ITAT Directs Readjudication with respect to Interest paid to Related Persons and Family Members for Availing of Unsecured Loans [Read Order]

The  Mumbai bench  of Income Tax Appellate Tribunal (ITAT) recently directed readjudication with respect to interest paid to the related persons and family members for availing of unsecured loans.

The assessee Gallant Freight And Travels Pvt. Ltd.is engaged in the business of a freight cargo agency.After filing the return of income the assessee case was selected for scrutiny. From the details filed by the assessee, it was observed that the assessee has paid interest of Rs. 38,65,583 to its related persons and family members @18%. As the payment was made to related parties, the assessee was asked to justify the rate of interest paid.

The assessee submitted that the interest paid @18% is reasonable since the amount of loan was received without any security, and in the current scenario the loans are either quite difficult to obtain or the rates are quite high.

Subsequently the AO passed the order  holding that the average bank rates are 12% and the banks are willing to finance. Thus, it was held that the rate of interest @18% paid by the assessee to the related persons is unreasonable. Accordingly, the AO considering the interest over 12% (i.e. Rs. 12,88,528) as excessive and unreasonable and disallowed the same under section 40A(2)(b) of the Act.

Aggrieved by the order the assessee  filed an appeal before the CIT(A). CIT(A) held that the assessee has failed to prove the necessity of taking loans at a higher interest rate when it was having its own funds lying in the bank account and hence the assessee has filed this appeal before the Tribunal. 

During the adjudication N.H. Gajria, the counsel for assessee argued that the  assessee has availed unsecured loans of Rs. 3,97,53,471 from its related persons and family members @18% per annum during the year under consideration. Further the loan from banks involves not only a lot of paperwork but also involves the securities to be placed against the loans besides obtaining the personal guarantees of the Directors.

Manoj Kumar Singh, Department representatives argued that the the payment made by the assessee to any related person is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made, so much of the expenditure as is considered excessive or unreasonable by the AO shall not be allowed as deduction

The tribunal observed that the loans received from the related parties are unsecured loans. It is further pertinent to note that though the AO considered the rate of interest charged by the bank @12%, however, did not provide the name of such bank and the terms of such loan for comparing the same with the unsecured loans received by the assessee.

Thus the AO thought the rate of interest at 12% to be reasonable under section 40A(2)(b) of the Act, however, did not bring any material on record to sufficiently substantiate its claim.

Moreover it is not anybody’s case that the interest has been paid by the assessee to its partners and rather fact of the case is that the assessee has availed unsecured loans from its related persons at the interest rate of 18% per annum.

Therefore After analyzing the submission of both parties the bench comprising  Sandeep Singh Karhail (Judicial Member) and Om Prakash Kant (Accountant Member)  observed that the relevant material for determining the fair market value of the interest rate for availing unsecured loans has not been examined.

Hence the bench directed readjudication with respect to interest paid to the related persons and family members for availing of unsecured loans.

To Read the full text of the Order CLICK HERE

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