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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
Per Chandra Poojari, Accountant Member
This appeal by the assessee is directed against the order dated 08.11.2019 of the Assessing Officer passed u/s. 143(3) r.w.s. 92CA r.w.s. 144C of the Income-tax Act, 1961 [the Act], pursuant to the directions of the DRP dated 19.9.2019 for the assessment year 2016-17.
2. The assessee has raised the following grounds:-
“1. The Learned Assessing Officer erred in law and on facts in making an addition of Rs.10,93,125/- as excessive interest paid to depositors by benchmarking lending rates of banks on secured loans to that of interest paid to depositors on unsecured loans.
IT(TP)A No.42/Bang/2020 Page 2 of 6
The Learned Assessing Officer has not taken into consideration the rate of Interest paid by the Finn in earlier years at 15% per annum to the very same depositors, which had been accepted by the Department and had not made any adjustment.
The Learned Assessing Officer has also not considered the decisions of various High Court's wherein it has been held that interest charged by the banks is not comparable and has held that interest of 15% per annum is neither excessive nor unreasonable. 4. In view of the above, it is humbly prayed that additions of Rs.10,93,125/- be deleted and justice done. 5. The Appellant craves leave to add, include or modify on any other ground at the time of hearing before your Honour.” 3. The crux of the above grounds are that the assessee made interest payment on deposit to partners @ 15%. The TPO observed that the rate at which interest is paid to related parties cannot exceed the rate of interest paid for secured loans. Hence the method adopted by TPO is CUP for bench marking the interest payment for the deposits. It was noted that the assessee is paying an average of 11.25% p.a. for the term loans from various banks which is uncontrolled and hence the same is retained as bench mark. The difference of 3.75% was adjusted on the interest payment for the deposits. Against this, the assessee is in appeal before us.
We have heard both the parties and perused the material on record. The ld. AR submitted that the assessee has been paying interest to partners on deposits @ 15% p.a. and this has been accepted by the department from year to year, specifically in earlier AY 2014-15 where assessment was completed u/s. 143(3) and the department has accepted
IT(TP)A No.42/Bang/2020 Page 3 of 6 the payment of interest to partners @ 15% p.a. Being so, the consistent practice of the assessee on this count cannot be disturbed. He brought on record copy of the assessment order for AY 2014-15 which is placed at pages 101 to 103 of the assessee’s PB. Further, he relied on the order of the Tribunal in the case of K L Concast (P) Ltd. v. DCIT, 52 taxmann.com 445 (Delhi Trib.) wherein it was held as follows:-
“15. We have heard both the parties and have carefully perused the records and the case laws cited by the parties. On the facts of the instant case, it is an undisputed position that interest has been paid to the specified persons in the earlier years at 16% which has been allowed in the respective previous years. The assessee however, has claimed deductions on the money borrowed from said ten persons at 18% in the instant year. The AO has held the same to be excessive and unreasonable in term of section 40A(2)(b) of the Act. He has referred to the interest paid to six parties at 12% and thus the difference between 18% and 12% was disallowed u/s 40A(2)(b) of the Act. We however find that it would be unfair to restrict the disallowance by adopting the interest at 12% because in earlier year interest has been allowed to such persons at 16%. Reference has been made by the authorities below to interest paid at 12% in respect of six parties. In our opinion in view of the preceding history of the ten said persons, it would be appropriate to refer to the interest paid to the said person in the earlier year for the purpose of section 4A(2)(b) of the Act. Having regard to the above, we conclude that it would be fair and appropriate to restrict the disallowance by adopting the interest rate at 16%. In view of the above the AO is directed to disallow the interest between 18% to 16% and the balance be allowed as deduction. In the result this ground is partly allowed.”
Further, he relied on the order of the Delhi Tribunal in the case of Amit Mehra v. ITO, 116 taxmann.com 870 (Del Trib) wherein it was held as under:-
IT(TP)A No.42/Bang/2020 Page 4 of 6
“6. We have perused the material on record. The main contention of the AO is that the transactions have been made up with an intention to lower the tax liability of the assessee and also to build up capital for the HUF and for the mother. We find that this is not a case where the borrowed funds have been diverted to interest free advances without any commercial expediency. The case of the AO is that the interest expenses are claimed only to reduce the tax liability of the assessee and to aid in increased capitalization of the loan parties. There is no dispute about the payment of the interest and the utilization of the loans received by the business entity. The invocation of the Section 40A(2)(b) by the AO in this case is on a wrong interpretation/application of the provisions. The provisions of Section 40A(2)(b) entitles disallowance on account of any expenditure being excessive are unreasonable having regard to the fair market value. In the instant case, we find that the amounts have been received from the partnership firm by the loan parties and if at all any disallowance is to be made, the same needs to be considered in the hands of the partnership firms but not in the proprietary concern. Further, the Section 40A(2)(b) does not envisage the complete disallowance of expenditure unless it is proved to be excessive or unreasonable having regard to the fair market value. No such finding with regard to the excess payment has also been established by the revenue while invoking the provisions of Section 40A(2)(b). Hence, the disallowance made is hereby directed to be deleted.”
However, the ld. DR submitted that interest paid by the assessee to the partners is excessive as compared to the interest payment on unsecured loan.
In our opinion, in this case the assessee is consistently paying interest to partners @ 15% p.a. as against the payment of interest on unsecured loans @ 11.25% p.a. and this method has been followed by the assessee from year to year and it has been accepted by the department in earlier AY 2014-15. Being so, judicial discipline requires consistency in its proceedings and AO cannot disturb the same. While making this IT(TP)A No.42/Bang/2020 Page 5 of 6 observation, we are aware of the Hon’ble Supreme Court judgment in the case of New Jehangir Vakil Mills Co. Ltd. [1963] 43 ITR (SC) 137 wherein it was held that there is no such thing such thing as res judicata in Income Tax matters and the decision given by an Income Tax Officer for one assessment year cannot effect or bind his decision for another year and that generally, the doctrine of res judicata or estoppel by record does not apply to such decisions. But in Radhasoami Satsang ([1992] 193 ITR 321 (SC), the Supreme Court held at page-329 as follows:
"We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
In view of the above decision, we hold that the lower authorities are not justified in holding that the assessee has made excessive payment of interest to partners @ 15% p.a. instead of 11.25% p.a. Accordingly, we allow the grounds taken by the assessee.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 7th day of March, 2022.