In a recent case, the Indore bench of Income Tax Appellate Tribunal (ITAT) ruled that interest rate on secured loans from banks cannot be compared with interest rate on unsecured loan.
The premise of the ruling stem from the appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) [ CIT (A) ], which favored Surajbhan Agarwal, the assessee.
The assessee made payment of interest to the tune of Rs.10,99,117/ to persons covered under section 40A(2)(b) of the Income Tax Act 1961 (ITA) at the rate of 15%, in relation to an unsecured loan.
During the assessment, the Assessing Officer (AO) worked out the figure at Rs.2,74,779/- as excessive, and consequently disallowed the interest. The AO also concluded that the loan was not used by the assessee for business purposes. Aggrieved by this, the assessee appealed against the AO’s order before the CIT (A).
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On appeal, the CIT(A) considered the facts and the submissions of the assessee and found that the A.O. failed to demonstrate that the borrowed funds were not used by the assessee for the purposes of his business. The CIT (A) noted that the same rate of interest of 15% was paid by the assessee in the last year and no such disallowance was made, thus, there was no reason to hold that the interest rate of 15% is too high during the year under consideration, and that this consistency in interest rate indicated that this was in fact the market rate of the relevant year.
The CIT(A) further noted that the case of the assessee finds strength from previous judgments in cases like ITO vs. Chambamal Roopchand (2001) 70 TTJ(ASR) 43 and Seth Faquirchand Karwa & sons vs. CIT (1996) 135 Taxman 126 (Chd. Tri.) Dissatisfied with this decision, the Revenue appealed before the tribunal contesting the order.
The Bench comprising Mr Joginder Singh and Mr RC Sharma, after hearing the arguments, observed that unless and until corroborative material is brought on record, it is not expected from the AO to conclude that the interest rate of 15% was too high. It was highlighted that the interest rate on secured loan from banks cannot be compared with the interest rate on unsecured loans, as the businessman knows his interest best.
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The tribunal also observed that the AO is not expected to sit in the chair of the businessman and decide the reasonableness of rate of interest, that too without bringing any corroborative material on record.
In view of these facts, the bench found no justification to interfere with the conclusion drawn by the CIT(A) and upheld the same.
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