Income Tax Appellate Tribunal - Delhi
Religare Finvest Ltd , New Delhi vs Department Of Income Tax on 27 April, 2009
ITA NO. 2968/Del/2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "F" NEW DELHI
BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 2968/Del/2009
A.Y. : 2006-07
Addl. C.I.T., Range-15, vs. M/s Religare Finvest Ltd.,
New Delhi 3rd floor, 6, Devika Tower, Right
Wing, Nehru Place, New Delhi
(PAN/GIR NO. : AAFCS6801H)
(Appellant ) (Respondent )
Asseessee by : Sh. M.S. Syali, Sr. Adv., and Sh.
Tarandeep Singh, CA
Department by : Sh. Sudesh Garg, C.I.T. (D.R.)
ORDER
PER SHAMIM YAHYA: AM This appeal by the Revenue is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 27.4.2009 pertaining to assessment year 2006-07.
2. The issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in deleting the disallowance of ` 6,85,64,364/- made by the Assessing Officer u/s 40A(2)(b) of the IT Act.
3. In this case Assessing Officer observed that assessee has taken unsecured loans from the following concerns:-
Name of the concern Interest amount (in Rate of interest Rupees) Ranbaxy Holding Co. 26,84,89,950/- 11% 1 ITA NO. 2968/Del/2009 Religare Commodities 74,816/- 11% Ltd.
Religare Securities Ltd. 8,43,350/- 11% Luminous Holding (P) 4,29,877/- 10% Ltd. Shri Ram Global Ent. 29,80,849/- 9% to 9.10% Jaguar Estates (P) Ltd. 1,92,864/- 9% Total = 27,30,11,706/- 3.1 Assessing Officer further observed that out of the aforementioned concerns, MIs Ranbaxy Holding Co., Religare
Commodities Ltd & Religare Securities Ltd. are covered u/s 40A(2)(b) as per the auditors report. It is also clear from the above chart that interest has been paid to these three concerns @ 11 % whereas the interest paid to other concerns who are not covered u/s 40A(2)(b) @ 9% to 10%.
3.2 Besides these, it was also noticed that the assessee has paid interest to different banks on the working capital loans such as DBS Bank Ltd. @ 8.2%, HDFC Bank @ 8.5% and Yes Bank @ 9.2%. Out of these working capital loans, the loans from HDFC Bank and Yes Bank were repaid by the assessee during the relevant previous year. Only the bank loan from DBS Bank continued and the closing balance as on 31.03.2006 was RS.15 crores.
3.3 Besides these, the assessee was also found to have paid interest to the corporate bodies on shorts term loan at the rates varying from 8.5% to 10% and on debentures at the rates varying from 6.5% to 8.7%.2
ITA NO. 2968/Del/2009 3.4 The assessee was requested to explain as to why the excessive interest paid to the concerns covered u/s 40A(2)(b) i.e. at the higher rate of 11 % should not be disallowed u/s 40A(2)(b).
3.5 In its reply, the assessee stated that:
- Unlike other loans, loans from the specified persons are unsecured loans and were available to the assessee company within a short time without any significant paper work, in contrast to the loans taken from the HDFC Bank, which was secured loan and was given after significant paper work.
- The loans from related parties were easily available at ,any desired point of time as compared to loans from Banks. Further, the company was at the inception stage of operation and the loans from Bank were not readily available as per the requirements of the company.
- The bank prime lending rate during the previous year 2005-06 was in the range of 10.25 to 10.75% (for secured loans) as per economic survey report for 2005-06.
- The rate at which the loans were taken from specified persons was for business expediency.
3.6 Assessing Officer did not find assessees explanation satisfactory and gave following observation:-
"(i) The economic survey report for the F.Y.2005-06 is general in nature. The Economic Survey Report is based on the transactions of top five banks only from whom the assessee has not taken any loan. It is worthwhile to mention here that the loan transactions are of different types such as Short Term Loan, Long Term Loan, 3 ITA NO. 2968/Del/2009 Working Capital Loan etc. and the rate of interest charged by the banks may vary depending on the nature of loan transaction. The Non-Banking Finance Companies have a different structure and working. If we consider this report in the present case then the rate of interest charged by the assessee from its customers should be at the rate of prime-lending rate which was, according to the report, around 10.25% to 10.75 %. But it was found from the record that the assessee has charged interest from its customers much above these rates. So this report cannot be considered for as a benchmark for comparing the rate of interest with the prime lending rates in the case of banks. Even for argument sake, if we consider, this Economic Survey Report, the Report suggests that the rate of interest was in the range of 10.25% to 10.75% i.e. the prime lending rate in the case of five banks, the rate of interest paid to the aforementioned specified persons @ 11 % is on the higher side. During the course of assessment, the loan agreement with Yes Bank was examined and it was found that the Bank has clearly mentioned that the PLR of 11.75% on the date of D.P. note is only customary and Is a part of their standard documentation. This shows that it was not compulsory for the Banks to charge the PLR at the rate of 11.75%, as claimed by the assessee. Subsequently, the assessee has obtained loan at the rate of 9.2% (average) from Yes Bank.
(ii) The loan from HDFC Bank has been taken by the assessee through syndication via Ranbaxy Holding Co. The rate of interest charged by HDFC Bank was found to be @ 8.5% and the assessee has paid 1% as syndication fee to M/s Ranbaxy Holding Co. for arranging this loan. So the assessee contention that the secured 4 ITA NO. 2968/Del/2009 loans were available from this bank@ 10.25% to 10.75% is contradictory to the facts of this case.
(iii) No evidence has been produced by the assessee to show that loans from banks were not available at the desired point of time.
Even the report from economic survey for the year 2005-06 does not suggests that there was any liquidity problem.
(iv) The assessee contention that the payment of interest at the higher rate to the specified persons was for business expediency, has also no merit. The assessee is a non banking financial company and its prime objective is to earn income. Payment of higher rate of interest cannot be considered as business expediency. During the year the assessee has obtained loan from various sources such as banks, inter corporate loan, debentures etc. at a much lower rate then the loans taken from the aforementioned specified persons. Even if we consider the commercial expediency, it would have been wiser to return the loans taken at the higher rate of interest then the loan taken on the lower rate of interest. In the present case of the assessee, it was noticed that the assessee returned the loans taken at the lower rates from HDFC Bank and Yes Bank whereas it has continued the loans taken at higher rates from the specified persons. This act of the assessee cannot be construed as commercial expediency. In fact, the transactions with the specified persons show that in order to suppress its income, the assessee has continued these loans and incurred expenditure as interest on these loans. Out of the total expenditure on account of interest payment of RS.37,18,88,771/- (total interest paid on 5 ITA NO. 2968/Del/2009 short term loan from corporate bodies, debentures, working capital loan and unsecured loan) the assessee has paid RS.27,30,11,705/- as interest on unsecured loan i.e. 73.41%. Out of the total interest expenditure of RS.27,30,11,706/- on unsecured loan during the relevant previous year, the assessee has paid RS.26,84,89,950/- to M/s Ranbaxy Holding Co. which is covered u/s 40A(2)(b). This shows that 98.34% of the total expenditure on account of interest paid on unsecured loan, has been paid to M/s Ranbaxy Co. Ltd. who holds substantial interest in the assessee company. The return of income filed by M/s Ranbaxy Holding Co. revealed that it is a loss making company and no tax has been paid by this company even under MAT. The return of income of M/s Ranbaxy Co. Ltd. has been illustrated below for reference.
Name A.Y. Returned Tax
income paid
Ranbaxy Holding Co. 2006-07 (-) 30400439/- NIL
-do- 2005-06 NIL NIL
-do- 2004-05 (-)9276572/- NIL
-do- 2003-04 (-)157613570/- NIL
3.7 Similarly, It was found that the assessee has received interest from M/s Religare Commodities Ltd at the rate of 11 % and have paid interest at the same rate i.e. at the rate of 11 %. In the case of Religare Securities Ltd. the assessee have paid interest at the rate of 11 % and have received interest from it at the rate of 11 % to 12%. It was noticed that during the previous year 2005-06 the assessee had advanced loan to the tune of RS.38,93,05,730/- to Religare 6 ITA NO. 2968/Del/2009 Commodities Ltd. and have received interest of RS.10,40,966/- @ 11 % interest. If we compare the rate of interest on which the loan was given to other customers ranging between 12% to 18% during the same previous year with the loan given to specified person namely Religare Commodities Ltd. which is @11 %, it is evident that on this account also the assessee has charged less interest in comparison to other customers. All these transactions indicate that the assessee has, in fact, incurred losses on these transactions, if we consider, the administrative cost attributable to these transactions. Again, all these transactions with the specified persons cannot be considered as commercial expediency on the part of the assessee and from the point of view that profit. These transactions have not been made by the assessee with the intention to make profit.
3.8 The above illustration suggests that the assessee has adopted a method through the corporate veil to reduce its income and evaded tax to that extent. The continuance of loan from the specified persons at the higher rate of interest and the repayment of loan from other sources which was at the lower rate of interest, cannot be considered as business/commercial expediency."
3.9 Assessing Officer further examined the provisions of section 40A(2)(b) and held as under:-
"The funds available to the assessee during the year were as low as @ 6.5% to 8.7% (debentures) and working capital loans from DBS Bank Limited @8.20% and Yes Bank @9.2%. The funds from HDFC Bank were available @8.5%. Even from the market assessee has taken loans @ 9 to 10% of interest. But only to associate concerns namely Ranbaxy Holding Co., Religare 7 ITA NO. 2968/Del/2009 Commodities Limited and Religare Securities Limited, the payment of interest has been made @11%, which was not the rate prevailing and excessive, prejudicial to the income of the assessee company. Therefore, the disallowance u/s 40A(2)(b) is calculated below:-
3.10 Interest paid @ 11 % to the associated concerns during the year:
i) Ranbaxy Holding Co. 26,84,89,950/-
ii) Religare Commodites Limited 74,816/-
iii) Religare Securities Limited 8,43,350/-
Total 26,94,08,116/-
3.11 Among the banks from which the assessee has taken working capital, the loan with M/s DBS Bank Limited was existing during earlier previous year i.e. 2004-05 and the loan has continued into the next year i.e. the relevant previous year i.e. 2005-06. Hence, taking the transactions with this bank as the fair market value for the interest payments for the relevant previous year 2005-06, the reasonable interest rate is taken @ 8%. Since the assessee has paid excessive interest @ 11 % as against interest payment of only 8.2% to DBS Bank Limited, the excessive interest payment to the associate concerns is determined at 2.8% (11% - 8.20%. Hence, 25.45% of the interest payment ( 2.8/11x100) is to be held as excessive and unreasonable interest payment having regard to the fair market value and legitimate needs of the business, which are illustrated below:-
Ranbaxy Holding Co. - 26,84,89,950 x = ` 6,83,30,692/-
25.45% 8 ITA NO. 2968/Del/2009 Religare Commodites - 74,816 x 25.45% = ` 19,040/-
Limited Religare Securities - 8,43,350 x - ` 2,14,632/-
Limited 25.45%
Total ` 6,85,64,364/-
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) considered the issue and held as under:-
"(i) It is beyond doubt that the appellant has paid interest @ 11 % to its associate concerns viz. M/s.Ranbaxy Holding Co., M/s.
Religare Commodities Ltd. and M/s.Religare Securities on unsecured loans taken by it. It is also not doubted that the transactions with the aforesaid three associate concerns were genuine and the interest cost was actually borne by the appellant.
ii) The Ld. Assessing Officer in his order has compared the rate of interest (11%) on unsecured loans taken from the above three associate concerns with secured loans taken from M/s.DBS Bank Ltd. @ 8.2% by holding that the appellant continued the loan with M/s.DBS Bank Ltd. through out the year.
iii) The appellant has submitted that the rate of interest on secured loans borne by it during the year under reference ranged from 8.2% to 10%, the details of which were dully furnished with AO during the course of assessment proceedings. A copy of the same has also been filed before me.
9ITA NO. 2968/Del/2009
(iv) The year under reference is the second assessment year of the business operation of he appellant. The appellant submitted that during the year under reference, its business activities as well as income therefrom has increased substantially and it has accordingly returned income at RS. 10.71 Crs. on which it has paid tax to the tune of Rs.3.61 Crs. as against returned income of Rs.3.l0 Crs. and tax paid thereon to the tune of RS.1.13 Crs. in the immediately preceding assessment year. It thus submitted that there is an increase of over 200% in the returned income as well as taxes paid in the current year.
v) During the year under reference, the appellant has paid interest cost ofRs.26.85 Crs. (out of total RS.37.19 Crs.) to M/s.Ranbaxy Holding Co. @ 11% and has earned interest income @ 12% to 16% amounting to Rs.49.23 Crs. (Out of total RS.51.50 Crs.) mainly out of borrowings made from Mls.Ranbaxy Holding Co. It thus claimed that without such loans from Mls.Ranbaxy Holding Co., it would not have been possible to earn additional interest income @ 12% to 16% from its clients and therefore the borrowings made from M/s. Ranbaxy Holding Co. were absolutely necessary and legitimate need of the appellant for expansion of its business.
vi) The AR had also drawn my attention to the fact that the secured loans were neither available easily nor they were enough to cater to the business needs of the appellant as it did not have enough security and/or provision of guarantee for obtaining such loans. Moreover, the secured loans required substantial time, huge amount of paper work and formalities including arrangement of 10 ITA NO. 2968/Del/2009 security and/or guarantee, which it was not able to manage. The AR has also furnished before me sanction letter from Mls.DBS Bank Ltd., wherein it has sanctioned a loan facility of Rs.30 Crs. only as against RS. 100 Crs. requisitioned by the appellant. In the said letter the bank has also stated that there would be an upfront levy of fee of 1% of loan amount as also it would levy penalty for prepayment of loans. The AR had also drawn my attention to the fact that the loan was finally disbursed by Mls.DBS Bank Ltd. on 09.12.2005 i.e. after a period of more than two months from the date of application. The AR has also produced before me sanction letters from other banks, which also require similar formalities in the case of secured loans sanctioned by them. Whereas, the unsecured loans from M/s.Ranbaxy Holding Co. were available, though at a slightly higher rate of interest, at any point of time and for any number of days without much of paper work and/or other formalities. The AR therefore pleaded that the loan taken from M/s.Ranbaxy Holding Co. was absolutely necessary for the purpose of carrying on its business as well as for expansion of the business of granting loans & advances to earn the additional interest income @ 12% to 16%, without which, it would not have earned such additional interest income and had paid taxes accordingly. The AR has also furnished Memorandum of Understanding with M/s.Ranbaxy Holding Co. with regard to unsecured loans obtained by it.
vii) The AR also submitted that the interest cost borne by M/s.Ranbaxy Holding Co. was also 10% - or more. It also submitted before me the sanction letters from various institutions which stated that the interest rate on secured loans taken by M/s.Ranbaxy Holding 11 ITA NO. 2968/Del/2009 Co. was 10% (payable monthly or quarterly). Therefore, keeping in view the formalities and paper work including provision of security/guarantee for obtaining secured loans at the request of the appellant, it was justified n the part of M/s.Ranbaxy Holding Co. to charge interest @ 11 % on the unsecured loans given to the appellant on which the appellant has earned interest income from 12% to 16%.
(viii) The ld. Assessing Officer while computing the disallowance u/s 40A(2)(b) has considered/compared the rate of interest on secured loans from M/s.DBS Bank Ltd. @ 8.2%, while not mentioning the higher rate of interest on secured loans availed by the appellant, the detail of which was available with the Ld.AO. Even otherwise, it is common practice that interest on unsecured loans is generally more than interest on secured loans, keeping in view the risk involved in the case of unsecured loans as has also been held by the Hon'ble High Court of Guwahati in the case of Development Investors v. C.I.T.- 223 ITR 432.
(ix) It is also noted that the loan from M/s.Ranbaxy Holding Co. is continuing from the previous year and the rate of interest also remained the same i.e. 11%. The said rate of interest has not been adversely commented upon and therefore accepted by the department in the immediately preceding assessment year in the assessment framed u/s 143(3) of the Act.
(x) I have also gone through the prime lending rates in respect of secured loans as per the Economic Survey Report for the Financial Year 2005-06 duly furnished before me as well as the 12 ITA NO. 2968/Del/2009 Ld.AO as per which the rate of interest on secured loans ranged from 10.25% to 10.75%, which was not considered by the Ld.AO.
In view of the facts and circumstances of the case, contentions of the appellant including case laws relied upon by it and Order of the Ld.AO, I am of the considered view that the appellant had earned substantial interest income and had paid substantially higher taxes in the year under reference as compared to the earlier years mainly out of loans raised from M/s.Ranbaxy Holding Co. @ 11 %, which were lent by the appellant to earn the interest income amounting to Rs.49.23 Crs. @ 12% to 16% which is substantially higher than the previous year. I fully agree with the contention of the appellant that it had borrowed the money from M/s.Ranbaxy Holding Co. @ 11 % for it business needs & requirements, and without such borrowing, it would not have been able to run/expand its business in an efficient manner as adequate secured loans were not available to the appellant from banks keeping in view the resources in the form of security etc. available with the appellant. Accordingly, without such unsecured loans, it would not have been able to earn substantially higher interest income on which it has paid substantially higher taxes.
I thus hold that the unsecured loans taken by the appellant from M/s Ranbaxy Holding Co. were for the business needs of the appellant and without the same it would not have been possible for it to earn the interest income offered by it for taxation.
Similarly, the small loans taken from M/s Religare Commodities Ltd. and M/s Religare Securities Ltd were also for 13 ITA NO. 2968/Del/2009 the purpose of business of the appellant on which it has earned interest income.
I therefore direct the Ld.AO to delete the disallowance of interest amounting to ` 6,85,64,364 made in the assessment order u/s 40A(2)(b) of the Act."
5. Against the above order the Revenue is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon.
7. Ld. Departmental Representative submitted that assessee has raised loans @ 8.2% from banks whereas interest paid to the sister concern was @11%. He further claimed that the arguments of secured loan being less costly is not relevant because as far as the assessee and the lending sister concern of the assessee is concerned, there was inbuilt security as there was no fear of loss of principle or interest to the lender. He further submitted that the assessee company had enough assets on its balance sheet to offer as security and arrange secured loans at the interest rate of around 8%. He further submitted that there was a clear tax saving to the assessee 'as a group' on account of payment of interest @ 11% to sister concern. He further claimed that assessee has claimed business exigency but has not been able to demonstrate any evidence for the same. He further submitted that the assessee's arguments and reliance on Economy Survey is also absolutely uncalled for, especially in view of the fact that the assessee has itself raised money @ 8%. Ld. Departmental Representative submitted that interpretation of section 40A(2)(b) as done by the assessee is erroneous. In this regard, he 14 ITA NO. 2968/Del/2009 placed reliance upon Hon'ble Gujrat High Court decision in the case of [2010] 188 257 Coronation Flour Mills vs. ACIT. Regarding the case law relied upon by the assessee, he argued that they were distinguishable on facts.
7.1 Ld. counsel of the assessee supported the order of the Ld. Commissioner of Income Tax (Appeals). He mentioned that assessee has borrowed unsecured loan from M/s Ranbaxy Holdings Co. in assessment year 2005-06. No disallowance was made by the Assessing Officer, in this connection, in assessment year 2005-06. He argued the rate of interest on unsecured loan borrowed from Ranbaxy Holdings Co. has been accepted by the department in earlier years and the same rate of interest is continuing in the current year as well. With the loans taken from the Ranbaxy Holdings Co., the assessee was able to increase business activity manifold. He further submitted that the assessee had no assets available with it to offer as a security for the purpose of availing a secured loan. He further submitted that difference between secured and unsecured loans have not been properly appreciated by the Assessing Officer.
7.2 We have carefully consider the submissions and perused the records. We can gainfully refer here the provisions of section 40A:-
Expenses or payments not deductible in certain circumstances. 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the [Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is 15 ITA NO. 2968/Del/2009 made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
(b) The persons referred to in clause (a) are the following, namely :--
(i) where the assessee is any relative of the assessee;
an individual
(ii) where the assessee is a any director of the company, partner
company, firm, of the firm, or member of the
association of persons association or family, or any relative
or Hindu un- divided of such director, partner or member;
family
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession,-- (A)where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B)where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.
Explanation.--For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,--
(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and 16 ITA NO. 2968/Del/2009
(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.
8. We find that Assessing Officer has compared the rate of interest of 8.2% on which secured loan was obtained from DBS Bank with that of loan from associated concern from whom the unsecured loan was obtained @ 11% and Assessing Officer has made proportionate disallowance u/s 40A(2)(b). We find that loan from Ranbaxy Holding Co. is continuing from the previous year and the rate of interest also remained the same i.e. 11%. The said rate of interest has not been adversely commented upon and therefore, accepted by the revenue in the immediately preceding assessment year in the assessment framed u/s 143(3). We find that Hon'ble Jurisdictional High Court in the case CIT vs. Dalmia Promoters Developers (P) Ltd. 281 ITR 346 has held that for rejecting the view taken in earlier assessment years, there must be material change in the fact, situation or in law. In this case, clearly there is neither any change in the fact, situation or in law. Hence, Assessing Officer's action is not justified from this angle.
8.1 It is further noted that assessee has earned substantial interest income and paid substantially higher taxes in the year under review as compared to earlier years mainly out of loans raised from M/s Ranbaxy Holding co. @ 11% which were lent by the assessee to earn interest income amounting to ` 49.23 crores @ 13% to 16% which is substantially higher than the previous year. Thus, obtaining the unsecured loan @ 11% from associated concern was commercially expedient.
8.2 It is further noted that secured loan were neither available easily nor they were enough to cater the business needs of the assessee as it 17 ITA NO. 2968/Del/2009 did not have enough security and / or provision of guarantee for obtaining such loan. Moreover, the secured loans required substantial time, huge amount of paper work including formalities including arrangement of security / or guarantee, which the assessee was not able to manage.
The above finds its cogency from the fact that assessee was able to secure loan facility of Rs. 30 crores from M/s DBS Bench as against the requisitioned loan amount of ` 100 crores. Further the loan was sanctioned after a period of 2 months from the date of application.
8.3 As against the difficulties faced by the assessee with respect to secured loan from banks, the unsecured loan from M/s Ranbaxy Holding Co. were available, though at a slightly higher rate of interest, at any point of time and for any number of days without much paper work and / or formalities.
8.4 With regard to provisions of Section 40A Circular No. 6P dated 6th July, 1968 issued by CBDT inter-alia mentions that Income Tax Officer is expected to exercise his judgement in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bonafide cases.
8.5 Clearly on the facts and circumstances of this case strict application of the provision would cause undue hardship upon the assessee, whose case is bonafide. We further find that in the case of Som Dutt Goyal & Sons vs. ITO 27 DTR 263, it was held that in view of the difficulties in obtaining the loan from banks or the financial 18 ITA NO. 2968/Del/2009 institutions, if assessee has paid a little higher rate of interest then it would not be considered that it was paid in violation of s. 40A(2) of the Act.
8.6 Further, from the above discussion, it is clear that unlike other loans, loans from specified persons were available to the assessee company within a short time without significant paper wok in contrast to loan taken from banks which were secured loan and were given after significant paper work.
8.7 From the above discussion, we find that Ld. Commissioner of Income Tax (Appeals) is correct in holding that assessee has earned substantial interest income and has paid substantially higher taxes in the year under reference, as compared to earlier years mainly out of loan raised from M/s Ranbaxy Holding Co. @ 11%. Further, Ld. Commissioner of Income Tax (Appeals) is correct in holding that assessee has borrowed the money from M/s Ranbaxy Holding Co. @ 11% for its business needs and requirement and without such borrowing, it would not have been able to run/expand its business in an efficient manner as adequate secured loans were not available to the assessee from banks keeping in view the resources in the form of security etc. available with the assessee. Accordingly, without such unsecured loans, it would not have been able to earn substantially higher interest income on which it has paid substantially higher taxes.
19ITA NO. 2968/Del/2009 In the background of the aforesaid discussion, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals) and hence, we uphold the same.
9. In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced in the open court on 16/9/2011.
Sd/- Sd/-
[C.L. SETHI]
SETHI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 16/9/2011
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar, ITAT, Delhi Benches
20