M/S VISHNULAXMI SILK MILLS,MUMBAI vs. ITO 18 (3)(5), MUMBAI

Brief facts of the case are that the Assessing Officer has observed that assessee has paid interest to outsiders at rates starting from 12% and other higher rates. He noted that assessee has paid interest at the rate of 18% to persons covered under section 40A(2)(b) of the Act. Assessing Officer proceeded to disallow interest paid to parties covered u/s. 40A(2)(b) of the Act by holding that the fair market value of the interest should be 12%. Learned CIT(A) upheld the Assessing Officer’s order.

Against this order the assessee is in appeal before us. We have heard both the counsel and perused the records. Learned Counsel of the assessee

2 M/s. Vishnulaxmi Silk Mills contended that the assessee is obtaining loan from the market at various rates ranging from 18% to 21% in the contemporaneous situation. He submitted that even bank finance is available at the rate of 15%. He further submitted that advances from relatives were obtained at the time of stress. He further submitted that these loans do not require any collateral or complicated documentation. Hence, learned counsel pleaded that no adjustment/ disallowance is required in this case u/s. 40A(2)(b) of the Act.

Upon hearing both the counsel and perusing the records, we are inclined to agree with the contentions raised by learned counsel of the assessee. On the facts and circumstances of the case on consideration of cogency in the submission of learned Counsel of the assessee in our considered opinion the disallowance of interest to parties u/s. 40A(2)(b) of the Act is not justified. Hence, we direct that the disallowance of interest u/s. 40A(2)(b) be deleted.

In the result, both the appeals filed by the assessee stand allowed. Order has been pronounced in the Court on 06.01.2020.