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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED&
PER Ms. MADHUMITA ROY - JM:
The instant appeal has been filed before us by the assessee against the order dated 22.12.2017 passed by the Commissioner of Income Tax (Appeals)-5, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (The Act) arising out of the order dated 20.10.2016 for the Assessment Year 2014-15.
The assessee has assailed the order impugned on two counts; firstly, the observation made by authority below that the appeal is not maintainable since the order of addition has been made on consent given by the assessee’s representative, secondly, the upholding of disallowance u/s 40A(2)(b) to the tune of Rs.13,45,505/- out of the interest payment to relatives ranging from 18% to 21% made by the ld CIT(A) without appreciating the audit report and the fact that the same has been consistently paid by the assessee which was duly allowed by the department is bad in law.
- 2 - ITA No.359/Ahd/2018 Vinodkumar R. Dhandharia vs. ACIT Asst.Year – 2014-15 3. The facts leading to the case is this that the assessee, an individual, engaged in the business of trading of textile clothes since 01.07.1987, has paid interest of Rs.35,72,537/- to relatives defined u/s 40A(2)(b) of the Act with the rate of interest varied from 18% to 21%. The assessee was asked to justify such high rate of interest being paid to family members. According to the assessing officer no justification has been forwarded by the assessee for such high rate of interest being paid since the prevalent rate of interest in market during the period varied between 9% to 12%. Taking into consideration this particular aspect of the matter the Learned Assessing Officer allowed 12% rate of interest and the interest payment made over and above 12% was disallowed to the tune of Rs.13,45,505/- and added to the total income of the assessee.
However, the Ld. AO observed that such addition was made after the matter being discussed with the Representative of the Assessee. The assessee in appeal joints issue on this point before the Ld CIT(A). According to the assessee no such consent, whatsoever, was given by the assessee’s representative to the Ld. AO. He further added that looking into the commercial expediency such high rate of interest was given on the unsecured loan taken from the family members. However, the said plea of the assessee was rejected by the Ld CIT(A) and he then confirmed the order of addition made by the Ld AO reiterating the observations made in the assessment order. The appeal has been, in fact rejected by the Learned CIT(A) as not maintainable since the same has been alleged to have been preferred on consent order. Hence, the instant appeal before us.
At the time of hearing of the appeal, the Ld Representative of the Assessee vehemently argued against the observation made by the authorities below in regard to the consent given by the Ld Representative of the assessee for such addition made by the Ld. Assessing Officer. He further added that from the perusal of the assessment order nothing is evident that the Representative of the assessee has ever given consent to such addition before the Ld AO. Mere discussion, according to the Representative of the assessee,
- 3 - ITA No.359/Ahd/2018 Vinodkumar R. Dhandharia vs. ACIT Asst.Year – 2014-15 cannot be a consent to the order to be passed by the revenue which is prejudicial to the interest of the assessee. He, therefore, prays for deletion of such observation made by the AO so confirmed by the Ld CIT(A). On merit, the Ld Representative of the assessee submitted before us that looking into the commercial expediency such interest from 18% to 21% was paid to the relative of the assessee on unsecured loan. Further that order passed by the Ld AO observing that the interest paid @18% to 21% to the relative is excessive and unreasonable is bad in law in view of the fact that such advance from the relatives is for long term and particularly when said rate of interest was allowed by the revenue in earlier years. He further relies upon the judgment passed by the Co-ordinate Bench of this Tribunal. In this regard and the judgment passed by the Hon’ble Jurisdictional High Court where the identical issue of paying interest @ 18 to 21% per annum to the relatives was allowed, was also relied upon by the Learned Representative of the Assessee.
On the other hand, Ld Representative of the Department relies on the order passed by the Ld Assessing Officer which was confirmed by the Ld CIT(A). He further relies upon the paragraph 5 of the order passed by the AO.
We have heard the respective parties, perused the relevant materials available on record and judgments relied upon by the Ld Representative of the assessee. We have perused the order passed by the Ld Assessing Officer particularly paragraph 5 where the Assessing Officer has observed that after discussion the AR of the assessee agreed for disallowance of excess interest therefore the said addition has been made upon disallowing the high rate of interest. We find no such document which is evident that the assessee’s counsel has ever consented to the order passed by the Ld Assessing Officer which is practically prejudicial to the interest of the assessee. Mere observation that the assessee’s representative has agreed upon discussion cannot make the order as ‘consent order’ passed by the Ld AO sacrosanct particularly when there are number of judgments
- 4 - ITA No.359/Ahd/2018 Vinodkumar R. Dhandharia vs. ACIT Asst.Year – 2014-15 available before the Assessee’s Representative in his support which the assessee could have relied upon instead of going consent. Neither we find any self observation made by the Ld CIT(A) that the Representative of the Assessee has given consent to the order passed by the Ld AO rather the Learned CIT(A) observed that by giving the consent to make additions the assessee stopped the Assessing Officer to make any further enquiry which according to us is of no basis. In the absence of any cogent documents to that effect we cannot support such contention of the authorities below in making the appeal not maintainable in order to justify their disallowance and addition made thereof. Coming to the merit of the matter, we find that the assessee has paid interest @ 18% to 21% to the relatives on unsecured loan. As a prudent businessman, the appellant is driver’s seat to carry on his business more profitably even by borrowing the money @ 18% to 21% because his margin of profit is substantially high. The Department cannot enter into the shoes of the business man to decide whether the rate of interest applied by the appellant is reasonable or not, because of the particular reason that the Assessing Officer is not conversant with the trade practice prevalent in the line of cloth trading carried on by the assessee. We have also gone through the judgment passed by the Ld Representative of the assessee, in this regard the Co-ordinate Bench in ITA No.901/Ahd/2010 for Asst. Year 2006-07 dealt with the identical situation and allowed the appeal preferred by the assessee in his favour with the following observation: “It was pointed out by the learned counsel that in the immediately preceding year, the interest paid to the relatives at the rate of 18% was duly allowed by the Assessing Officer. On the other hand, it was pointed out by the learned DR that since the assessee paid interest to the other persons ranging between 12% to 15%, the interest paid to the relatives at the rate of 18% was certainly excessive or unreasonable. In the rejoinder, it was explained by the learned counsel that the advance from the relative is for the long term while the advances from other persons was for relatively shorter period. He reiterated that the payment of interest at the rate of 18% for unsecured loan is neither unreasonable nor excessive. 4. We have heard both the parties and perused material placed before us. From the above decisions of the ITAT it is evident that the ITAT held the interest varying between 15% to 24% per annum to be reasonable. Therefore, the interest paid at the rate of 18% per annum by the assessee to the relatives cannot be said to be unreasonable or excessive. Moreover, the AO himself has accepted the interest at the rate of 18% to be reasonable in the immediately preceding year, therefore, the same
- 5 - ITA No.359/Ahd/2018 Vinodkumar R. Dhandharia vs. ACIT Asst.Year – 2014-15 rate of interest cannot be become excessive in the subsequent year. In view of the above, we delete the disallowance of Rs.1,31,682/- made by the AO under Section 40(A)(2)(b). Accordingly the ground no.1 of the assessee’s appeal is allowed. 5. Ground no.2 of the assessee’s appeal is against the charging of interest under Section 234B of the Act. Both the parties agreed that it is consequential, we therefore direct the Assessing Officer to recalculate the interest, if any, after determination of the income as per our above order. 6. In the result, assessee’s appeal is partly allowed.”
Further that the judgment pronounced in the Tax Appeal No. 262/2017 by the Jurisdictional High Court upheld the issue in favour of the assessee has relied upon by the Ld AR in support of his argument. The relevant portion of the said judgment is reproduced herein below: “[5.0] Now so far as proposed question no.(a) is concerned, at the outset, it is required to be noted that the respondent – assessee paid the interest at the rate of 15% and claimed the deduction towards the interest expenditure. However, the Assessing Officer was of the opinion that considering the bank interest prevailing at the relevant time the respondent - assessee ought to have paid the interest at the rate of 12.5%, and therefore, the Assessing Officer made' the addition of Rs.3,00,544/- for the excess payment of interest expenditure. The aforesaid addition came to be confirmed by the learned CIT(A). However, the learned tribunal by the impugned judgment and order has directed to delete the addition of Rs.3,00,544/- being excess amount of interest expenditure observing that it was commercial expediency of the respondent- assessee, which is required to be considered and even the interest paid by the respondent - assessee at 15% against 12.5% as claimed by the Assessing Officer cannot be said to be on higher side, and therefore, the learned tribunal deleted the addition of Rs.3,00,544/-. [6.0] Having heard Shri K.M. Parikh, learned advocate appearing on behalf of the revenue and the reasoning given by the learned tribunal and more particularly considering the fact that the respondent assessee paid the interest at the rate of 15% and the Assessing Officer was of the opinion that the assessee ought to have paid the interest at the rate of 12.5% and as observed by the learned tribunal the respondent -assessee paid the interest at the rate of 15% looking to the commercial expediency, it cannot be said that the learned tribunal had committed any error in deleting the addition of Rs.3,00,554/-. We are complete agreement with the view taken by the learned tribunal. No substantial question of law arises as sought to be proposed by the revenue. In view of the above and for the reasons stated hereinabove, the present Tax Appeal deserves to be dismissed and is accordingly dismissed."
We find that in both the judgments the excess amount of interest expenditure was allowed taking into consideration the commercial expediency of the assessee and said
- 6 - ITA No.359/Ahd/2018 Vinodkumar R. Dhandharia vs. ACIT Asst.Year – 2014-15 was held not to be on higher side. We, therefore, can conclude that the rate of interest ranging from 18% to 21% per annum is not excessive or unreasonable. In fact, the Jurisdictional High Court upheld the order passed by the Ld Tribunal in deleting the addition made by the authorities below only on the premises that the said rate of interest was required to be considered in view of the commercial expediency of the business of the assessee. We, therefore, find no reason for such disallowance as made by the Ld AO and resultantly the addition of Rs. 3,00,554/- which was subsequently confirmed by the first appellant authority. In view of observation made herein above highly and respectfully rely upon the judgment passed by the Jurisdictional High Court, we delete such addition made by authorities below.
In the result, the assessee’s appeal is hereby allowed. This Order pronounced in Open Court on 26/11/2018
Sd/- Sd/- ( WASEEM AHMED ) ( Ms. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 26/11/2018 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)-5, 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