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

Brief facts of the case are that assessee has filed its return of income electronically on 26/09/2012 declaring total income at Rs.4,70,07,880/-. The assessee at the relevant time was engaged in Ship Breaking business at Sosiya Ship Breaking Yard, Sosiya. The case of the assessee was selected for scrutiny assessment and notice u/s.143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was served upon the assessee. On scrutiny of the accounts, it revealed to the Assessing Officer that assessee has debited a sum of Rs.11,11,635/- under the head ‘gift and presentation’. The Assessing Officer has directed the assessee to submit details qua this expenditure. It was pointed out to the Assessing Officer that gold was purchased from Indian Overseas Bank, out of which gold coins having logo of the assessee- company were prepared. These coins were gifted to various bank employees and others with whom assessee has business connection. The Ld.AO did not dispute with regard to purchase of gold and also did not dispute with manufacturing of gold coin with logo of the assessee- company. He raised objection that these coins were presented to the bank employees. Hence, according to Explanation-1 to section 37, this amounts to illegal gratification which deserves to be disallowed. Accordingly, Ld. Assessing Officer disallowed the claim of the assessee.

With the assistance of the Ld.Representatives, we have gone through the record carefully. According to the assessee, it has given these gifts on festival occasion to various persons with whom it has business dealing. These were not given in lieu of any specific work. It was a gesture for good relationship with various employees of the bank.

On the other hand, stand of the Revenue is that Explanation-1 to section 37 prohibits presentation of such gifts. On due consideration of the above, we are of the view that Explanation-1 to section 37 prohibits allowance of any expenditure if incurred on illegal activities. In other words, if any, expenditure was incurred for breach of any law, then that expenditure will not be allowed. If assessee had made payment of some money or gold coin on a fixed term basis for carrying out its work from the bank employees probably expenditure will not be allowable but here the expenditure was not incurred, keeping in mind any specific work, it was given at the time of festivals as a gift to mark social relation. This does not fall within the ambit of Explanation-1 appended to section 37 of the Act. Therefore, we allow the claim of the assessee and delete the disallowance.

The assessee had availed loans from related parties and other parties. It has given interest ranging between 11 to 15% to other parties and 18% to the related parties. The Assessing Officer was of the view that assessee has extended undue benefit to the related parties and therefore the excess interest expenditure incurred by it deserves to be disallowed u/s.40A(2)(b) of the Act. He allowed interest @ 13% and balance was disallowed.

Appeal to the Ld.CIT(A) did not bring any relief to the assessee.

Before us, Ld.counsel for the assessee contended that similar disallowance was made in AY 2011-12 which travelled upto the Tribunal and Tribunal has deleted the disallowance. He placed copy of the Tribunal’s order dated 13/04/2018 passed in ITA No.756/Ahd/2015. The Tribunal while deleting the disallowance recorded following finding:

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.

The Ld.DR was unable to controvert the contentions of the ld.counsel for the assessee.

On due consideration of the above, we are of the view that disallowance u/s.40A(2)(b) can be made, if any, payment is being made to the persons covered under sub-clause((b) of section 40A(2) and such payment was excessive in respect of the services or goods availed from them if the rates are compared with the open market. In other words, if an assessee has availed services and goods from related parties at a higher rate, than it could be availed from open market at a lower rate, the excess payment will be disallowed. Payment of interest @ 18% cannot be termed at a higher rate. Respectfully following the order of the Tribunal in assessee’s own case passed in earlier assessment year, we delete the disallowance made by the Assessing Officer. As a result, ground raised by the assessee is allowed.

In the last ground of appeal, assessee’s grievance is that the Ld.CIT(A) erred in confirming the disallowance of interest amount of Rs.40,28,592/-.

Appeal to the Ld.CIT(A), did not bring any relief to the assessee.

Before us, ld.counsel for the assessee contended that in earlier year, assessee has paid interest and the Ld.CIT(A) has deleted the disallowance made by the Assessing Officer in AY 2011-12. This order of the Ld.CIT(A) was accepted by the Revenue. The assessee brought the order of the Ld.CIT(A)-6, Ahmedabad dated 05/01/2015 to the notice of Ld.CIT(A) for AY 2012-13, but it was not considered. The finding recorded by the Ld.CIT(A) for AY 2011-12 on this issue read as under:

On the other hand, Ld.DR relied upon the orders of the revenue authorities.

On due consideration of the above fact, we find that same amounts continued from earlier years to this year. On these very advances payment of interest expenditure were allowed to the assessee in earlier years. The Revenue did not challenge the order of the Ld.CIT(A). Hence, Revenue cannot challenge this issue in this year. The sales advances received by the assessee were ultimately repaid on 04/12/2014 as noticed by the Ld.CIT(A) in AY 2011-12. It is also important to note that it’s a transaction between business man, if it is agreed that on sale advances, interest has to be paid then how the Assessing Officer can disallow payment of such interest by the assessee to its creditor. Therefore, we delete the disallowance made by the Assessing Officer and allow the ground of appeal of the assessee.

In the result, appeal of the assessee is allowed.