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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: Shri Joginder Singh, & Shri Ashwani Taneja
आदेश / O R D E R
Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 07/02/2012 of the First Appellate Authority, Mumbai. The only ground raised in this appeal is with respect to disallowing interest paid at the rate of 18% to the Directors and other relatives on unsecured loans and thereby adding Rs.1,53,610/- to the returned income of the assessee.
During hearing, the ld. counsel for the assessee, Shri Kantilal Gugalia, contended that the assessee has paid interest at the rate of 18% on unsecured loans and the Ld. Assessing Officer unjustifiably allowed at the rate of 12%. It was also pleaded that the interest at the rate of 18% was not only paid to the relatives but also to the outside parties like M/s Abhishek Investments, Ratlam and the rate of interest at 18% was the prevailing market rate, thus, it was not excessive. Plea was also raised that besides interest charges, there are many other charges like stamp duty on renewals, processing fees, administrative charges to secure loan from banks. It was also explained that the persons from whom loan were obtained are all income tax payee. On the other hand, the ld. DR, Shri K.V. Vispute, defended the addition on the ground that the interest was paid to the directors and other relatives, which is excessive, therefore, the addition was rightly made.
M/s Mahakoshal Refractories Private Ltd.
2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is engaged in the business of manufacturing and trading of refractories. It was noted by the ld. Assessing Officer that the assessee paid interest on secured and unsecured loans amounting to Rs.76,52,399/- and Rs.5,98,826/- respectively. The unsecured loans were mainly obtained from directors and other relatives on which the interest was paid at the rate of 18% per annum. The ld. Assessing Officer was of the view that the prevailing market rate was 12%, therefore, the payment of interest at 18% is highly excessive, thus, he paid Rs.1,53,610/- to the parties covered u/s 40A(2)(b) and addition was made to the returned income.
2.2. On appeal, before the Commissioner of Income Tax (Appeal), the facts were analyzed and the stand taken in the assessment order was affirmed. The assessee is in further appeal before this Tribunal.
2.3. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, there is no dispute to the fact that unsecured loans were obtained from the directors and other relatives and interest was paid at the rate of 18% to them. The addition was made by the Ld. Assessing Officer and confirmed
M/s Mahakoshal Refractories Private Ltd. by the Commissioner of Income Tax (Appeal) is that the bank interest rate was 12%. This is also an admitted position that for securing interest from the banks, lot of formalities like paper work, processing fee, administrative charges, time is required, whereas, for unsecured loans from relatives and friends, such formalities are not needed. It is also noted that the assessee paid interest at the rate of 18% from outside parties namely M/s Abhishek Investment, Ratlam, therefore, the basis of addition that excessive interest was paid to the related parties, solely cannot be the basis for making the disallowance. So far as, the observation contained in 2.3 of the impugned order that option was available to obtain the loan from the bank is concerned, the business man is wise enough to take a decision under the circumstances and no business will pay higher rate of interest unless and until there are pressing circumstances. Since, the assessee has paid interest at the rate of 18% to the outside parties also, therefore, there is no justification to disallow the same. Generally, the transactions even from the relatives and other associates/concern person cannot be discarded and the price paid therefore cannot be discarded unless it is established otherwise by the Department that the transaction was sham. The reasonableness of the interest is to be determined after taking into account, the legitimate needs of the business of the assessee. So far as, the legitimate business needs are concerned, these are to be just from the commercial expediency or business needs of the business man and the M/s Mahakoshal Refractories Private Ltd.
Assessing Officer is not expected to sit on the chair of the business man. Our view find supports from the decision from Hon’ble Gujarat High Court in Voltmap Transformers Pvt. Ltd. vs CIT (1981) 129 ITR 105, 113(Guj.). The ratio laid down in Anand G. Shah vs CIT (1990) 181 ITR 171, wherein the assessee firm paid interest at the rate of 24%, per annum to the son and wife of its two partners. The Tribunal found that interest at the rate of 18% as reasonable. This case supports the case of the assessee. Considering the totality of facts and the judicial pronouncements, the appeal of the assessee is allowed.
Finally, the appeal of the assessee is allowed.
This order was pronounced in the open court in the presence of Ld. representative from both sides at the conclusion of the hearing on 26/04/2016.