M/S ARENA ENTERPRISES,MUMBAI vs. ITO, WARD, 41(4)(1), MUMBAI

2.1 The assessee is challenged the order passed u/s 263 of the Act The assessee is challenged the order passed u/s 263 of the Act The assessee is challenged the order passed u/s 263 of the Act before the ITAT. The ITAT vide order dated 01.12.2022 in the ITAT. The ITAT vide order dated 01.12.2022 in the ITAT. The ITAT vide order dated 01.12.2022 in ITA No. 862/Mum/2022. Though allowed the appeal 862/Mum/2022. Though allowed the appeal of the assessee on the of the assessee on the issue of the allowability of the expenses claimed out of income from issue of the allowability of the expenses claimed out of income from issue of the allowability of the expenses claimed out of income from house property however, upheld the order u/s 263 on the issue of house property however, upheld the order u/s 263 on the issue of house property however, upheld the order u/s 263 on the issue of the payment of the interest at higher rates to person specified u/s the payment of the interest at higher rates to person specified u/s the payment of the interest at higher rates to person specified u/s 40A(2)(b) of the Act. In compli 40A(2)(b) of the Act. In compliance of the direction of the ITAT ance of the direction of the ITAT accordingly the Assessing Officer commenced the assessment accordingly the Assessing Officer commenced the assessment accordingly the Assessing Officer commenced the assessment proceedings for complying to the direction of the PCIT passed u/s proceedings for complying to the direction of the PCIT passed u/s proceedings for complying to the direction of the PCIT passed u/s 263 of the Act.

M/s Arena Enterprises 3 & 6322/MUM/2024 Nos. 6321 & 6322/MUM/2024 2.2 The Assessing Officer accordingly noticed that assessee was in The Assessing Officer accordingly noticed that assessee was in The Assessing Officer accordingly noticed that assessee was in the business of development of the property and of development of the property and of development of the property and constructs a commercial building namely Arena Space parts. Parts of the units of commercial building namely Arena Space parts. Parts of the units of commercial building namely Arena Space parts. Parts of the units of the building were sold in earlier year and unsold stock units had e building were sold in earlier year and unsold stock units had e building were sold in earlier year and unsold stock units had been given on rent or lose out to various parties. During the year been given on rent or lose out to various parties. During the year been given on rent or lose out to various parties. During the year under consideration, the assessee had shown income by way of rent onsideration, the assessee had shown income by way of rent onsideration, the assessee had shown income by way of rent receipt, company area maintenance etc. under the head ‘income receipt, company area maintenance etc. under the head ‘income receipt, company area maintenance etc. under the head ‘income from house property’ and ‘income from business or profession’. The from house property’ and ‘income from business or profession’. The from house property’ and ‘income from business or profession’. The Assessing Officer further noticed that assessee claimed interest Assessing Officer further noticed that assessee claimed interest Assessing Officer further noticed that assessee claimed interest income and expenses, he noticed that assessee availed including ome and expenses, he noticed that assessee availed including ome and expenses, he noticed that assessee availed including loan of immovable property and outstanding loan as on 31.03.2017 loan of immovable property and outstanding loan as on 31.03.2017 loan of immovable property and outstanding loan as on 31.03.2017 was shown at Rs.1,20,14,31,950/ was shown at Rs.1,20,14,31,950/- and interest payment of and interest payment of Rs.12,03,52,935/- on the aforesaid loan was treated as relating to on the aforesaid loan was treated as relating to on the aforesaid loan was treated as relating to house property of which the assessee has earned rental income property of which the assessee has earned rental income property of which the assessee has earned rental income during the year whereas, the remaining interest payment during the year whereas, the remaining interest payment during the year whereas, the remaining interest payment Rs.2,90,87,072/- on the unsecured loan, major portion which was on the unsecured loan, major portion which was on the unsecured loan, major portion which was taken from related party was not related to house property. The taken from related party was not related to house property. The taken from related party was not related to house property. The Assessing Officer noted that assessee had taken interest from the r noted that assessee had taken interest from the r noted that assessee had taken interest from the following related party: following related party:

Sr. Name of the party. Name of the party. Amount of Rate of interest Rate of interest No. interest paid. paid. 1 Samkit Enterprise. Samkit Enterprise. 73,01,656/- 18% 2 Mulchand S. Chheda, HUF Mulchand S. Chheda, HUF 40,93,406 18% 3 Parag J. Chheda Parag J. Chheda 39,88,373/- 18%

M/s Arena Enterprises 4 & 6322/MUM/2024 Nos. 6321 & 6322/MUM/2024

4 Ayushi K Dudhagara Ayushi K Dudhagara 49,250/- 18% 5 Nathalal S. Dudhagara Nathalal S. Dudhagara 1,82,500/- 18%

6 Parishma K Dudhagara Parishma K Dudhagara ** ^1,82,500/- 18%

7 Vrajbala N. Dudhagara Vrajbala N. Dudhagara 3,10,250/- 18%

Total 1,61,07,935/- 2.3 Though initially the Assessing Officer proposed as Though initially the Assessing Officer proposed as Though initially the Assessing Officer proposed as why the proportionate interest in excess of the 12% paid to the related proportionate interest in excess of the 12% paid to the related proportionate interest in excess of the 12% paid to the related parties should be disallowed parties should be disallowed however after considering the however after considering the submission of the assessee that loans from outside parties were submission of the assessee that loans from outside parties were submission of the assessee that loans from outside parties were taken as loan of 15% per annum, the Assessing Officer applied the taken as loan of 15% per annum, the Assessing Officer applied taken as loan of 15% per annum, the Assessing Officer applied rate of the 15% as benchmark and disallowed the excess interest rate of the 15% as benchmark and disallowed the excess interest rate of the 15% as benchmark and disallowed the excess interest payment @ 3% to the related parties invoking section 40A(2)(b) of payment @ 3% to the related parties invoking section 40A(2)(b) of payment @ 3% to the related parties invoking section 40A(2)(b) of the Act which was determined at Rs.26,84,056/-. The relevant the Act which was determined at Rs.26,84,056/ the Act which was determined at Rs.26,84,056/ finding the Assessing Officer is reproduced as under: finding the Assessing Officer is reproduced as under: finding the Assessing Officer is reproduced as under:

“6. The above submissions of the assessee are carefully considered 6. The above submissions of the assessee are carefully considered 6. The above submissions of the assessee are carefully considered and found that they do not stand any merit. The main contention of and found that they do not stand any merit. The main contention of and found that they do not stand any merit. The main contention of the assessee is that the provisions of section 40A(2)(b) cannot apply the assessee is that the provisions of section 40A(2)(b) cannot apply the assessee is that the provisions of section 40A(2)(b) cannot apply in its case because they made the claim of Interest e in its case because they made the claim of Interest e in its case because they made the claim of Interest expenditure under the head "Income from House Property". First of all the under the head "Income from House Property". First of all the under the head "Income from House Property". First of all the assessee has failed to segregate and claim the proportionate assessee has failed to segregate and claim the proportionate assessee has failed to segregate and claim the proportionate interest expenses in different heads of income in accordance with interest expenses in different heads of income in accordance with interest expenses in different heads of income in accordance with its utilization. As mentioned supra, the assessee has av its utilization. As mentioned supra, the assessee has av its utilization. As mentioned supra, the assessee has availed secured loan on the immovable property and the interest payment of secured loan on the immovable property and the interest payment of secured loan on the immovable property and the interest payment of Rs. 12,03,52,935/ Rs. 12,03,52,935/- made on the aforesaid loan relates to the house made on the aforesaid loan relates to the house property, on which the assessee earned rental income during the property, on which the assessee earned rental income during the property, on which the assessee earned rental income during the year. Whereas the remaining interest payment of Rs.2 year. Whereas the remaining interest payment of Rs.2 year. Whereas the remaining interest payment of Rs.2,19,87,072/- on the unsecured loan taken, is not related to the house property, on the unsecured loan taken, is not related to the house property, on the unsecured loan taken, is not related to the house property, but related to 'Income from Business or Profession'. In the but related to 'Income from Business or Profession'. In the but related to 'Income from Business or Profession'. In the computation of total income, the assessee has shown income under computation of total income, the assessee has shown income under computation of total income, the assessee has shown income under the head 'Income from Business or Profession' as we the head 'Income from Business or Profession' as we the head 'Income from Business or Profession' as well as 'Income from House Property', But instead of claiming proportionate interest from House Property', But instead of claiming proportionate interest from House Property', But instead of claiming proportionate interest

M/s Arena Enterprises 5 & 6322/MUM/2024 Nos. 6321 & 6322/MUM/2024 expenses under the different heads of income, the assessee has expenses under the different heads of income, the assessee has expenses under the different heads of income, the assessee has claimed the entire interest expenses under the head 'Income from claimed the entire interest expenses under the head 'Income from claimed the entire interest expenses under the head 'Income from House Property', which is not allowable. As s House Property', which is not allowable. As such, provisions of uch, provisions of section 40A(2)(b) of the Act are clearly applicable in respect of section 40A(2)(b) of the Act are clearly applicable in respect of section 40A(2)(b) of the Act are clearly applicable in respect of interest payment of Rs.2,19,87,072/ interest payment of Rs.2,19,87,072/- as the same is wholly and as the same is wholly and exclusively used for the purpose of exclusively used for the purpose of business expenditure. business expenditure. 6.1. Another main objection of the assessee is th 6.1. Another main objection of the assessee is that loans have been at loans have been taken from outsiders @ 15% p.a. and therefore the 12% p.a. cannot taken from outsiders @ 15% p.a. and therefore the 12% p.a. cannot taken from outsiders @ 15% p.a. and therefore the 12% p.a. cannot be the bench mark for making any addition. The assessee has also be the bench mark for making any addition. The assessee has also be the bench mark for making any addition. The assessee has also relied upon the decision of Hon'ble ITAT in some of the cases. It is relied upon the decision of Hon'ble ITAT in some of the cases. It is relied upon the decision of Hon'ble ITAT in some of the cases. It is noticed that the facts and circumstan noticed that the facts and circumstances of those case are different ces of those case are different from the case of the assessee and hence not applicable in this case. from the case of the assessee and hence not applicable in this case. from the case of the assessee and hence not applicable in this case. 6.2. 6.2. On perusal of the list of unsecured loan parties and the 6.2. 6.2. On perusal of the list of unsecured loan parties and the 6.2. 6.2. On perusal of the list of unsecured loan parties and the interest payment made to them, it is noticed that out of total 55 interest payment made to them, it is noticed that out of total 55 interest payment made to them, it is noticed that out of total 55 parties from whom the parties from whom the assessee has taken unsecured loan, assessee has taken unsecured loan, assessee has paid interest @ 15% to majority of such parties i.e. in assessee has paid interest @ 15% to majority of such parties i.e. in assessee has paid interest @ 15% to majority of such parties i.e. in 34 cases. In the remaining cases interest payment @ 12%, 17.4% & 34 cases. In the remaining cases interest payment @ 12%, 17.4% & 34 cases. In the remaining cases interest payment @ 12%, 17.4% & 18% were made. It is also noticed that the assessee has paid 18% were made. It is also noticed that the assessee has paid 18% were made. It is also noticed that the assessee has paid interest @ 18% mostly on t interest @ 18% mostly on the loan taken from related parties, as he loan taken from related parties, as mentioned above. Since the assessee has made interest payment @ mentioned above. Since the assessee has made interest payment @ mentioned above. Since the assessee has made interest payment @ 15% on majority of the unsecured loan, proportionate interest in 15% on majority of the unsecured loan, proportionate interest in 15% on majority of the unsecured loan, proportionate interest in excess of 15% paid to the related parties, which comes to excess of 15% paid to the related parties, which comes to excess of 15% paid to the related parties, which comes to Rs.26,84,656/ Rs.26,84,656/- is disallowed u/s. 40A(2)(b) of the I.T. Act out of /s. 40A(2)(b) of the I.T. Act out of total interest expenses claimed and added back to its total income total interest expenses claimed and added back to its total income total interest expenses claimed and added back to its total income of the assessee. Penalty proceeding u/s. 270A of the I.T. Act is also of the assessee. Penalty proceeding u/s. 270A of the I.T. Act is also of the assessee. Penalty proceeding u/s. 270A of the I.T. Act is also initiated for under reporting initiated for under reporting of income.”

“5.3 5.3 5.3 It It It is is is noticed noticed noticed that that that the the the Assessing Assessing Assessing Officer Officer Officer disallowed disallowed disallowed Rs.26,84,656/ Rs.26,84,656/- u/s 40A(2)(b) of the Act since the interest payment u/s 40A(2)(b) of the Act since the interest payment @15% was made on majority of the unsecured loans, as @15% was made on majority of the unsecured loans, as @15% was made on majority of the unsecured loans, as proportionate interest in excess of 15% paid to the rel proportionate interest in excess of 15% paid to the rel proportionate interest in excess of 15% paid to the related parties which worked out of the total interest expenses claimed and added which worked out of the total interest expenses claimed and added which worked out of the total interest expenses claimed and added back to the total income. It was contended by the appellant that the back to the total income. It was contended by the appellant that the back to the total income. It was contended by the appellant that the Assessing Officer made proportionate disallowance @3% u/s Assessing Officer made proportionate disallowance @3% u/s Assessing Officer made proportionate disallowance @3% u/s 40A(2)(b) presuming that loans taken from related 40A(2)(b) presuming that loans taken from related parties have been parties have been M/s Arena Enterprises 6 & 6322/MUM/2024 Nos. 6321 & 6322/MUM/2024 allocated to business income. The appellant submitted that the allocated to business income. The appellant submitted that the allocated to business income. The appellant submitted that the loans taken from related parties were utilized in construction loans taken from related parties were utilized in construction loans taken from related parties were utilized in construction activity and hence claimed u/s 24(b) of the Act. Except for merely activity and hence claimed u/s 24(b) of the Act. Except for merely activity and hence claimed u/s 24(b) of the Act. Except for merely stating that the loans taken were utilized fo stating that the loans taken were utilized for construction work, the r construction work, the appellant appellant appellant did did did not not not produce produce produce any any any documentary documentary documentary evidence evidence evidence to to to substantiate its claim. The onus lies on the appellant to substantiate substantiate its claim. The onus lies on the appellant to substantiate substantiate its claim. The onus lies on the appellant to substantiate any claim that the finding of the Assessing Officer was erroneous any claim that the finding of the Assessing Officer was erroneous any claim that the finding of the Assessing Officer was erroneous and in the absence of sufficient documen and in the absence of sufficient documentary evidence, the tary evidence, the contention of the appellant is not acceptable. Moreover, facts of the contention of the appellant is not acceptable. Moreover, facts of the contention of the appellant is not acceptable. Moreover, facts of the case in the case laws relied upon by the appellant are different to case in the case laws relied upon by the appellant are different to case in the case laws relied upon by the appellant are different to that of the appellant. In view of the same, I confirm the addition by that of the appellant. In view of the same, I confirm the addition by that of the appellant. In view of the same, I confirm the addition by the Assessing Officer at Rs.2 the Assessing Officer at Rs.26,84,656/- u/s 40A(2)(b) of the Act, u/s 40A(2)(b) of the Act, being 3% excessive interest on loans taken from related parties and being 3% excessive interest on loans taken from related parties and being 3% excessive interest on loans taken from related parties and attributed to business income. Accordingly, these grounds of attributed to business income. Accordingly, these grounds of attributed to business income. Accordingly, these grounds of appeal are dismissed. dismissed.”

4. We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant materials on record elevant materials on record. The Ld. counsel for the assessee . The Ld. counsel for the assessee was asked to provide complete details of opening balance loans was asked to provide complete details of opening balance loans was asked to provide complete details of opening balance loans taken during the year return during the year and closing balance in taken during the year return during the year and closing balance in taken during the year return during the year and closing balance in respect of related as well as unrelated parties. But no such details respect of related as well as unrelated parties. But no such de respect of related as well as unrelated parties. But no such de was provided on behalf of the assessee. The Ld. counsel for the was provided on behalf of the assessee. The Ld. counsel for the was provided on behalf of the assessee. The Ld. counsel for the assessee questioned the rate of the 15% considered by the assessee questioned the rate of the 15% considered by the assessee questioned the rate of the 15% considered by the Assessing Officer as paid to the unrelated parties. According to the Assessing Officer as paid to the unrelated parties. According to the Assessing Officer as paid to the unrelated parties. According to the Ld. counsel for the assessee, the related parties were also paid Ld. counsel for the assessee, the related parties were also Ld. counsel for the assessee, the related parties were also interest @ 18%. However, no such evidence have been filed before interest @ 18%. However, no such evidence have been filed before interest @ 18%. However, no such evidence have been filed before us in support of this claim also. Since this matter of verification us in support of this claim also. Since this matter of verification us in support of this claim also. Since this matter of verification from the internal comparables of the assessee as to what fair from the internal comparables of the assessee as to what fair from the internal comparables of the assessee as to what fair market value of the interest rate payment and therefore, in the market value of the interest rate payment and therefore market value of the interest rate payment and therefore interest of the substantial justice, we feel it appropriate to restore interest of the substantial justice, we feel it appropriate to restore interest of the substantial justice, we feel it appropriate to restore this matter back to the file of the Ld. CIT(A) with the direction to the this matter back to the file of the Ld. CIT(A) with the direction to the this matter back to the file of the Ld. CIT(A) with the direction to the assessee to provide all necessary documentary evidence justifying assessee to provide all necessary documentary evidence justifying assessee to provide all necessary documentary evidence justifying

M/s Arena Enterprises 7 & 6322/MUM/2024 Nos. 6321 & 6322/MUM/2024 the fair market value of the interest the fair market value of the interest rate applicable in respect of rate applicable in respect of loans availed from individual parties. In identical circumstances as loans availed from individual parties. In identical circumstances as loans availed from individual parties. In identical circumstances as compared to the loans obtained from the relatives. The grounds of compared to the loans obtained from the relatives. The grounds of compared to the loans obtained from the relatives. The grounds of appeal of the assessee are accordingly allowed for statistical appeal of the assessee are accordingly allowed for statistical appeal of the assessee are accordingly allowed for statistical purposes.

5. The appeal of the assessee in is in the assessee in is in respect of penalty levied in respect of quantum proceedings. Since respect of penalty levied in respect of quantum proceedings. Since respect of penalty levied in respect of quantum proceedings. Since we have already restored the quantum proceedings back to the file we have already restored the quantum proceedings back to the file we have already restored the quantum proceedings back to the file of the Assessing Officer, therefore, we feel it appropriate to restore of the Assessing Officer, therefore, we feel it appropriate to restore of the Assessing Officer, therefore, we feel it appropriate to restore this penalty proceedings again also back to the file of the Assessing nalty proceedings again also back to the file of the Assessing nalty proceedings again also back to the file of the Assessing Officer for consideration afresh. Officer for consideration afresh.