DCIT, CENTRAL CIRCLE-1, UDAIPUR vs. VIKRAM ANJANA, CHITTORGARH

PER: B.R. BASKARAN, AM

The appeal filed by the Revenue is directed against the order dated

22.05.2019 passed by the ld. CIT(A)-1, Udaipur and it relates to the

Assessment Year 2013-14.

issues:-

A. Disallowance of interest expenditure u/s 40A(2)(b) of the Act.

2 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana B. Disallowance of interest on loans which were treated as

unexplained in earlier years.

C. Disallowance of interest expenditure on account of diversion of

interest bearing funds.

assessee derives interest income on advances given by it.

parties u/s 40A(2)(b) of the Act. The AO noticed that the assessee has paid

interest to the following related concerns at the rate mentioned in the

table.

S. No. Name of the assessee Interest paid Rate of Interest% 1 M/s Chetak Enterprises 6,11,84,735/- @13% Ltd. 2 M/s Sarvodaya Agrotech 49,19,595/- @12% India Ltd. 3 M/s Sarvodaya Mining 53,117/- @12% Services 4 M/s U. B. Roadlines 17,16,154/- @12%

unrelated parties. Accordingly he took the view that the rate of interest

paid in excess of 10% to related parties would be liable for disallowance

u/s 40A(2)(a) of the Act. Accordingly he restricted the interest rate to 10%

3 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana in respect of loans taken from related parties, which resulted in a

disallowance of interest expenditure to the tune of Rs. 1,52,34,365/-. The

ld. CIT(A), however, deleted the disallowance. Hence the Revenue has

challenged the decision of ld. CIT(A).

the ld. CIT(A) has deleted the disallowance with following observations:-

“4.2 I have considered the facts of the case, assessment order and appellant's submissions. The AO noted that the assessee had paid interest to the aforesaid four parties over and above 10%, which are related parties / concerns u/s. 40A(2)(b) of the Act. Accordingly, the AO disallowed Rs. 1,52,34,365/- after working out the excess interest payment over and above 10% made to these close relative/concerns. The appellant has submitted that the AO cannot sit on the chair of the management or business and decide at what rate of interest is to be charged; the loan raised from these parties were for business purpose and in commercial expediency. The appellant claimed that he had also charged interest @13% in number of cases which too taxed by the AO, thus, the provision of section 40A(2)(b) of the Act are not applicable as per the definition of the said section. The appellant pointed-out that similar disallowance was made in appellant's case own case for AY 2009 10, which was deleted by the Hon'ble ITAT in their order in ITA No. 452/Jodh/2014. Considering the appellant's submissions, I am inclined to agree with the appellant's arguments made therein. In order to make a disallowance u/s 40A(2)(b) it is necessary that the Assessing Officer should establish that the benefits given to the related parties are more than the fair market value. It is not the case here that the appellant had paid interest over and above 10% of these four parties, he had also charged interest @13% from the various parties. Further, the Assessing Officer has not been able to establish as to what was the market rate of interest.

In fact the AO did not bring any material on record for holding that the payment of interest @ 12% and 13% per annum to

4 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana unsecured creditors was excessive and how interest @ 13% pa was reasonable or represented fair market value for the services and facilities. Before proceeding further, I may refer to the provisions of section 40A(2)(a) of the Act, the relevant portion of which reads as follows: *40A(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 the 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 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."

A mere glance at the aforesaid provision reveals that the expenditure mentioned therein is in relation to any person referred to in clause (b) of the sub-section and the expenditure has to be considered in relation to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom. Hon'ble Gujarat High Court observed in Coronation Flour Mills v. Asstt. CIT [2010] 188 Taxman 257 that in relation to the disallowance under the provisions of section 40A(2)(a) of the Act, a plain reading of the provision reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to a fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed, which are independent and alternative to each other All the three requirements need not exist simultaneously. In a given case, if any one condition is shown to be satisfied the provision can be invoked and applied, if the

5 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC). In the instant case, there is nothing to suggest that the AO found the payment of interest excessive having regard to either (a) fair market value of the services or facilities; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. Not a whisper has been made by the AO in respect of any of these three ingredients in his assessment orders. There is nothing to suggest that the AO ever brought any material on record on this aspect before concluding that interest over and above 10% was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the interest on unsecured loans.

In case of private borrowings and more particularly in respect of the borrowings for longer period where no collateral security is furnished, the normal rate of interest charged is higher. As the loan from the these parties were taken for a longer period and without furnishing any collateral security or other guarantee, the payment of interest at 12% to 13.5% is commensurate with the market trend of borrowings. Facts of the of M/s Bansidhar Onkarmal Vis CIT (58 ITR 462) are clearly applicable to the facts of the present case wherein it was held that it is not possible for a party to raise loan in open market on a uniform rate, nor can a debtor dictate his rate of interest to the creditor. Rate of Interest naturally depends upon various factors such as the credit of the debtor in the market and availability of capital in the market at a particular time. On account of business exigencies, a businessman may be forced to pay a higher rate of interest. It may be reasonable to hold that no businessman would agree to borrow capital at an excessive or unreasonable rate of interest. These parties provided the loans to the assessee for business purpose for longer period and without any collateral security, therefore, rate of interest was paid between 12% to 13.5%, however, it cannot be said to be excessive or higher or unreasonable considering the facts of the case.

6 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana Moreover, it is observed that in the appellant's case for AY 2009-10, the similar disallowance was made on identical facts, where rate interest paid over and above 10% to some related concerns/parties were found excessive and disallowance was made. However, the Hon'ble ITAT in their order dated 22-05-2014 in ITA No. 452/Jodh/2014 for AY 2009-10 confirmed the findings of CIT(A) deleting the addition made on this account. For the sake of clarity, the relevant finding of Hon'ble ITAT are reproduced as under:

In view of the discussion made above and respectfully following the findings of Hon'ble ITAT, it is held that the AO is not justified in making the addition of 1,52,34,365/- on account of disallowance of excess interest payment made to close relative/concerns. The addition made on this account is directed to be deleted. The ground of appeal raised by the appellant regarding this issue is allowed.”

7 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana 7. A perusal of the order passed by Ld CIT(A) would show that the Ld

CIT(A) has given a definite finding that the assessee itself has been

granting advances @ 13% to other persons. Further, the Ld CIT(A) has

observed that the AO has not brought any material on record to show that

the interest rate of 12% to 13% is unreasonable and does not represent

market rate. The Ld CIT(A) has also noticed that the assessee has availed

loans from related parties without furnishing any security, in such kind of

cases the market rate of interest will be usually higher. Further, the co-

ordinate bench has deleted an identical addition made in the earlier years

and the said decision has been followed by Ld CIT(A). In view of the

various reasoning given by Ld CIT(A), we do not find any infirmity in the

decision taken by Ld CIT(A) on this issue.

interest expenses to the tune of Rs.5,32,766/- claimed on loans, which

were considered as non-genuine in the earlier years.

credits as treated as unexplained in the earlier years and accordingly

disallowed interest expenses claimed thereon. The Ld CIT(A) noticed that

8 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana

(a) Three items of cash credits were considered to be genuine by

ITAT in its order dated 22.11.2013 passed in ITA No.154/Jodh/2013

relating to AY 2007-08.

(b) Four items of cash credits were considered to be genuine by

ITAT in the order passed for AY 2009-10 in ITA No.452/Jodh/2014.

(c) Remaining six items of cash credits have been deleted by Ld

CIT(A) in the order passed for AY 2012-13.

Since the relevant cash credits have been found to be genuine by the

appellate authorities in the earlier years and since the additions made by

the AO was deleted, the Ld CIT(A) directed the AO to allow interest claimed

on above said creditors amounting to Rs.5,32,766/-.

notice that the AO had disallowed the interest expenditure claim on the

reasoning that the relevant cash credits were held to be non-genuine in the

earlier years and accordingly addition was made. The Ld CIT(A) has given

finding that the addition of cash credits have been deleted in the appellate

forums. Hence the cause of action for making disallowance of interest

expenditure has disappeared, in which case, the interest expenditure

claimed by the assessee needs to be allowed. Accordingly, we hold that

9 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana the Ld CIT(A) was justified in directing the AO to allow interest

expenditure.

expenses of Rs.10,12,926/- on the allegation of diversion of interest

bearing funds. The AO noticed that the assessee claimed interest

expenditure of Rs.8.14 crores and it has not charged interest on the loans

given to the following parties:-

M/s Capricon Credit P Ltd - 1,92,00,000 Smt Sangeeta Anjana - 65,000 M/s U B Infrastructure - 4,10,000

Hence the AO took the view that the assessee has diverted interest bearing

funds for giving above loans free of interest. Accordingly, the AO

disallowed proportionate interest expenses of Rs.10,12,926/-.

diverted any interest bearing funds. In this regard, the Ld CIT(A) took

support of the decision rendered by Hon’ble Bombay High Court in the case

of CIT vs. Reliance Utility and Power Limited (2009)(313 ITR 340)(Bom).

D.R supported the order passed by the AO. The Ld A.R submitted that the

10 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana assessee is having own capital of Rs.1.70 crores as on 31.3.2013. Besides

the above, the assessee was also having interest free unsecured loan of

Rs.4.45 crores. Accordingly, he submitted that the assessee was having

interest free funds of Rs.6.15 crores as against the interest free advances

of Rs.1.96 crores. Accordingly, he submitted that the Ld CIT(A) was

justified in deleting the disallowance on the above set of facts.

has exceeded the amount of interest free advances given by the assessee.

The Hon’ble Bombay High Court has held in the case of Reliance Utility and

Power Ltd (supra) as under:-

“…Tribunal having recorded a clear finding that the assessee possessed sufficient interest free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds.” We notice that the Ld CIT(A) has deleted the addition following the above

said decision; the decision rendered by Hon’ble Madras High Court in the

case of CIT vs. Hotel Savera (1998)(148 CTR 585)(Mad) and also decisions

11 ITA No. 274/Jodh/2019 DCIT vs. Sh. Vikram Anjana rendered by the Tribunal on identical issues. Accordingly, we do not find

any reason to interfere with the order passed by Ld CIT(A) on this issue.

Sd/- Sd/- (SANDEEP GOSAIN) (B. R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated : 09/11/2022

*Ganesh Kr Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR 6. Guard File

Assistant Registrar Jodhpur Bench