PRIYA BLUE INDUSTRIES PVT. LTD.,,BHAVNAGAR vs. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-1,, BHAVNAGAR

As regards Ground Nos. 2 & 3, the Learned A.R. submitted that these grounds relate to disallowance of domestic travelling expenses and international travelling expenses. It was submitted that the assessee is a corporate assessee and therefore the action of the AO in disallowing a part of travelling expenses on the basis of some personal element is not justified. Our attention was involved to an order of learned CIT(A) in the case of assessee itself for AY 2012-13 wherein the learned CIT(A) had deleted similar disallowance. It was submitted that since the department did not file any appeal against such deletion, the same has attained finality and therefore, in the present year also the same may be allowed following the principles of consistency as held by Hon’ble Supreme Court in the case of CIT vs. Excel Industries 358 ITR 295 (SC).

As regards Ground Nos. 4 & 5, the Learned AR submitted that these grounds relate to disallowance under s.40A(2)(b) of the Act. Explaining the facts of the case, the Learned A.R. submitted that the assessee had paid interest to Directors @ 18% per annum and the AO has restricted the same to 13% holding the same to be excessive. He further stated that learned CIT(A) has confirmed the disallowance ignoring his earlier decision in the case of the assessee itself wherein the interest @ 18% was held to be reasonable and was allowed. The Learned A.R. further submitted that the Hon’ble Tribunal vide order dated 13.04.2018 has dismissed the appeal of Revenue on this issue.

As regards appeal in the Learned A.R. submitted that in this appeal only one issue of disallowance under s.40A(2)(b) is involved and submitted that similar argument for deletion of the same may be noted as argued in .

The Learned D.R., on the other hand, as regarding disallowance of travelling expenses relied upon the orders of the authorities below whereas on the other issue of disallowance under s.40A(20(b) of the Act, the Learned Sr. D.R. referred to the order of learned CIT(A) wherein he has confirmed the disallowance by distinguishing the order of learned CIT(A) in earlier year. The Learned Sr. D.R. submitted that learned CIT(A) & 2/Ahd/18 [Priya Blue Industries Pvt. Ltd. vs. ACIT] A.Ys. 2013-14 & 2014-15 - 3 - has made a categorical finding of fact that in earlier year the assessee had paid interest to other unrelated parties @ 18% which is not the case in the present years.

We find that the AO in the earlier year had disallowed travelling expenses by holding the same observations as in the year under consideration which is that assessee was not able to establish co-ordination between the travelling expenses and consequential transaction of the business. The learned CIT(A)’s action in not allowing relief to the assessee in these years is not justified specifically in view of the fact that facts and circumstances in both years remained same and moreover the Revenue did not file any appeal against the order of learned CIT(A).

In view of the above facts and circumstances, the action of the authorities below during the present year, is not justified and therefore the disallowance sustained by the learned CIT(A) is deleted. In view of the above, ground nos. 2 & 3 are allowed. & 2/Ahd/18 [Priya Blue Industries Pvt. Ltd. vs. ACIT] A.Ys. 2013-14 & 2014-15 - 4 -

Now coming to disallowance under s.40A(2)(b) of the Act, we find that similar issue arose in the case of assessee itself for AY 2011-12 and in that year also the interest was paid to same Directors @ 18% and learned CIT(A) had allowed the relief to the assessee. The Revenue took the matter to the Hon’ble Tribunal and Hon’ble Tribunal vide order dated 13.04.2018 dismissed this ground by holding as under:

We find substance at the first instance on the plea paddled on behalf of the assessee that interest rate @ 18% cannot be seen as excessive or unreasonable having regard to the fact that the assessee has incurred interest costs at the similar rate on borrowed funds from uncontrolled parties. This fact itself proves the case of the assessee in affirmative. The revenue has not been able to counter this aspect of justification for making payment of interest alleged at higher rate qua other lenders. Therefore, we do not consider it necessary to look into the other plea of the assessee on requirement of determination of market rate of interest independently. In view of the aforesaid discussion, we do not find any infirmity in the order of the CIT(A) in drawing conclusion in favour of the assessee.”

Though in the AY 2011-2, the Hon’ble Tribunal had made a finding of fact that interest @ 18% was paid to other unrelated parties also which as per learned CIT(A) is not the case in the present year as in the present year he has observed that interest @ 18% was not paid to other unrelated parties. However, while adjudicating the issue he has totally ignored the alternative submissions of the assessee which though he has noted in his order but did not ajudicate the same. For the sake of completeness, the submissions of assessee as noted by the CIT(A) are reproduced below: & 2/Ahd/18 [Priya Blue Industries Pvt. Ltd. vs. ACIT] A.Ys. 2013-14 & 2014-15 - 5 - "6. Ground #4 challenges the action of learned AO in concluding the interest of Rs.44,26,446/- paid-to the related parties to be excessive and unreasonable and disallowed the same u/s. 40A(2)(b) of the Act. 6.1. The ld. AO during the assessment proceedings observed that the appellant has made the interest payment to its Directors in the year under consideration. The ld. AO further observed that the appellant has paid the interest to related parties at the rate of 18% and that the interest paid to other third parties are at lesser or same rate. The ld. AO therefore issued a show cause notice to the appellant to explain such differences in the rate of interest. The Appellant in this regard explained to the ld. AO vide its reply dated 23/02/2015 that the funds borrowed from all the parties are for business purpose. Moreover, the rate of interest from the Banks and from related parties varies on the basis of market circumstances and also on the terms and conditions of each and every advances and loans as also the repayment terms. The ld. AO however, failed to understand the facts submitted by the appellant and held the interest rate of 11- 13% as reasonable. The ld. AO alleged that even considering 2% additional interest rate for guarantee in case of loans from related parties, there would be excess interest rate of 5% for that reason, the ld. AO disallowed interest of Rs.40,15,247/- u/s. 40A(2)(b) of the Act. The learned AO further did not appreciate that the advances from Odessey Corporation was not against the sales but the loan taken on interest. The ld. AO therefore grossly erred in disallowing the interest amount of Rs.40,28,592/-. 6.2. At the outset, the appellant most respectfully submits that an identical issue was heard in Appellant's own case in for A. Y 2011-12 wherein it was held that interested paid at the rate of 18% is reasonable. The copy of such order is placed along with this submission herewith marked as Annexure-B. 6.3. Alternatively and without prejudice to the above, the appellant most respectfully submits that learned AO has himself stated that the appellant has paid interest of 11-18% to parties other than related parties, (please refer para 1), page no. 6 of the Assessment order read with Page no. 45 of the P/b. It is further submitted that the learned AO has further not objected that such related parties being- directors of the appellant have given guarantees against the risks of borrowing by the appellant. Accordingly, looking upon the overall picture, interest paid by the appellant to such directors is not excessive as far as interest is benchmarked from within the organisation and the appellant has paid interest @18% per annum to unrelated parties like M/s Madhav Industries Corporation, Shri Anil Goyal, M/s U.K. Gupta & Sons referred at page no.45ofthe P/b.

Alternatively and without prejudice to the above, the provisions of S.40A(2)(b) are as under for your ready reference:- "40A. (2) (2)(a) Where the assesses 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 mode 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 : — (ii) where the assessee is an individual any relative of the assessee;

In the above submissions to learned CIT(A), the assessee has brought into his kind attention that the finding of AO that assessee had paid interest ranging from 11 to 13% to unrelated parties was not correct and had invited attention to page no.75 of paper book wherein the appellant had paid interest @ 15% to unrelated party as well. It was also submitted that applying Section 40A(2)(b) of the Act without determining the market value of goods/services provided, the disallowance cannot be sustained and reliance was also placed on the two judgments of Hon’ble Gujarat High Court. It was also submitted that loans granted by such Directors to the appellant were unsecured in nature and nationalized or private banks while granting loans in such categories charged interest @ 24% to 40%. It was further submitted to him that various Tribunals have concluded that rate of 24% is fair so far as to market value of such services are concerned and in this respect and order of Ahmedabad Tribunal in the case of Omkarmal Gaurishanker Vs. ITO, 92 TTJ (Ahd) 223 was also relied. However, the learned CIT(A) has totally ignored these submissions which were quite relevant as the funds obtained from related parties are generally without any security and such funds are not repayable in near future and therefore these loans fall in the high risk category and therefore carry higher rate of interest. Further, we find that the authorities below have not commented on the reasonableness of the expenditure. Therefore, keeping in view the above facts and circumstances and in view of the fact that AO did not independently determine the reasonableness of interest paid to Directors and following judicial precedents in the case of assessee itself, this addition is also deleted.

Rest of the grounds taken by the assessee do not require any adjudication as these are consequential in nature.

Only single issue is involved in this appeal which is disallowance under s.40A(2)(b) of the Act and which is covered by grounds 1 to 3. Keeping in view our finding in , grounds of appeal are also allowed. Rest of the grounds taken by assessee do not require any adjudication as these are consequential in nature.

In nut shell, both the appeals filed by the assessee are partly allowed.