Jasibai Dayaram Amlani Vs DCIT (ITAT Nagpur)
Secured Bank Rate Is Not the Ceiling for Unsecured Loans—Interest at 18% Allowed After Counting the Hidden Cost of Bank Finance
Summary: The Nagpur Bench of the ITAT has held that interest paid at 18% on unsecured business loans cannot be restricted merely because banks charged nominal interest ranging from 14.75% to 15.25%. The real comparison must account for stamp duty, processing fees, inspection charges, bank commission, transaction charges and other costs attached to secured finance. The Tribunal also deleted additions concerning rental income and salary paid to the assessee’s son by following its decision in the assessee’s own case for the succeeding year.
The assessee, Jasibai Dayaram Amlani, was an individual carrying on business under the name Naresh Steel Company. She filed her return for AY 2013-14 declaring income of ₹21,30,600. The case was selected for scrutiny through CASS, and an assessment was completed u/sec. 143(3).
Three disputes arose from the assessment. The AO made an addition of ₹1.80 lakh concerning rental income from a property let out by the assessee, disallowed salary expenditure of ₹2.50 lakh paid to her son, Naresh D. Amlani, and restricted interest paid on unsecured loans from 18% to 16%, resulting in a disallowance of ₹4,07,709.
The CIT(A) confirmed all three adjustments.
Before the ITAT, the assessee pointed out that the rental-income and salary issues had already been decided in her favour by the same Tribunal in her own case for AY 2014-15 through an order dated 12.02.2026. Since the facts remained the same, the earlier decision was directly applicable.
In the succeeding year, the AO had estimated the fair market rent of the assessee’s Amravati commercial property at ₹3.72 lakh, as against the annual rent of ₹1.80 lakh actually received. The estimate was based upon an Inspector’s report concerning a supposedly comparable property situated in Nagpur, even though the assessee’s property was located in Amravati.
The Tribunal had found that a Nagpur property could not be treated as a reliable comparable for estimating rent of a property in Amravati without supporting material. The annual standard rent according to the Amravati Municipal Corporation reckoner was merely ₹20,084, whereas the assessee was already charging ₹1.80 lakh.
There was no credible local evidence demonstrating that a similarly situated property in Amravati could command a higher rent. The tenant happened to be the assessee’s son, but both the assessee and the tenant were subject to the maximum rate of taxation. The Tribunal therefore found no evident tax-avoidance motive and accepted the rent as reasonable.
The salary disallowance had also been deleted in AY 2014-15. The son was actively engaged in the family business and attended to operations at Nagpur & Amravati, including loading and unloading of cement and other goods and banking-related work. Salary had been paid to him for around ten years without any history of disallowance.
The business turnover, gross profit and net profit were all on an increasing trend. Further, the salary received by the son was disclosed in his return and offered to tax. On those facts, the Tribunal had held that selective reliance upon a portion of his statement could not justify disallowing the salary.
Following its own decision on identical facts, the ITAT deleted the rental-income addition and the salary disallowance for AY 2013-14 as well.
The remaining controversy concerned interest on unsecured loans. The assessee had paid interest at 18%, but the AO regarded 16% as a reasonable rate. His comparison was based primarily upon bank-loan rates ranging between 14.75% and 15.25%. He also noticed that the assessee had paid brokerage at 2% for arranging unsecured finance. The CIT(A) upheld the restriction.
The Tribunal found this comparison incomplete. The assessee had a turnover of approximately ₹63.94 crore and incurred total interest expenditure of around ₹1.06 crore on secured and unsecured borrowings.
Although banks quoted rates between 14.75% and 15.25%, secured loans involved additional expenditure such as stamp duty of approximately 0.5%, inspection charges, processing fees, bank commission, cheque-handling charges and transaction costs. Once these ancillary charges were considered, the effective cost of bank borrowing approached 17.5% to 18%.
Further, secured bank loans and unsecured market loans were not commercially identical. Bank facilities ordinarily required security by way of immovable property or stock-in-trade and were subject to formalities and conditions. Unsecured loans obtained from the open market were generally more flexible, could be arranged for short periods and could be repaid frequently without additional charges.
The higher rate on an unsecured borrowing thus reflected the lender’s greater risk and the borrower’s commercial flexibility. Treating the headline rate on secured bank finance as the automatic benchmark for an unsecured loan ignored these material differences.
The ITAT held that interest at 18% was reasonable, incurred in the normal course of business and supported by commercial expediency. The disallowance of ₹4,07,709 was accordingly deleted. The assessee’s appeal was allowed in full.
Cases Discussed
- Assessee’s own case for A.Y. 2014-15, order dated 12.02.2026.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, NAGPUR SMC BENCH
This appeal by the assessee is directed against the order of Ld. ADDL/JCIT (Appeals), Udaipur (for short, “CIT(A)”) dated 27.02.2026 passed u/sec. 250 of the Income Tax Act, 1961 (for short, “Act”) which is arising out of assessment order dated 23.03.2016 passed u/sec. 143(3) of the Act by the DCIT, Circle-Amravati, Amravati for the Assessment Year (A.Y.) 2013-14.
2. Grievance of the assessee is against the addition for rental income from letting out the premises at Rs. 1,80,000/-, disallowance of salary expenses paid to Mr. Naresh D. Amlani at Rs. 2,50,000/- and disallowance of interest expenditure at Rs. 4,07,709/-.
3. At the outset, learned counsel for the assessee submitted that the issues raised regarding addition for rental income and disallowance of salary expenses have already been dealt with by this Tribunal in assessee’s own case for A.Y. 2014-15, dated 12.02.2026 deciding in favour of the assessee. So far as interest disallowance is concerned, he submitted that Ld.Assessing Officer (AO) made disallowance by allowing the interest expenditure only at 16% as against 18% paid by the assessee.
4. On the other hand, Ld.DR vehemently argued supporting the order of Ld.CIT(A).
5. I have heard the rival submissions and perused the material placed before me. I find that assessee is an individual and income of Rs. 21,30,600/- declared in the return for A.Y. 2013-14 furnished on 28.09.2013 which was picked up for scrutiny through CASS after validly serving statutory notices u/sec. 143(2) & 142(1) of the Act. In the assessment completed u/sec. 143(3) of the Act, Ld. AO made three additions firstly rental income as per the fair market value for letting out the immovable property at Rs. 1,80,000/-; secondly disallowance of salary expenditure paid to Mr. Naresh D. Amlani Rs. 2,50,000/- and thirdly disallowance of interest expenditure at Rs.4,07,709/-. I find that the first two issues i.e. addition for rental income and salary expenses paid to Mr.Naresh D. Amlani have been dealt with by this Tribunal in assessee’s own case for A.Y. 2014-15 and decided in favour of the assessee observing as follows:-
“10. I have heard rival contentions and perused the records placed before me. First issue for my consideration raised in ground No.2 is regarding the addition for under-statement of rental income from the business premises located at Amravati. I observe that the assessee has received rent at ₹ 1,80,000/- p.a. Ld.AO based on the report of the Inspector has estimated the fair market rent at ₹ 3,72,000/-. Fair market rent estimated by the Ld.AO is based on similar commercial property located at Nagpur whereas the property in question is located at Amravati. Ld. DR also failed to controvert the fact that the standard rent of the premises let out by the appellant as per AMC reckoner is ₹ 20,084/- p.a. whereas the assessee has charged rent of ₹ 1,80,000/- p.a. The assessee is showing increased sales as well as higher gross and net profit. Both the assessee and the tenant, who is assessee’s son are subject to maximum rate of taxation. Except the Inspector’s report, no other credible evidence about the property located at Amravati in the same location fetching higher amount of rent has been placed before me. Considering the consistent rental income shown by the assessee and also the standard rent as per the record of AMC, I find that the assessee has charged reasonable rent of ₹1,80,000/- p.a. and that Ld.AO grossly erred in estimating higher amount of rental income. I therefore, reverse the finding of Ld.CIT(A) and delete the addition of ₹ 1,92,000/- made by the Assessing Officer. Ground No.2 raised by the assessee is allowed.
11. Ground No.3 relates to disallowance of salary expenditure of ₹ 3,00,000/- paid to the assessee’s son Mr.Naresh Amlani. The alleged disallowance made by the Ld.AO is majorly based on some portion of statement of Mr.Naresh Amlani and that too, have been utilized by the Ld.AO for the purpose of making disallowance. I find that Ld.AO has completely disregarded the fact that Mr. Naresh Amlani is son of the appellant, who gave services in the family under business. The assessee i.e. mother is the proprietor and the son and other family members jointly work in the family business. Mr. Naresh Amlani is looking after the business work of the assessee at Nagpur as well as Amravati and mainly takes care of loading and unloading of cement and other goods and also takes care of bank related work. Salary is being paid for last 10 years. There is no history of such disallowance in the past. The turnover of the assessee along with gross profit and net profit is on increasing trend and there does not seem any planning of the assessee to reduce tax liability. The alleged salary expenditure is duly offered to tax by Mr. Naresh Amlani in his return of income. Under these given facts and circumstances, I am of the considered view that the alleged disallowance of salary expenditure is uncalled for. Finding of the Ld.CIT(A) is set aside and ground No.3 raised by the assessee is allowed.
6. On going through the finding of this Tribunal rendered in the case of assessee herself, I find that the same is squarely applicable and therefore addition for rental income at Rs.1,80,000/- and disallowance of salary expenditure paid to Mr. Naresh D. Amlani at Rs. 2,50,000/- stand deleted. Ground Nos. 2 & 5 are hereby allowed.
7. Third issue relates to disallowance of interest expenditure raised in ground Nos. 3 & 4, I find that the assessee has paid interest on unsecured loans @18%. However, Ld. AO has allowed only 16% interest rate based on his observations that assessee had paid brokerage @2% for arranging unsecured loan whereas interest paid to the banks ranging from 14.75% -15.25%. This action of the Ld. AO has been confirmed by the Ld.CIT(A). I find that assessee is having turnover of Rs. 63.94 Crore and is paying interest on both secured and unsecured loans amounting to Rs. 1.06 crore. On secured loans taken from banks average rate interest is 14.75% -15.25%, but the assessee has further incurred stamp duty charges of 0.5%, inspection charges, loan processing fee, bank commission, cheque handling charges, transaction charges etc., therefore, the effective rate of interest from banks comes to 17.5%-18. It is also an admitted fact that the rate of interest charged on unsecured loans obtained from the open market is generally higher than the rate of interest payable on secured loans availed against mortgage of immovable property or stock-in-trade.
8. Considering all these aspects and also observing that the loans on unsecured loans are flexible for short term and repayable frequently and without any additional charges, therefore, interest paid @18% is a reasonable rate of interest incurred in the natural course of business and for commercial expediency and the Ld. AO grossly erred in treating the interest on unsecured loans at par with the secured loans and also ignoring various charges paid by the assessee for getting secured loans discussed above. Therefore, I fail to find any merit in the finding of Ld. AO and hold that the assessee has claimed genuine interest expenditure and the same deserves to be allowed and the disallowance made by the Ld. AO at Rs. 4,07,709/- is hereby deleted. Ground Nos.3 & 4 raised by the assessee are allowed.
9. In the result, appeal of the assessee is allowed. Other grounds of appeal are academic in nature, needs no adjudication.
Order pronounced on 11th September, 2026 under Rule 34(5) of the Income Tax (Appellate Tribunal) Rules, 1963.
