Case Law Details
Gallant Freight And Travels Pvt. Ltd. Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that rate of interest @18% paid to related party towards unsecured loan is reasonable as rate of interest charged by bank @12% is with security, whereas, rate of interest charged on unsecured loan is without any security.
Facts- During the course of assessment, AO observed that the assessee has paid interest of Rs. 38,65,583 to its related persons and family members @18%. AO held 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 u/s. 40A(2)(b) of the Act. CIT(A) upheld the addition. Being aggrieved, the present appeal is filed.
Conclusion- Held 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. Therefore, we are of the considered view that the AO though considered 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. Further, also observed that the assessee has earned interest @18% per annum from Rajesh Estate and Nirman Ltd. Therefore, the prevailing market rate amongst the private parties is 18%, which justifies the payment of interest by the assessee to its related parties for availing of unsecured loans.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
Please become a Premium member. If you are already a Premium member, login here to access the full content.
Author Bio
