The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has recently in an appeal filed before it, held that unsecured loan taken at higher rate for commercial expediency is admissible under section 57(iii).
The aforesaid observation was made by the Ahmedabad ITAT, when an appeal was preferred before it by the assessee, asagainst the order of National Faceless Appeal Centre (NFAC), Delhi, in proceeding under Section. 250 of the Income Tax Act, vide order dated 17/05/2022, for Assessment Year 2018-19.
The ground of the assessee’s appeal being that both the authorities have grievously erred in holding the impugned addition of Rs. 6,00,000/- without considering commercial expediency to borrow fund to meet with urgent need in business, the brief facts of the case were that the assessee was an individual deriving income from salary from M/s Rushabhdev Infra Projects Private Limited, in which he was a director, earning interest income.
During the year under consideration, the assessee filed return of income declaring total income of 42,42,140/-. The assessee, during the impugned assessment year had earned gross interest income on unsecured loans given to various parties amounting to 1,23,84,617 /- and had incurred interest expenses on funds borrowed from several parties, in the form of unsecured loans amounting to 92,74,214/-.
The case of the assessee was selected for limited scrutiny, to examine the issue of deductions from income from other sources. During the course of assessment proceedings, the AO observed that the assessee had taken loan of 1 crore from one party, namely Shri Dharmesh kumar Patel, to whom interest at 21% per annum was given.
Before the AO, the assessee had submitted that the purpose of incurring such high interest on loan taken from Shri Dharmesh Kumar Patel was owing to commercial expediency. The assessee added that he was a Director in M/s Rushabhdev Infra Projects Private Limited, which was engaged in construction business, and that such concern was in urgent need of funds since it was required to make payment of 2.05 crores to the Ahmedabad Municipal Corporation for getting plan approved in respect of new site of the company.
The assessee further added that it was accordingly that, the assessee had taken loan from Shri Dharmesh Kumar Patel on 07-01-2017, which was given to M/s Rushabhdev Infra Projects Private Limited, which, in turn made a payment of 2.05 crores to Ahmedabad Municipal Corporation on 09-01-2017. Therefore, the assessee submitted that the above flow of events showed that the loan was taken from Shri Dharmesh Kumar Patel owing to commercial expediency ,that the aforesaid loan was taken without any deposit of any security and hence that higher rate of interest at 21% was paid for such unsecured loan.
However, these contentions of the assessee,was rejected by the AO, on the ground that assessee paid an excessive rate of interest on loan taken from Shri Dharmesh Kumar Patel and restricted the interest payment to 15% on such loan taken.
And accordingly, the AO made an addition of differential interest of 6% to the income of the assessee, amounting to 6 lakhs. And also recorded his observations, while making the disallowance.
In appeal before the CIT(Appeals), the assessee reiterated the submissions made before the assessing officer, however, the CIT (A) rejected the appeal of the assessee on the ground that assessee had failed to demonstrate how the interest paid at 21% on aforesaid loan taken from Shri Dharmesh Kumar Patel, was having any nexus with earning interest income at the prevailing rate of 6 to 12% (maximum at rate of 15%).
Thus, the CIT(Appeals) passed his order, recording his observations, thus leaving the assessee aggrieved to prefer the instant appeal before the Tribunal.
Hearing the opposing contentions of both sides as submitted by Shri R.B. Patel, the Sr. A.R, on behalf of the assessee, and by Shri V.K. Mangla, the Sr. D.R., on behalf of the Revenue, as well as perusing the materials available on record, the ITAT observed:
“We have heard the rival contentions and perused the material on record. We observe that the AO made disallowance of 6 lakhs on account of excessive interest expenses by restricting the amount of interest expenses to 15% as against 21% interest paid by the assessee to Shri Dharmesh Kumar Patel. However, the CIT(Appeals) while dismissing the appeal of the assessee held that the assessee has not been able to establish the nexus between the interest paid at 21% to Shri Dharmesh Kumar Patel and interest income earned by way of giving unsecured loan to various parties. In our considered view, the same is erroneous, since if the assessee is unable to establish the nexus between interest bearing loans and earning of interest income itself, the entire interest expense is liable to be disallowed and not part thereof as upheld by Ld. CIT(Appeals)”.
“Further, even in the assessment order, the assessing officer has not challenged the fact that assessee has not been able to establish the nexus between interest taken at 21% and the earning of interest income by the assessee. Further, both the AO and CIT(Appeals) have not been able to controvert the commercial expediency demonstrated by the assessee for incurring a higher rate of 21% interest on loan taken from Shri Dharmesh Kumar Patel, given the facts of the instant case. Therefore, in our considered view, the assessee has been able to establish both the commercial expediency for taking the interest at higher rate of 21% (since the same was required by the assessee on urgent basis to be given to the firm in which the assessee was a Director) and has also been able to establish the nexus as required under section 57 of the Income Tax Act”, the coram of Annapurna Gupta, the Accountant Member and Siddhartha Nautiyal, the Judicial Member added.
Thus, the Ahmedabad ITAT finally held:
“Considering the facts of the case and our observations made in the preceding paragraphs, we are hereby allowing the appeal of the assessee. In the result, the appeal of the assessee is allowed.”
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