M/S SRINIVAS SAREE CENTRE ,GULBARGA vs. THE INCOME TAX OFFICER WARD-2 , GULBARGA

The assessee has raised as many as 4 grounds but the effective grievance is only one and that is this that the disallowance of Rs. 72,782/- out of interest expenditure by invoking the provisions of section 40A (2) is not justified.

Learned AR of the assessee submitted that as per the AO, the payment of interest by the assessee @ 15% per anumn on borrowings from the relatives of the partners of the assessee firm is excessive because the scheduled banks are charging interest @ 12%. He submitted that the said rate of interest by scheduled banks is for secured loan and the assessee has borrowed unsecured loans but this factual aspect is ignored by the AO. Learned DR of the revenue supported the orders of the authorities below.

I have considered the rival submissions. I find force in the submission of the learned AR of the assessee because the rate of interest in respect of unsecured loan is always higher as compared to secured loan because the lender undertakes extra risk. In this view of the matter, 15% rate of interest for unsecured loan as against 12% for secured loan is not excessive in my opinion. Hence, I delete this disallowance.

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