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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI PRAMOD KUMAR&
PER Ms. MADHUMITA ROY - JM:
The instant appeal filed by the Assessee is against the order dated 06.09.2016 passed by the Commissioner of Income Tax (Appeals)-10, Ahmedabad under section 143(3) of the Income Tax Act, 1961 arising out of the order dated 05.03.2015 for the Assessment Year 2012-13.
The assessee is an individual and filed its return of income for A.Y. 2012-13 declaring total income of Rs. 5,46,870/- which was duly processed. Upon scrutiny notice u/s 143(2) dated 12.08.2013 was served. During the assessment proceeding, it was found from the record that the assessee has paid interest at 15% totaling to Rs. 25,00,469/- to
- 2 - ITA No.3389/Ahd/2016 Shri Mahendra Kumar Dalchand Shah vs. ITO Asst.Year – 2012-13 certain parties covered u/s 40A(2)(b) whereas 10% - 12% to other parties. A show-cause dated 10.02.2015 was issued to the assessee as to why 3% (in excess of 12%) of such payment to the parties u/s 40A(2)(b) should not be disallowed. In reply, the assessee submitted that funds were borrowed for business purpose and such interest @15% was paid according to the demand of the lenders. The contention of the assessee was not accepted by the Learned AO and Rs. 5,00,094/- was disallowed u/s 40A(2)(b) treating it to be excessive. The matter was carried before the Learned CIT(A) but without success. Hence, the appeal before us.
At the time of hearing of the instant appeal Learned Advocate appearing for the assessee argued before us that no comparable case as to the fair market of similar services has been made out by the Learned AO, before coming to the finding that 15% interest as paid to the parties are excessive to that of the interest paid to other parties or that the same is above market rate of interest. Thus, according to the Learned AR the order of disallowance is not sustainable. He has also placed reliance upon the judgment passed by the Jurisdictional High Court in the case of CIT-vs-Sarjan Realities – (2014) 50 taxmann.com 52 (Guj.) as well as the order passed by the Co-ordinate Bench in ITA No.2511/Ahd/2013 for A.Y. 2008-09. According to the Learned AO even the first appellate authority has not made any discussion about the prevailing market rate of interest before confirming the order passed by the Learned AO. He thus, prayed for deletion of such addition made by the authorities below. On the other hand, Learned DR relied upon the order passed by the authorities below.
We have heard the Learned Representative appearing for the respective parties, we have perused the relevant materials available on record. It appears from the orders passed by the authorities below that before invoking the Section 40A(2)(b) while disallowing 3% of excess rate of interest paid to the parties @15% on the borrowed funds, no
- 3 - ITA No.3389/Ahd/2016 Shri Mahendra Kumar Dalchand Shah vs. ITO Asst.Year – 2012-13 deliberation has been made by the authorities below as regards the prevailing market rate of interest on similar service. In terms of the order passed by the Jurisdictional High Court in the matter of CIT-vs-Suzlon Energy Ltd as relied upon by the Learned AR, it is the duty incumbent upon the Learned AO to assess the fair market price and give comparative instance for payment of interest for similar services. Firstly; before disallowing u/s 40A(2)(b) for such payment being excessive or unreasonable it has to be ascertained that such payment is made to specific person under clause 40A(2)(b) and secondly there must be a clear finding that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, service or facilities for which the payment is made. The jurisdictional High Court clearly laid down this principle that the opinion of the AO for the expenditure excessive or unreasonable is to be confirmed vis-à- vis fair market price for such goods services or facilities. We find that such finding is absolutely missing from the orders passed by the authorities below. Relying upon the said ratio of the judgment passed by the Jurisdictional High Court in the matter of CIT-vs- Sarjan Realities (supra) the Co-ordinate Bench in ITA No.2511/Ahd/2013 also passed order deleting addition made by Revenue on excess payment of interest made by the assessee. Since no deliberation has been made by the authorities below so as to compare the rate of interest paid by the assessee with that of the market rate of interest before making addition we delete the addition made by the authorities below.
The next ground of appeal before us is against the order of disallowance to the tune of Rs. 6,00,000/- u/s 36(1)(iii) being interest at 12% on certain advances made by the assessee.
It appears from the records that the Assessing Officer observed that the appellant has fixed assets of Rs. 4,22,64,182/- against capital of Rs. 34,14,312/-. The appellant has shown investment to the tune of Rs. 50,00,000/- towards non business assets. A show-
- 4 - ITA No.3389/Ahd/2016 Shri Mahendra Kumar Dalchand Shah vs. ITO Asst.Year – 2012-13 cause notice was issued as to why proportionate disallowance of interest expenses should not be made in view of Section 36(1)(iii) of the Act. In reply whereof the assessee submitted that unsecured loans were borrowed for the purpose of business and investment were made out of own funds and not out of borrowed funds. Ultimately, the Learned AO disallowed Rs. 6,00,000/- u/s 36(1)(iii) being 12% of the investment of Rs.50,00,000/-. In appeal, the said order was confirmed by the Learned CIT(A). Hence, the instant appeal before us.
At the time of hearing of the instant appeal, the Learned AR submitted before us that the advances were made on account of business expediency. Such advances to the builders was made to acquire commercial properties for business purposes. The Learned AR further contended that the Learned AO failed to appreciate that the assessee has substantial interest free funds at its disposal for making such advances which is also evident from an annual account being part of the paper book before us. According to him, when assessee has substantial interest free funds disallowance u/s 36(1)(iii) is not warranted. On the other hand, Learned DR relied upon the order passed before the authorities below.
Heard the respective parties, perused the relevant materials available on record including the balance sheet and the profit and loss account of the assessee. The Learned AR before us failed to substantiate that the impugned advance to the tune of Rs.5,00,000/- has been made for business purposes. Apart from that it appears from the balance sheet of the assessee at page 21 of the paper book being part of the record before us that the assessee is having capital as own interest free fund of Rs.34,14,312/- therefore it seems that the assessee made advances of Rs.15,85,678/- (50,00,000-34,14,312) from the borrowed funds. We, therefore, fail to appreciate as to why disallowance has been made u/s 36(1)(iii) at 12% on the entire investment of Rs.50,00,000/-. We, therefore,
- 5 - ITA No.3389/Ahd/2016 Shri Mahendra Kumar Dalchand Shah vs. ITO Asst.Year – 2012-13
restrict such disallowance to the tune of Rs. 1,90,283/- u/s 36(1)(iii) being 12% of investment of Rs.15,85,678/- made from the borrowed funds by the assessee.
In the result, assessee’s appeal is partly allowed. 9. This Order pronounced in Open Court on 19/02/2019
Sd/- Sd/- ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER
Ahmedabad; Dated 19/02/2019 Priti Yadav, Sr.PS
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-10, Ahmedabad. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 11/02/2019 + 14/02/2019 (Dictation Pages - 12) 2. Date on which the typed draft is placed before the Dictating Member 12/02/2019. 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S …14/02/2019 5. Date on which the fair order is placed before the Dictating Member for pronouncement… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order………………