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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘A’
Before: SHRI RAJPAL YADAV & SHRI PRADIPKUMAR KEDIA
Assessee by : Shri Biren Shah, AR Revenue by : Shri S.K. Dev, Sr.DR सुनवाई क� तार�ख/Date of Hearing : 08/08/2019 घोषणा क� तार�ख /Date of Pronouncement: 21 /08/2019 आदेश/O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER:
Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-2, Vadodara dated 3.5.2017 passed for the Asstt.Year 2013-14.
Assessee has taken four grounds of appeal. However, its grievance revolves around a single viz. the ld.CIT(A) has erred in upholding the disallowance of interest amounting to Rs.55,37,500/- which was added by the AO by restricting the 2 interest expenditure allowable at the rate of 12% as against 18% claimed by the assessee.
3. The ld.counsel for the assessee at the very outset submitted that similar disallowance was made in the Asstt.Year 2012-12, and the dispute travelled upto the Tribunal. The Tribunal has deleted the disallowance vide order dated 9.7.2019 passed in ITA No.319/Ahd/2017. He placed on record copy of the Tribunal’s order. On the other hand, the ld.DR was unable to controvert this fact.
4. We have duly considered rival submissions and gone through the record carefully. While considering similar aspects, the Tribunal has recorded the following finding: “2. Assessee has take five grounds of appeal, but its grievance revolves around two issues viz. (a) the ld.CIT(A) has erred in upholding disallowance of interest amounting to Rs.63,67,512/-, and (b) ld.CIT(A) has erred in confirming disallowance of foreign travel expenses of Rs.22,25,767/-.
Brief facts of the case are that the assessee-company has filed its return of income on 26.9.2012 declaring total income at Rs.1,96,47,205/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. The assessee at the relevant time was engaged in the business of manufacturing and trading of scientific electronics instruments and broadcast audio video equipments. It has shown turnover of Rs.4641.06 lakhs. On scrutiny of the accounts, it revealed to the AO that the assessee company has paid an interest of Rs.1,91,02,535/- to ASE Ltd. at the rate of 18% on unpaid price of electronics division. It further emerges out that a memorandum of understanding was executed with ASE Ltd. on 8.5.2010 vide which it was agreed that ASE would transfer its electronic division to the assessee-company for a consideration of Rs.23.77 crores. 50% of the consideration was decided to be paid by way of issue of shares and the balance 50% of the consideration
3 being unpaid price consideration to be paid by way of monthly payment of Rs.7 lakhs at a simple interest of 12% per annum commencing from expiry of 3 years from the date of execution of the MOU. It is also pertinent to note that interest was to be payable from the date of MOU i.e. 8.5.2010. Thereafter, some changes have been effected in the rate of interest and the interest was paid at the rate of 18%. The AO was of the view that interest at the rate of 12% is available in the open market and interest paid on unpaid consideration over and above 12% deserves to be disallowed. With the aid of section 40A(2)b), the interest of Rs.63,67,512/- was disallowed. The appeal to the CIT(A) did not bring any relief to the assessee.
The ld.counsel for the assessee submitted that no doubt in the MOU dated 8.5.2010 the assessee has agreed to pay simple interest at the rate of 12% on the unpaid purchase consideration; but later on 1.3.2012 in the Board meeting it was resolved that interest will be payable at the rate of 18%. It was also pointed out that the assessee has submitted all these facts to the AO in a letter dated 2.3.2015. It was pointed that bank used to charge interest at the rate of 14% on the loan borrowed by the assessee, but on the loan from ASE Ltd. assessee was not required to furnish bank guarantee and could avoid so many other hurdles. The ld.counsel for the assessee took us through the reply of the assessee reproduced on page nos.2 to 4 of the assessment order. On the other hand, the ld.DR relied upon the orders of the Revenue authorities.
It is pertinent to observe that in order to claim expenditure under section 37(1) of the Income tax Act, the assessee is required to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenditure of the assessee, and (d) expenditure must be laid out or expended wholly and exclusively for the purpose of business or profession. The expression “wholly” employed in section 37 refers to quantification of expenditure while expression “exclusively” refers to the motive, objective and purpose of the expenditure.
6. In the light of the above, let us examine the facts of the present case. No doubt the interest expenditure incurred
4 by the assessee has been considered by the AO as incurred in connection with the business. The dispute between the assessee and the AO relates to rate of interest expenditure. The AO was of the view that the assessee ought to have incurred interest expenditure at the rate of 12% only and should not have paid at 18%. The AO has made reference to the terms of the MOU executed on 8.5.2010, but lost sight of subsequent amendment carried out in the resolution of the Board of Directors. A copy of such resolution passed by the Board is placed at page no.18-19 of the paper book. We have perused this resolution, and the relevant part reads as under:
“4. Revision of interest rate on Unpaid Consideration of acquisition of Electronic Undertaking-
The Board was informed that there were series of discussion and personal meetings between the holding company Ambalal Sarabhai Enterprises Limited and the Company from time to time regarding revision of rate of interest on unpaid consideration payable by the company in respect of transfer of Electronic Undertaking by way of slump sale. Considering the matter In totality it was decided to revise the rate of interest from the present rate of interest @12% to 18% per annum with effect from 1.4.2011 with half yearly rests.
Noted and approved”
As far as rate of 18% is concerned, it is not on the higher side because on unsecured loans, the Tribunal is unanimous in holding that market rate can be 16% to 20% because in that borrowings the assessee used to avoid providing bank guarantee for the loans and also could avoid execution of so many documentation and other processing formalities. The AO has not compared this 18% with the market rate of unsecured loans. He has compared this rate with the bank loan vis-à-vis MOU executed by the assessee. Therefore, we are of the view that there is no justification to disallow business expenditure incurred wholly and exclusively for the purpose of business.”
5 5. There is no disparity on facts. The interest was paid on the loans from ASE Ltd. in the last year as well as this year. This is the same amount which is outstanding in this year also. According to the assessee it has agreed for payment of interest at the rate of 18% whereas the AO was of the view that this interest ought to be paid at the rate of 12%, and the amount over and above of 12% has been disallowed. Similar amount has been deleted by the Tribunal as per the finding extracted (supra). Therefore, respectfully following the order of the Tribunal in the earlier year, we delete the disallowance in this year also.
In the result, appeal of the assessee is allowed.
Order pronounced in the Court on 21st August, 2019.