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Income Tax Appellate Tribunal (ITAT) Chandigarh in a recent judgment has held that interest paid on unsecured loans to related parties at higher interest rate was reasonable in view that the loans from banks are taken against the charge on the property.
Case Details:
Brief Facts of the Case: The assessee contested the addition before CIT(Appeals) and after considering the submissions of the assessee the CIT (Appeals) held that the payment of interest @ 15% p.a. was not unreasonable. Based on this, the CIT (Appeals) deleted the addition made by the AO. Aggrieved, the Revenue brought the matter to ITAT. Before the Tribunal, the assessee emphasized the fact that the rate of interest charged by the Market Committee was 18% and in view of that, it was prayed that the rate of interest charged by the assessee at 15% may be held to be reasonable. Important Excerpts from ITAT Judgment Section 40A(2)(b) of the Act is meant to cover cases where interest paid to the related parties as defined in this section is in excess of the interest paid to unrelated parties. The undisputed fact is that the assessee has paid 15% interest on unsecured loan to persons covered under section 40A(2)(b) of the Act. This is also undisputed that the rate of bank loans are at around 10.5% but this is also a fact that the loans from banks are taken against the charge on the property and there are other opportunity costs involved in raising the loans from the banks, which are not there in the cases of these unsecured loans and the loans from these related persons are instantly available also. Further, since the rate of interest charged by Market Committee itself is 18%, we are in agreement with the findings recorded by the learned CIT (Appeals) that the rate of interest at 15% is quite reasonable. Since the borrowings from private parties are always at higher rate of interest than the banks and these Market Committees. In view of this, order of the learned CIT (Appeals) in this regard is confirmed. The ground of appeal raised by the Revenue is dismissed Download Full Judgment Click Here >>
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