CHEMAROMA DRUG HOUSE,MUMBAI vs. ACIT, WARD-18(1), MUMBAI

Issue raised is that learned CIT(A) erred in disallowing Rs. 3,50,745/- out of expenses covered u/s. 40A(2)(b) of the I.T. Act.

Brief facts of the case are as under :- During the course of assessment proceedings it was noticed that the assessee firm had taken loans from various parties which included relatives covered u/s.40A(2)(b) of the Act. It was seen that the assessee had paid interest @ 15%, however the relatives were paid interest @ 18%. The total interest paid to relative covered u/s 40A(2)(b) was Rs.18,43,465/-. Out of this amount, only In the case of Shri Rajesh H. Shah (HUF), the interest paid amounting to Rs.90,000/- was @ 12%. The AO asked the assessee to clarify the same. In response, the assessee submitted before the AO that out of the total borrowed fund: a part was borrowed in the initial phase and the rate was agreed @ 18%. These loans were received during the period when, their

The reply of the assessee was duly considered by the AO. He noted that the assessee was not able to substantiate the reasons for taking loans at higher rates from relatives when the loans from outsiders were available at much lower rate. The AO has relied on the following judgements wherein the Courts have held that in case of Payment to relatives, the resonableness has to be proved by the assessee and not the department :-

Accordingly, the AO proceeded to disallow interest paid in excess of 15% and added the same to the total income of the assessee.

Upon assessee’s appeal learned CIT(A) confirmed the disallowance against this order. The assessee is in appeal before the ITAT.

I have heard both the counsel and perused the records. Learned Counsel of the assessee submitted that loans have been taken from the relatives at the time when interest rates were very high and these are old loans. He further submitted that loans were taken from the relatives where a lot of paper formalities are not required, hence he submitted that 18% rate of interest given to some of them should be allowed.

Per contra, learned Departmental Representative relied upon the orders of the authorities below.

Upon careful consideration, I note that the assessee has paid interest @ 18% to the relatives, which is slightly higher than 15% rate paid to the banks. Assessee’s submission is that these advances/loans were taken at the time of stress on the fact that many of the formalities are not required in obtaining loans from the relatives. In my considered opinion rate of interest charged by 3 Chemaroma Drug House the assessee is reasonable. Hence, I set aside the orders of authorities below and delete the addition.

In the result, appeal by the assessee stands allowed. Order has been pronounced in the Court on 9.10.2019.