H V Textile Syndicate Vs ITO (ITAT Bangalore)
Secured vs Unsecured Loans Not Comparable – Interest Paid to Relatives at 15% Allowed – AO’s Comparison with Bank Loan Rejected- Benchmark Related-Party Interest with Market Rates, Not Bank Rates-
Banaglore Tribunal dealt with disallowance of interest u/s 40A(2)(b) where AO had compared bank loan rates with interest paid to relatives.
Assessee, engaged in wholesale trade, filed ROI declaring income of ₹65,570. During scrutiny, AO noted that Assessee paid interest of ₹44.38 lakh to relatives at 15% p.a. while it was paying only 10.2% on a secured loan from Corporation Bank. AO restricted allowable interest to 10.2% & disallowed excess ₹14.20 lakh u/s 40A(2)(b).
CIT(A) upheld the addition, holding that even if assuming that the bankers charging interest monthly processing fee and other charges, it will be very much less than the 15%.
On further appeal, Tribunal observed that comparison between secured bank loans & unsecured loans from relatives was fundamentally flawed. Secured loans are backed by hypothecation & lower risk, whereas unsecured loans naturally attract higher rates. AO was required to benchmark the related-party interest with prevailing market rates for unsecured loans under similar conditions, not with secured bank rates. Since AO failed to bring any comparable market data on record, the disallowance was unsustainable.
