on such receipts of income, is of prime importance.

4.

I also observe that the terms and conditions on which the bank provides loan are very stringent wherein the assessee is also required to provide collateral security of immovable property, also to comply so many other terms and conditions and incur further expenditure for insurance, inspection by the bank officers etc.. However, no such conditions are being there in case of private borrowings from friends and relatives which are not to be secured by any immovable property by mortgaging the same. Taking into consideration, the terms and conditions on which private borrowing has been taken by the assessee vis a vis borrowing from the bank, I do not find any justification in disallowing the part of interest paid on private borrowing which are comparatively on easier terms. Accordingly, there is no justification for disallowance of part of interest.

Reliable Rainwear (Firm) Vs A.O. 5. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 13th January, 2020.

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