MOHAN LAL KIRI,KANKER vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1), RAIPUR

The present appeal filed by the assessee is directed against the order passed by the Commissioner of Income-Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, dated 29.09.2021, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) dated 29.11.2016 for the assessment year 2014-15. The assessee has assailed the impugned order on the following grounds of appeal before us :

On the facts and in the circumstances of the case the learned AO erred in invoking provision of section 40A(2)(b) when the rate of interest payment to unsecured loan creditors is same for loan from relatives and loan from other persons.

Succinctly stated, the A.O during the course of the assessment proceedings observed that the assessee had claimed deduction of interest of Rs.27,97,989/- that was paid @18% on the unsecured loans raised from the following 19 related persons:-

Smt. Bhawana Kiri 18% 50173 15% 41811 8362 Charama 15. Smt. Indu Kiri 18% 360927 15% 300772 60155 Charama 16. Smt. Swati Kiri 18% 362111 15% 301759 60352 Charama 17. Smt. Usha Kiri 18% 142711 15% 118926 23785 Charama 18. Smt. Veena Kiri 18% 91131 15% 75942 15189 Charama 19. Smt. Bharti Mehta 18% 234924 15% 195770 39154 Dmt. Total 2797989 2331655 466334 Observing, that the assessee had excessively paid interest @18% as in comparison to the interest which would have otherwise been paid by him on a personal loan raised from State Bank of India, the A.O on the basis of his aforesaid conviction restricted the assessee’s claim for deduction of interest on the loans raised from the aforesaid related parties to 15% and accordingly, made a disallowance of Rs.4,66,334/- (supra.).

On appeal, the CIT(Appeals) though principally concurred with the disallowance made by the A.O u/s. 40A(2)(b) of the Act but taking cognizance of the fact that two parties, viz. Shri Jayant Kiri and Smt. Bharati Mehta Dmt. did not fall within the realm of the specified persons contemplated u/s. 40A(2)(b) of the Act, thus, excluded the disallowance to 5 Mohan Lal Kiri, HUF Vs. DCIT, CC-1(1), Raipur the said extent made by the A.O. Accordingly, the CIT(Appeals) partly allowed the assessee’s appeal.

The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.

We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Having given a thoughtful consideration to the issue in hand, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities. Admittedly, as per sub-section 2(a) of Section 40A of the Act, where the assessee incurs any expenditure in respect of which payment has been or is to be made to any specified related party, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

Ostensibly, the aforesaid statutory provision presupposes a comparison between the likes as a yardstick which would form the very basis for the A.O to trigger the disallowance therein contemplated. Undeniably, the aforesaid 15 persons referred to by the A.O fall within the meaning of related parties as contemplated in clause (b) of sub-section (2) to Section 40A of the Act. Controversy as observed by us hereinabove hinges around the sustainability of the disallowance which had been assailed by the assessee before us, primarily for the very reason that the same is based on an infeasible comparison. As stated by the Ld. AR, and, rightly so, we find that the A.O while triggering the provisions of Section 40A(2)(a) of the Act had embarked on an infeasible comparative analysis, i.e., comparison between interest that was paid by the assessee on unsecured loans raised from related parties, as against the interest which would have otherwise been paid on a personal loan raised from State Bank of India. We cannot remain oblivion of the fact that unlike unsecured loans the loans raised from a bank involves certain formalities, i.e., providing of collateral securities, hidden charges etc. On the basis of material difference between unsecured loans raised by the assessee from his relatives as against that raised from a nationalized bank, we are of a strong conviction that no feasible comparison could have been made on the basis of which the disallowance u/s.40A(2)(a) could have been carried out.

At this stage, we would also not hesitate to state that the very observation of the A.O that though the assessee had sufficient amounts lying in his bank account, but it had still raised unsecured loans from the related parties is an absolutely uncalled for observation or a suggestion as to the manner in which the assessee should have managed its financial affairs. We, say so, for the reason that the manner in which the assessee chooses to conduct his business is absolutely his prerogative and the department by no means can trench on the same. The department cannot be permitted to share its wisdom as regards the manner in which the business of the assessee is to be carried out. Be that as it may, we are of a strong conviction that as the disallowance worked out by the A.O u/s.40A(2)(a) of the assessee’s claim for deduction of interest expenditure paid on unsecured loans raised from relatives is absolutely based on an infeasible comparison, therefore, there is no justifiable reason to sustain the said disallowance, which, thus, is vacated. Accordingly, we set-aside the order passed by the CIT(Appeals) and vacate the disallowance of Rs.4,66,334/- that was sustained by him. Thus, the Grounds of appeal No.(s) 1 to 3 raised by the assessee are allowed in terms of our aforesaid observations.

In the result, appeal of the assessee is allowed in terms of our aforesaid observations. Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board.