Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that s. 40A(2) was attracted to the payment of interest by the assessee to the estate of late Smt. Taramathi S. Shah?

Counsel Appeared

P. Balachandran, for the Assessee : P.K.R. Menon & N.R.K. Nair, for the Revenue

K.A. NAYAR, J.:

At the instance of the applicant-assessee, the following questions of law have been referred to this Court for opinion by the Tribunal, Cochin Bench :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that s. 40A(2) was attracted to the payment of interest by the assessee to the estate of late Smt. Taramathi S. Shah?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of interest at the rate of 24% by the assessee to the estate of late Smt. Taramathi S. Shah was excessive and that only interest at 18% can be said to be reasonable?”

2. The question of law related to the asst. yrs. 1974-75 and 1978-79. The assessee is a registered firm. During the relevant previous years, the assessee paid interest of Rs. 33,764 and Rs. 10,083, respectively, to the estate of the late Smt. Taramathi S. Shah. The rate of interest was 24% per annum. In the original assessment for the asst. yr. 1974-75, the interest paid was allowed. But the assessment was reopened by the ITO on receiving information that the late Smt. Taramathi S. Shah was a relative of the partners of the firm. The payment of interest at the rate of 24% was held by the ITO to be excessive and invoking the provision of s. 40A(2) of the IT Act, he allowed interest only at 12% per annum and disallowed the balance. Similar action was taken in the original assessment for the year 1978-79. On appeals, the CIT(A) held that interest at 18% will be reasonable and restricted the disallowance of interest to only the amount in excess of the same. The assessee went in further appeals to the Tribunal. Before the Tribunal, it was contended that payment of interest to the estate of Smt. Taramathi S. Shah will not be hit by s. 40A(2) of the Act. It was also contended that the payment of interest at 24% was not excessive. The Tribunal rejected both the contentions. It is, thereafter, that the questions of law aforementioned have been referred to this Court. We heard counsel.

3. Smt. Taramathi S. Shah was the wife of Anandji Shah, the managing partner of the firm. On the death of the said Taramathi S. Shah in 1972, her estate was divided equally between Nilesh A. Shah and Smt. Sobha Shantilal. The father of the said Nilesh A. Shah and the husband of the said Smt. Sobha Shantilal are all partners of the firm. The said firm in which the father of one and the husband of the other are partners paid interest at 24% per annum. Sec. 40A(2)(a) provides that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person being a relative or partner expenditure is excessive or unreasonable having regard to the facilities for which the payment is made or the legitimate needs of the business or profession, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Sec.2(41) of the Act defines “relative” to be an individual to mean the husband, wife, brother or sister or any lineal ascendant or descendant of the individual. There is no dispute that the father of Nilesh A. Shah, namely, Arunchandra C.Shah, is a partner of the firm. Interest is paid to Nilesh A.Shah, the successor to the estate of Taramathi S. Shah. Similarly, the husband of Smt. Sobha Shantilal, namely, Shantilal C. Shah, is a partner of the assessee-firm. Interest is paid to Smt. Sobha Shantilal who is also a successor to the estate of Taramathi S. Shah. Therefore, the interest payments made to son and wife of two partners, respectively, are clearly hit by the provision of s. 40A(2) of the Act.

The interest paid is 24% per annum. The assessee, admittedly, paid interest only at 12% per annum on the amounts belonging to the manager. The statement of the ITO that the bank rate of interest was only 15% or less during the relevant time was not shown to be wrong. There was no material to show that the market rate of interest on hundi and demand pronote from Multani Bankers was 29 to 30%. Taking all these into consideration, the CIT(A) fixed the interest at 18%. There is no ground to consider that the same is not reasonable. In fact, the ITO fixed the interest rate at 12% which was increased by the CIT(A) to 18%. We do not think that the assessee is entitled to anything higher than that.

In the circumstances, we hold that the Tribunal was right in holding that s. 40A(2) was attracted to the payment of interest by the assessee to the estate of the late Smt. Taramathi S. Shah and further we hold that the Tribunal was right in holding that the payment of interest at the rate of 24% by the assessee to the estate of the late Smt. Taramathi S. Shah was excessive and that only interest at the rate of 18 per cent can be said to be reasonable. Therefore, both the questions are answered in the affirmative, that is, in favour of the Revenue and against the assessee.

[Citation :181 ITR 171]