IDRS LABS PRIVATE LIMITED V. DEPUTY COMMISSIONER OF INCOME TAX

ITA/63/2020

AI Insights

The case involves IDRS Labs Private Limited, which appealed against the decision of the Income Tax Appellate Tribunal (ITAT) that confirmed the Commissioner of Income Tax (Appeals)'s (CIT(A)) adjustment of the interest rate on a loan from its director, Shri Yogesh Bhandari. The company had paid an interest of 18% on the loan, which was contested by the tax authorities, leading to a reduction to 15.5% by CIT(A) and 12% by the Assessing Officer. The main legal question was whether the tribunal was correct in law in confirming the CIT(A)'s determination of the fair market rate of interest at 15.5% per annum under section 40A(2) of the Income Tax Act, 1961.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 753800 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 09-01-2023
• Assessment Year: misc
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: DILIP
• Assessee Lawyers: SUDHEENDRA
• Keywords: Income tax appeal; Interest rate adjustment; Loan from director; Secured loan; Fair Market Rate of Interest
• Section: 40A(2); 260-A

Judgement Text

" - 1 - ITA.63/2020 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 9TH DAY OF JANUARY, 2023 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE G. BASAVARAJA INCOME TAX APPEAL NO.63 OF 2020 BETWEEN: IDRS LABS PRIVATE LIMITED, NO.235-H, PHASE 3, HOSUR ROAD, BOMMASANDRA INDUSTRIAL AREA, BENGALURU-560 099. (REPRESENTED BY ITS DIRECTOR SRI SHIVKUMAR MADKI, AGED ABOUT 42 YEARS, S/O SRI VIJAYKUMAR MADKI. ...APPELLANT (BY SRI SUDHEENDRA B. R., ADVOCATE) AND: DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -3(1)(1), BANGALORE, BMTC BUILDING, 80 FT. ROAD, KORAMANGALA 6TH BLOCK, BENGALURU -560 095. ...RESPONDENT (BY SRI DILIP M., STANDING COUNSEL FOR SRI K.V. ARAVIND, SR.STANDING COUNSEL) THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23/10/2019, PASSED IN ITA NO.1309/BANG/2018, FOR THE ASSESSMENT YEAR 2015- 2016, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ETC,. Digitally signed by RAMYA D Location: High Court of Karnataka - 2 - ITA.63/2020 THIS ITA COMING ON FOR HEARING THIS DAY, P.DINESH KUMAR J., DELIVERED THE FOLLOWING: JUDGMENT This appeal by the assessee challenging the order dated October 23rd, 2019, passed in ITA No.1309/Bang/2018 has been admitted to consider two questions of law. 2. Shri.B.R.Sudheendra, learned advocate for the assessee and Shri.M.Dilip, learned advocate for Revenue jointly submit that Question No.1 will cover the issue involved in this appeal and it reads as follows: \"1. Whether, on the facts and circumstances of the case and law applicable, the Tribunal was correct in law in confirming the order of the Ld. CIT(A) in determining the fair market rate of interest at 15.5% p.a. under section 40A(2) of the Income Tax Act, 1961?\" 3. Brief facts of the case are, assessee was borrowing loan from one of its directors Shri. Yogesh - 3 - ITA.63/2020 Bhandari. As on April 1st, 2014 the loan amount had accumulated to Rs.2,22,43,087/-. For the Assessment Year 2015-16, an interest of Rs.77,84,526/- was paid by the company to the Director by computing the interest at 18%. The Assessing Officer restricted it to 12%. The Commissioner of Income Tax (Appeal) (\"CIT(A)\" for short) allowing the appeal in part increased the interest at 15.5% and same has been confirmed by the Income Tax Appellate Tribunal (for short 'ITAT'). 4. Shri. Sudheendra, learned advocate for the assessee submitted that transaction is not in dispute. The Director has declared the interest received in his return of income and paid tax on it. The CIT(A) has partly allowed the appeal on the premise that the company had obtained secured loan at 14.5% from M/s.Siemens Financial Services Private Limited. He argued that Revenue cannot fix the rate of interest arbitrarily. Accordingly, sought for allowing this appeal. - 4 - ITA.63/2020 5. Shri.Dilip for the Revenue, opposing the appeal submitted that secured loan was available at 14.5%. However, company has chosen to pay interest at 18%, therefore, no interference is called for. 6. We have carefully considered the rival contentions and perused the papers. 7. Undisputed facts of the case are, loan has been advanced by the Director - Shri.Yogesh Bhandari. The Assessing Officer has allowed 12% as interest and CIT(A) has increased it to 15.5%. The reason recorded by the CIT(A) is that company had taken secured loan from M/s.Siemens Financial Services Private Limited at 14.5%. 8. It is also not disputed that the Director has shown the interest received by him at 18% in his return of income and paid tax on the same. It is settled that the Revenue officers cannot sit in the chair of the - 5 - ITA.63/2020 assessee and decide the expediency in business. It is for the assessee to take its business call while conducting its business. There is no rationale in reducing the rate of interest by the Assessing Officer and arbitrarily increasing the same to 15.5% by the CIT(A) on the premise that secured loan was obtained at 14.5%. 9. Therefore, the impugned orders passed by the Assessing Officer, CIT(A), ITAT, are perverse and not sustainable in law. Hence, the following: ORDER (1) Appeal is allowed. (2) The order passed by the AO, modified by the CIT(A) and confirmed by the impugned order dated 23.10.2019 passed in ITA No.1309/Bang/2018 (Annexure-E) by the ITAT, are set aside - 6 - ITA.63/2020 holding that rate of interest shall be as agreed by the parties at 18%. (3) Question of law is answered in favour of assessee and against the Revenue. (4) No costs. Sd/- JUDGE Sd/- JUDGE DR List No.: 1 Sl No.: 96 "