(Per : HONOURABLE MS JUSTICE SONIA GOKANI) Following question is proposed by the Revenue for consideration of this Court in this Tax Appeal challenging the order dated 30th April 2010:
"Whether the Appellate Tribunal is right in law and on facts in deleting the addition made of Rs.1,16,26,420/- on account of disallowance of excess interest paid to persons covered u/s.40A(2)(b)?"
The issue pertains to disallowance made by the Assessing Officer of the interest paid to persons at the rate of 22%. CIT (Appeals) set aside the order of the Assessing Officer and the Tribunal upheld the said order. The Tribunal by a common order for the assessment years 2002-03 and 2003-04 have decided the said issue in favour of the assessee. While deciding Tax Appeal No.2488 of 2010 (for A.Y.2002-03) this issue has been dealt with by this Court as under:
"Second issue concerns disallowance of Rs.77,09,880/- made under section 40A(2)(b) of the Income Tax Act, 1961. It appears that the Assessing Officer found the interest paid to the persons at the rate of 22% excessive and unreasonable and therefore, the entire amount of Rs.77 lacs (rounded off) was disallowed. When challenged by the assessee before the CIT(Appeals), on the ground that loan was taken for the purpose of business, and borrowing had not been doubted by the Assessing Officer, majority of them being old as also the fact that the rate of interest paid by the assessee-respondent for the past 10 years was not objected to at any point of time, this disallowance was not sustained.
When challenged before the Tribunal, by a detailed order, it upheld the order of CIT(A). It would be apt to reproduce the findings of the Tribunal, as under:
"13.
We have heard the rival submissions and gone through the facts and circumstances of the case. We find that these loans were borrowed by the assessee for the purpose of business in earlier years i.e. since Assessment Year 1992-93. No such disallowance has been made in the past. This fact is not controverted by either the Assessing Officer or the learned DR. It is a fact that the rate of interest paid by the assessee on unsecured loan vis-a-vis the rate of interest in secured loan obtained from the bank and financial institutions, the rate of interest to associate concern is little higher but the amounts borrowed from bank are secured and hence carries lesser risk. Even the bank interest is almost at 19.5% and if we calculate the overhead expenses i.e. the registration charges, stamp duty charges, expenses to be incurred for submitting stock statements, etc. to the bank, the bank interest will automatically increase to a certain level. Therefore, the comparison of rate of interest paid by the assessee on unsecured loan with the secured loan is incorrect. It is also settled law that the decision how the business should be carried on is the prerogative of the assessee and the Assessing Officer cannot dictate the terms as to how the business should be carried on. While considering the claim under section 36(1)(iii) what is to be examined is whether the amount is borrowed for the purpose of business or not. Since the amount is borrowed in earlier years at a stipulated rate of interest and which is still utilized for the purpose of business, the interest rate could not have been renegotiated. Even the lending rate by banks in respect of secured loan is as high as 19.5%. Therefore, rate of interest, paid by the assessee is quite reasonable having regard to the fair market value of such services. The Assessing Officer has not compared the rate of interest on unsecured loans. Therefore, the Assessing Officer was incorrect in restricting the interest payable to the extent of 19.5% only. Since the rate of interest paid by the assessee is reasonable, the order of CIT(A) is confirmed deleting the disallowance."
The issue is essentially based on facts presented before the adjudicating authorities. The reasons given by the Tribunal are sound having no error nor any perversity. The issue since is in the realm of facts, proposing no question of law much less substantial question of law, resultantly, Tax Appeal is dismissed.
In view of the above, the Tax Appeal requires no further meritorious consideration. Tax Appeal is dismissed.
(Akil Kureshi J.) (Ms.Sonia Gokani, J.) (vjn) Top