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Income Tax Appellate Tribunal, AHMEDABAD – BENCH ‘D’
Before: SHRI RAJPAL YADAV & SHRI PRADIP KUMAR KEDIA
PER RAJPAL YADAV, JUDICIAL MEMBER : Revenue is in appeal before the Tribunal against order of the ld.CIT(A)-3, Ahmedabad dated 7.1.2016 passed for the Asstt.Year 2009-10.
Solitary grievance of the Revenue is that the ld.CIT(A) has erred in deleting the disallowance of Rs.66,96,418/- which was disallowed by the AO out of interest expenditure claimed by the assessee.
Brief facts of the case are that an assessment order under section 143(3) was passed on 28.11.2011 whereby total income of the assessee was determined at Rs.68,09,756/-. This order was held to be erroneous
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and prejudicial to the interest of the Revenue by the ld.Commissioner vide order dated 7.3.2014 passed under section 263 of the Act. The ld.AO thereafter passed fresh assessment order in pursuance of section 263 order on 30.6.2017. In this assessment order, the ld.AO noticed that the assessee took loan/deposits from 125 parties to whom it paid interest at rate ranging from 10% to 18%. The ld.AO allowed interest at the rate of 10% on all these deposits and disallowed the balance. He made addition of Rs.77,80,279/-. In the opinion of the AO excess interest of Rs.77,80,729/- deserves to be disallowed under section 40A(2)(b) of the Income Tax Act. Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A). The assessee contended that out of 125 parties, 104 parties did not fall within the ambit of sub-clause (b) of section 40A(2). Thus, the interest qua them cannot be disallowed on the ground of their position/association with the management. If some excess benefits were extended to them, then their case is to be examined within the scope of section 36(1)(iii) of the Act. In that case jurisdiction with the AO has to find out whether interest bearing funds were used for the purpose of business or not. The rate of interest at 18% on the loans taken from open market cannot be termed on higher side. The ld.CIT(A) has examined this aspect and reproduced the table pertaining to 37 parties. The ld.CIT(A) has observed that as far as loans taken from persons falling within the sub- clause (b) of section 40A(2), the interest rate ought to be allowed at 15% instead of 18% paid by the assessee, hence, partly confirmed the disallowance. In other words, a disallowance of Rs.10,83,861/- is being confirmed and remaining deleted.
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With the assistance of the ld.representative, we have gone through the record carefully. Sub-clause (b) of section 40A(2) provides categories of persons who can be considered as related parties on account of their relationship/association with the management. If an assessee has any transaction with the related party, then it is to be examined by the AO under section 40A(2)(b). If the AO arrived at a conclusion that services/goods or any other facilities obtained from such related parties, by making excess payment than the market rate, then such excess payment would not be allowed to the assessee as a deduction. The case of the assessee is that out of 125 parties, to whom it has paid interest on the loans/deposits, 104 did not fall in the category of related parties as provided in sub-clause (b) of section 40A(2). Therefore, on such payment of interest, section 40A(2)(b) is not applicable. Its claim was to be examined within the scope of section 36(1)(iii). The AO has no where provided any material on record demonstrating the fact these loans were not used for the purpose of business. These were obtained from unrelated parties, and therefore, interest expenditure cannot be disallowed with the aid of section 40A(2)(b). The ld.CIT(A) has examined this aspect elaborately. Before us, during the course of hearing, the ld.counsel for the assessee relied upon the judgment of Hon’ble Gujarat High Court in the case of CIT Vs. Sarjan Realities Ltd., 50 taxmann.com52 (Guj). Copy of the decision has been placed o0n record. Similarly, he also relied upon the decision of ITAT, Ahmedabad Bench in the case of Jyoti Enterprise Vs. DCIT, ITA No.750/Ahd/2012 order dated 21.10.2015 wherein Tribunal treated the payment of interest at the rate of 18% to relatives as reasonable rates and not excessive for making any disallowance. On due consideration of all these facts, we
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find that the AO was unable to make out a case that interest paid to unrelated parties can be disallowed under section 40A(2)(b) of the Act. Disallowance under this section can be made if some undue benefit is being extended to related parties as contemplated in sub-clause (b). The ld.CIT(A) has already restricted the disallowance qua payment made to related parties. We have been informed that the assessee has not challenged that disallowance. Therefore, taking into consideration well reasoned order of the ld.CIT(A), we do not find any error in it. The appeal of the Revenue is devoid of any merit, accordingly, it is dismissed.
In the result, appeal of the Revenue is dismissed. Pronounced in the Open Court on 25th April, 2019.
Sd/- Sd/- (PRADIP KUMAR KEDIA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER