SRI. SHAMBULAL G CHHABRA vs. ADDL.C.I.T.,

Per Shri Jason P Boaz, A.M. :

This appeal by the assessee is directed against the order of CIT(A)-V, Bangalore, dated 01.05.2013 for Assessment Year 2009-10.

2.1 The assessee is an individual, engaged in the business of trading in tiles and ceramics. For Assessment Year 2009-10, the assessee filed his return of income on 29.09.2009 declaring income of Rs.3,73,04,990/-. The case was taken up for

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scrutiny and the assessment was concluded under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 30.12.2011, wherein the assessee’s income was determined at Rs.4,21,71,540/-; in view of the Assessing Officer (AO) making a disallowance of Rs.48,66,550/- out of interest expenditure claimed; on grounds that it had not been incurred wholly and exclusively for running his business and also under section 40A(2)(b) of the Act. The assessee’s appeal was dismissed by CIT(A)-V, Bangalore, vide the impugned order dated 01.05.2013.

3.1 Aggrieved by the order of CIT(A)-V, Bangalore, dated 01.05.2013 for Assessment Year 2009-10, the assessee has preferred this appeal before the Tribunal wherein he has raised the following grounds:

The order of the Authorities below in so far as it is against the 1. Appellant is opposed to law, equity, weight of evidence, probabilities and the facts and circumstances in the Appellant's case. The appellant denies himself liable to be assessed over and above the 2. income reported of Rs. 3,73,04,990/- by the appellant under the facts and circumstances of the case. The learned authorities below are not justified in law in disallowing a sum 3. of Rs. 48,66,556/- as interest on unsecured loan under section 40A[2][b of the Act under the facts and circumstances of the case. 3.1 The learned authorities below failed to appreciate the fact that the appellant for the purposes of his business necessity had to borrow monies from relatives and others and on such borrowals the appellant had incurred a sum of Rs. 1,01,53,020/- being the interest on unsecured loan borrowed and claimed as a legitimate business expenditure under the facts and circumstances of the case. 3.2 The learned authorities below failed to appreciate the fact that the amounts borrowed from relatives and others are used for the purposes of business of the appellant and further for commercial expediency of the business of the appellant under the facts and circumstances of the case. 3.3 The learned commissioner of Income-tax [Appeals] is not justified in law in a-riving to a conclusion that no legitimate needs of business

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or profession arose which necessitated the appellant to indulge in such huge borrowings under the facts and circumstances of the case. 3.4 The learned authorities below failed to appreciate the fact that the majority of the creditors of unsecured loans on which the appellant has paid the interest are assessed to tax at maximum rate specified in the Act and hence there is no loss of revenue under the facts and circumstances of the case. 4. The Appellant denies himself liable to be charged to interest under section 234B Et 234C of the Income-Tax Act, 1961, under the facts and circumstances of the case. 5. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 6. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.

3.2 The learned AR for the assessee filed a paper book (pages 1 to 131) and has also field a list of dates and synopsis on 01.07.2016 which have been taken on record and considered. The submissions of the learned DR for Revenue have also been considered. 4. Ground Nos. 1,2,5 and 6 (supra) are general in nature and therefore no adjudication is called for thereon.

5.1 In this ground (supra), the assessee denies himself liable to be charged interest u/s 234B and 234C of the Act. The charging of interest is consequential and mandatory and the AO has no discretion in the matter. This proposition has been upheld by the Hon’ble Apex Court in the case of Anjum H. Ghaswala (252 ITR 1) (SC) and we, therefore, uphold the action of the AO in charging the assessee the aforesaid interest u/s 234B and 234C of the Act. The AO is, however, directed to

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re-compute the interest chargeable u/s 234B and 234C of the Act, if any, while giving effect of this order.

6.1.1 In these grounds (supra), the assessee assails the order of CIT(A) in sustaining the disallowance made by the AO under section 40A(2)(b) of the Act, by holding that the amounts borrowed as unsecured loans by the assessee from various family members / relatives is not for the purposes of business. The learned AR for the assessee submitted that the assessee had availed loans from his close relatives and friends during the year under consideration and the same has been utilized for business necessities of the assessee. According to the learned AR, the deposits made by the assessee in his bank account are out of surplus generated by the assessee and no part of the borrowed amounts have been utilized for making fixed deposit accounts in the bank. The assessee has paid interest to the lenders, ranging from 9%, 12% and 15% which is not excessive and on such interest payments tax has been deducted at source as applicable and payments thereof have been made by the assessee into the government account. It is submitted that the genuineness of the said loan transactions has not been doubted by the authorities below. The main reason given by the authorities below for disallowance of the interest paid on the unsecured loans taken from relatives and friends is that the assessee has huge fixed deposits and therefore the assessee could have withdrawn and utilized moneys in those Fixed Deposits for the purposes of the business and therefore there was no necessity for the assessee to borrow / take loans from others.

6.1.2 The learned AR further submitted that the assessee had filed confirmation letters from the persons who advanced the unsecured loans and that those persons have been filing their income tax returns regularly and offering to tax

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the interest received from the assessee in their respective returns of income. Thus, it was contended that business exigency depends upon the situation and circumstances prevailing at that point of time and the said amounts were borrowed from relatives / friends to run and maintain the business and in order to make payments to suppliers and such other overheads that arise from time to time and as a matter of commercial expediency. The learned AR contends that the AO cannot sit in the arm chair of the business man and decide what is correct or required for the conduct of assessee’s business in order to maximize profits. In support of the assessee’s contentions, the learned AR, inter alia, placed reliance on the decision of the Hon’ble Apex Court in the case of S A Builders, 288 ITR 1 (SC). In view of the above, the learned AR prayed that the disallowance made by the AO and sustained by the CIT(A) amounting to Rs.48,66,556/- requires to be deleted.

6.2 Per contra, the learned DR for Revenue supported the findings / action taken by the authorities below and submitted that disallowance of interest by the authorities below ought to be sustained.

6.3.1 We have considered the rival submissions / contentions put forth before us and carefully perused the material on record. On an appraisal of the orders of the authorities below and the assessee’s submissions, the facts that emerge are that in the year under consideration, the assessee had availed loans from relatives and friends as listed out in Annexure – 1 to the impugned order of the assessment, on which interest amounting to approx. Rs.1,01,53,020/- was paid; and claimed as business expenditure by the assessee in its books of account / financial statements. The authorities below have held that the amount of interest paid on such unsecured loans from relatives, friends and business concerns controlled by the assessee, is excessive and disallowed interest paid amounting to Rs.48,66,556/- under section 40A(2)(6) of the Act. The reason assigned for the aforesaid disallowance was that the assessee had no reason to borrow the said unsecured loans amounting to

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Rs.7,54,73,489/- and pay interest thereon when the assessee has a fixed deposit of Rs.7,85,00,000/- with Canara Bank which could have been withdrawn and utilized for the purposes of the assessee’s business. In that view of the matter, the AO disallowed interest amounting to Rs.48,66,556/- under section 40A(2)(b) of the Act; being the difference between the interest of Rs.1,01,53,020/- paid on unsecured loans from relatives and friends and the interest of Rs.52,86,464/- earned on fixed deposits in banks.

6.3.2 It is evident from the record that the authorities below have not doubted the genuineness of the unsecured loans taken by the assessee from relatives, friends and business concerns controlled by him, after the AO’s examination of the loan confirmation letters filed by the creditors, the details of interest paid and TDS thereon, the details of assessee’s Fixed Deposit with Canara Bank. The rate of interest paid by the assessee to the unsecured loan creditors is in the range of 9%, 12% and 15%. In our considered view, for the authorities below to invoke the provisions of section 40A(2)(b) of the Act, it was necessary for the AO to have rendered a factual finding about the expenditure incurred having been excessive / unreasonable having regard to the facilities / services for which the interest payment has been made. In this regard, the ITAT, Mumbai Bench in the case of ITO Vs. M. M. Textiles reported in (2010) 122 ITD 435 (Mumbai) at para 18 thereof has held as under:

“18. From the facts narrated above it is noted that the Assessing Officer did not allow deduction of interest to partners by relying on section 40A(2) as in his opinion the assessee had diverted its capital as well as interest free unsecured loans for the loans and advances of a much higher magnitude on which no interest was received. Section 40A(2) stipulates that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any person referred to clause (b) of this sub-section and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business then so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. From

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reading of this section it is clear that the expenditure should have been incurred by the assessee which is otherwise deductible, but the deduction is restricted to a part of the sum by considering such expenditure to be excessive having regard to the fair market value of the goods or services etc. The disallowance is to be restricted to 'so much part of the expenditure as is so considered by him to be excessive or unreasonable'. In order to be covered within the ambit of this section it is necessary that the expenditure incurred by the assessee should be proved by the Assessing Officer to be excessive or unreasonable. Such unreasonableness can be proved by considering the fair market value of the goods or services for which the payment is made. It cannot be so as per the mere whims and fancies of the Officer. Coming to the context of the interest paid to the partners, the same can be disallowed under section 40A(2) if a case is made out that the rate of interest allowed on the capital contributed by the partners is more than the rate of interest on which the money is otherwise available in the market, by keeping in view the other relevant considerations. In other words if the interest has been paid at 12 per cent to the partners and the money is available in the market under similar circumstances at 8 per cent, then the differential rate of 4 per cent can be held as excessive under section 40A(2). The co-relation of the funds contributed by the partners with the rate of interest on which the money is actually lent by the assessee, for making disallowance under section 40A(2), is misconceived. We, th refore, hold that the Assessing Officer was not justified in invoking the provisions of section 40A(2).”

6.3.3 We also find that the ITAT – Amritsar Bench in the case of Subhash Chander and Co., (2009) 31 SOT 11 (Amritsar) at paras 5 to 7 thereof has held as under:

“5. We have heard both the parties and have perused the material placed on record. The question is as to whether 15 per cent interest per annum to related parties has rightly been disallowed. There is no dispute that the payment of interest at the rate of 15 per cent per annum by the assessee was to persons specified in section 40A(2)(b) of the Act. Now, as per the provisions of section 40A(2)(a), disallowance can be made where the Assessing Officer is of the opinion that the expenditure in respect of which payment had been made to any person referred to in section 40A(2)(b), is excessive or unreasonable having regard to the fair market value of the goods, services or facilities, for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing therefrom. In the present case, the Assessing Officer was of the opinion that payment of 15 per cent interest per annum to related parties was excessive as compared to payment of 12 per cent interest per annum to unrelated parties. However, the requirement of section 40A(2Xa) is that the opinion of the Assessing Officer regarding the expenditure for excessive or unreasonable must be having regard to the fair market value of the

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goods/services/facilities for which the payment is made or the legitimate needs of the business of the assessee or benefit derived by or accruing therefrom. As to under which of these requirements the case of the assessee falls, has not been stated either by the Assessing Officer or by the learned CIT(A). So far as regards the fair market value, it is undeniable that 15 per cent interest per annum is neither excessive nor unreasonable, as held, inter alia, in the following cases : (1) ITO v. Bansi Lal Gupta [2009] 23 SOT 1 (Asr.) (URO) [24 per cent interest paid to persons covered under section 40A(2)(b) of the Act held not disallowable]. (2) Asstt. CIT v. Alfa Rubber Inds. [2008] 172 Taxman 35 (Ast)(am) [21 per cent interest paid to persons covered under section 40A(2Xb) held allowable]. (3) ITO v. Chamba Mal Roop Chand [2001] 119 Taxman 169 (Asr.)(leg.) [held that market value of the services and not the individual action of the assessee has to be looked into while making the disallowance under section 40A(2)(a) of the Act— market rate of interest at the rate of 24 per cent held to be reasonable]. (4) Hynoup Food & Oil Industries (P.) Ltd. v. Assn. CIT [1994] 48 lTD 202 (Ahd.,) (held that where interest paid to the directors was not at a rate higher than the market rate, disallowance could not be made on the ground that other creditors were paid interest at a lesser rate). 6. Moreover, as held in S.A. Builders Ltd. v. CIT (Appeals [2007] 288 1TR 1 (SC), the revenue cannot justifiably claim to put itself in the armchair of the businessman and assume the role to decide as to how much expenditure is reasonable having regard to the circumstances of the case; no businessman can be compelled to maximize his profit; the IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act; and that the authorities must not look at the matter from their viewpoint, but that of a prudent businessman impelled by commercial expediency. 7. In view of the above, finding merit in the grievance of the assessee, we hereby accept the same.”

6.3.4 In the case on hand, the fact is that the assessee has paid interest to his relatives / own business concerns @ 9%, 12% and 15% on unsecured loans taken from them and it is also generally known that interest on Fixed Deposits is in the range of 8% to 9%. We, however, find from the orders of the authorities below that

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they have not rendered any factual finding that the interest payments made by the assessee in respect of unsecured loans taken from relatives / related business concerns are either excessive or unreasonable having regard to the circumstances and requirements of the business of the assessee. In this factual matrix of the case, as discussed above, and respectfully following the aforesaid decision of the ITAT, Mumbai Bench in the case of M. M. Textiles (2010) 122 ITD 435 (Mum – ITAT) and of the ITAT, Amritsar Bench, in the case of Subhash Chander and Co., (2009) 31 SOT 11 (ASR), we are of the considered view that the disallowance of interest payment of Rs.48,66,556/- under section 40A(2)(b) of the Act, in the case on hand, is factually unsustainable and accordingly delete the same.

Order pronounced in the open court on this 24th day of May, 2019.

Sd/- Sd/- Sd/- (PAVAN KUMAR GADALE) (JASON P BOAZ) Judicial Member Accountant Member Bangalore. Dated: 24th May, 2019. /NS/*

Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.