IDRS LABS PRIVATE LIMITED vs. DEPUTY COMMISSIONER OF INCOME TAX

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ITA/63/2020HC KarnatakaKAHC01010056202009 January 2023Bench: P.S.DINESH KUMAR,G BASAVARAJA6 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that revenue officers cannot arbitrarily fix the rate of interest or decide business expediency. The rate of interest agreed upon by the parties at 18% should be upheld as the director had declared and paid tax on this interest.

What were the facts?

The assessee company paid interest at 18% on a loan taken from its director. The Assessing Officer restricted the interest to 12%, while the CIT(A) increased it to 15.5%, which was confirmed by the ITAT. The company had obtained a secured loan at 14.5% from a financial institution.

What were the issues?

Whether the Tribunal was correct in confirming the fair market rate of interest at 15.5% on a loan from a director, when the parties had agreed to 18% and the director had paid tax on it.

Which sections of the Income-tax Act were involved?

Section 40A(2)

AI-generated summary — verify with the full judgment below

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ITA.63/2020 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 9TH DAY OF JANUARY, 2023 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE G. BASAVARAJA INCOME TAX APPEAL NO.63 OF 2020 BETWEEN: IDRS LABS PRIVATE LIMITED, NO.235-H, PHASE 3, HOSUR ROAD, BOMMASANDRA INDUSTRIAL AREA, BENGALURU-560 099. (REPRESENTED BY ITS DIRECTOR SRI SHIVKUMAR MADKI, AGED ABOUT 42 YEARS, S/O SRI VIJAYKUMAR MADKI. ...APPELLANT (BY SRI SUDHEENDRA B. R., ADVOCATE) AND: DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -3(1)(1), BANGALORE, BMTC BUILDING, 80 FT. ROAD, KORAMANGALA 6TH BLOCK, BENGALURU -560 095. ...RESPONDENT (BY SRI DILIP M., STANDING COUNSEL FOR SRI K.V. ARAVIND, SR.STANDING COUNSEL)

THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23/10/2019, PASSED IN ITA NO.1309/BANG/2018, FOR THE ASSESSMENT YEAR 2015- 2016, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ETC,. Digitally signed by RAMYA D Location: High Court of Karnataka

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ITA.63/2020

THIS ITA COMING ON FOR

HEARING THIS DAY, P.DINESH KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT

This appeal by the assessee challenging the order dated

October 23rd, 2019, passed in ITA No.1309/Bang/2018 has been admitted to consider two questions of law.

2.

Shri.B.R.Sudheendra, learned advocate for the assessee and Shri.M.Dilip, learned advocate for Revenue jointly submit that Question No.1 will cover the issue involved in this appeal and it reads as follows: "1. Whether, on the facts and circumstances of the case and law applicable, the Tribunal was correct in law in confirming the order of the Ld. CIT(A) in determining the fair market rate of interest at 15.5% p.a. under section 40A(2) of the Income Tax Act, 1961?"

3.

Brief facts of the case are, assessee was borrowing loan from one of its directors Shri. Yogesh

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ITA.63/2020 Bhandari. As on April 1st, 2014 the loan amount had accumulated to Rs.2,22,43,087/-. For the Assessment Year 2015-16, an interest of Rs.77,84,526/- was paid by the company to the Director by computing the interest at 18%. The Assessing Officer restricted it to 12%. The Commissioner of Income Tax (Appeal) ("CIT(A)" for short) allowing the appeal in part increased the interest at 15.5% and same has been confirmed by the Income Tax Appellate Tribunal (for short 'ITAT').

4.

Shri. Sudheendra, learned advocate for the assessee submitted that transaction is not in dispute. The Director has declared the interest received in his return of income and paid tax on it. The CIT(A) has partly allowed the appeal on the premise that the company had obtained secured loan at 14.5% from M/s.Siemens Financial Services Private Limited. He argued that Revenue cannot fix the rate of interest arbitrarily. Accordingly, sought for allowing this appeal.

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ITA.63/2020

5.

Shri.Dilip for the Revenue, opposing the appeal submitted that secured loan was available at 14.5%. However, company has chosen to pay interest at 18%, therefore, no interference is called for.

6.

We have carefully considered the rival contentions and perused the papers.

7.

Undisputed facts of the case are, loan has been advanced by the Director - Shri.Yogesh Bhandari. The Assessing Officer has allowed 12% as interest and CIT(A) has increased it to 15.5%. The reason recorded by the CIT(A) is that company had taken secured loan from M/s.Siemens Financial Services Private Limited at 14.5%.

8.

It is also not disputed that the Director has shown the interest received by him at 18% in his return of income and paid tax on the same. It is settled that the Revenue officers cannot sit in the chair of the

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ITA.63/2020 assessee and decide the expediency in business. It is for the assessee to take its business call while conducting its business. There is no rationale in reducing the rate of interest by the Assessing Officer and arbitrarily increasing the same to 15.5% by the CIT(A) on the premise that secured loan was obtained at 14.5%.

9.

Therefore, the impugned orders passed by the Assessing Officer, CIT(A), ITAT, are perverse and not sustainable in law.

Hence, the following: ORDER (1) Appeal is allowed. (2) The order passed by the AO, modified by the CIT(A) and confirmed by the impugned order dated 23.10.2019 passed in ITA No.1309/Bang/2018 (Annexure-E) by the ITAT, are set aside

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ITA.63/2020 holding that rate of interest shall be as agreed by the parties at 18%. (3) Question of law is answered in favour of assessee and against the Revenue. (4) No costs. Sd/- JUDGE Sd/- JUDGE DR List No.: 1 Sl No.: 96

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