Loading judgment…
No AI summary yet for this case.
आदेश/Order
PER N.K. SAINI, VICE PRESIDENT
This is an appeal by the Assessee against the order dt. 09/08/2021 of the CIT(Appeal), National Appeal Centre, (NFAC), Delhi.
Following grounds have been raised in this appeal:
That the ld. CIT(A) has erred in confirming the disallowance of Interest of Rs.7,92,655/- paid to persons covered u/s. 40A(2)(b) of the Income Tax Act. 2. That the ld. CIT(A) has erred in confirming the disallowance of Car lease of Rs.36,000/- paid to persons covered u/s. 40A(2)(b) of the Income Tax Act. 3. That the ld. CIT(A) has erred in wrongly calculation the rate of interest at which short term loans were advanced.
1 ITA No.251/Chd/2021 AY 2017-18
That the ld. CIT(A) has erred in ignoring the rate of interest being paid to the bank by the appellant which is 11.65% on monthly basis. 5. That the appellant craves leave to add, amend or delete any of the grounds of appeal.
Vide ground nos. 1, 3 & 4 the grievance of the assessee relates to the adhoc disallowance made out of the interest paid by the assessee.
Facts of the case in brief are that the assessee filed its return of income on 14-10-2017 declaring income of Rs.40,21,950/-. The case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer ( in short, the AO ) noticed that the assessee had made payments of Rs.58,83,279/- on account of interest, salary and car lease to the related parties, which falls under the purview of section 40A(2)(b) of the Income-tax Act, 1961 (hereinafter referred to as ‘ the Act’ ). The AO observed that the replies submitted by the assessee revealed that no justification along with documentary evidence have been provided, which could substantiate the rationale of these payments. He, therefore, disallowed 20% of these payments, amounting to Rs. 11,76,655/-, which was added back to the income of the assessee.
Being aggrieved, the assessee carried the matter to the Ld. CIT(A) and submitted that the interest was paid on the deposits, which had been obtained and used exclusively for the assessee’s business. It was further stated that the deposits were old, which were obtained on the interest at the rate of 12%, which was equivalent to the market rate of interest on any loans obtained from any other financial institution.
The Ld. CIT(A) after considering the submissions of the assessee observed that the balance sheet of the assessee as on 31-03-2017 revealed that it had Rs. 2 ITA No.251/Chd/2021 AY 2017-18
3,29 crores as Long Term borrowings and Rs.26.71 Lakh as Short Term borrowings. Against that, assessee had advanced an amount of Rs. 1.90 crore as Short - Term loans and advances. He further observed that the assessee incurred finance finance cost of Rs.65,32,988/- and had offered interest income only of Rs. 11.14 lakhs. The Ld. CIT(A) also observed that the assessee had submitted that it was paying interest at the rate of 12% per annum (p.a) on the loans obtained from the related parties. However, interest charged on the loans advanced as short term loans mentioned under the head ‘ Current Assets’ (schedule 13) in the balance sheet was only at the rate of 6.86%, which shows that there was a diversion of borrowed funds for the purposes other than business. The Ld. CIT(A) sustained the disallowance made by the AO at the rate of 20% of the interest payments made to the persons covered under section 40A(2)(b) of the Act.
Now, the assessee is in appeal.
The Ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that all the loans taken by the assessee were old loans on which interest was paid at the rate of 12% in the earlier years also, which had been accepted by the department. It was further submitted that the short term loans considered by the Ld. CIT(A) under the head ‘ Current Assets’ were mainly trade debtors. A reference was made to page no. 22 of assessee’s compilation, which is the details of short term loans and advances receivable from different parties. It was stated that, it is not clear that from where the Ld. CIT(A) got information/calculation that the rate of interest from the trade debtors was @ 6.86 %. It was further submitted that neither the AO nor the Ld. CIT(A) cited any comparable case, wherein interest was paid less than 12% on the loans. Our attention was drawn towards page nos.1 to 6 of 3 ITA No.251/Chd/2021 AY 2017-18
assessee’s compilation, which is the copy of sanction letter dt. 07-10-2015 for renewal of credit facilities from Oriental Bank of Commerce. It was pointed out that at page no. 1 of the said copy the rate of interest for “ term loan” was 12.15% and for “ cash credit”, it was 11.65%. Whereas the assessee had paid interest at the rate of 12% on the loans from the relatives, which was very near to the market rate. It was further submitted that the interest paid at the same rate had been accepted by the department in the preceding years while framing the assessments u/s. 143(3) of the Act. Our attention was drawn to page nos. 11 to 17 of assessee’ s compilation, which are the copies of assessment orders for the A.Ys. 2014-15, 2013-14 and 2012-13. The Ld. Counsel for the assessee also drew our attention towards page nos. 23 & 24 of the assessee’ s compilation, which is the copy of letter dt. 18-05-2021 written to the CIT(A), National Faceless Appeal Centre (NFAC), wherein the aforesaid explanation on payment of interest has been mentioned at page no.24. A reference was also made to page no. 28 of the assessee’s compilation, which is the copy of letter written to the AO (DC/ACIT), wherein clause (x) stated the details of payments made to persons covered u/s. 40A(2)(b) was enclosed and interest paid was @ 12% p.a as against the market rate of 15%. It was contended that neither the AO nor the Ld. CIT(A) brought any material on record to substantiate that interest paid by assessee was higher than the market rate. Accordingly, it was submitted that the disallowance arbitrarily made by the AO and sustained by the Ld. CIT(A) be deleted. Reliance was placed on the following decisions/case laws:
S.No. Name of the parties Case laws/Citation 1 CIT Vs. Amrit Soap Co. P & H High Court reported in 308 ITR 287 2 Pr.CIT Vs. Cama Hotels Gujarat High Court 68 taxmann.com 153 (2016) 3 Pr.CIT Vs. Patel Alloy Steel Supreme Court 4 ITA No.251/Chd/2021 AY 2017-18
Co.P.Ltd 103 taxmann.com 432 (2019) 4 Amit Mehra Vs. ITO ITAT Delhi Bench 116 taxmann.com 870 (2020) 5 R.N.Gupta & Co. Ltd. Vs. ACIT ITAT Chandigarh Bench 69 taxmann.com 291 (2016)
In her rival submissions, the Ld. Sr.D reiterated the observations made by the Ld. CIT(A) in para 5.5 of the impugned order. It was further submitted that while taking the loan from the bank some guarantee(s) was to be given. That’ s why rate of interest was around 12%, which cannot be compared with the market rate. It was further submitted that the assessee did not provide any justification and documentary evidence for the payment of interest @ 12% to the relatives. Therefore, the disallowance made by the AO and sustained by the Ld. CIT(A) was justified.
We have considered the rival submissions of both the parties and perused the material available on record. It is noticed that the assessee paid the interest to the relatives and family members of the directors @ 12%. In the preceding years also the interest was paid at the same rate, which had been accepted by the department while framing the assessments u/s. 143(3) of the Act for the A.Ys 2012-13 to 2014-15. Copies of the assessment orders are placed at page nos. 11 to 17 of the assessee’s compilation. It is also noticed that the Ld. CIT(A) had not given any calculation for working out interest @ 6.86% on the loan given to different parties. In the present case, page no. 22 of assessee’s compilation is the copy of list of short term loans and advances as on 31-03-2017, it is noticed that most of the entries were related to the trade advances not the loans. In the present case the AO made adhoc disallowance @ 20% of the interest paid by the assessee, but he had not given any cogent reason for the same. Moreover, no comparable case was cited, wherein the rate of interest less than 12% was
5 ITA No.251/Chd/2021 AY 2017-18
paid to the persons from whom unsecured loan was raised. It is also not the case of the department that the loans received by the assessee were used elsewhere and not for the business purpose. In the instant case, it is an admitted fact that 80% of the payment of interest was considered as genuine by the AO and the remaining amount was disallowed without any basis. We, therefore, considering the totality of the facts are of the view that the Ld. CIT(A) was not justified in sustaining the disallowance made by the AO. Accordingly, the same is deleted.
Next issue vide ground no. 2 relates to the disallowance of car lease paid to the persons covered u/s. 40A(2)(b) of the Act.
The facts related to this issue in brief are that the assessee paid car lease amount of Rs. 1,80,000/- p.a to the director, Shri Deepak Gupta. The AO disallowed 20% of the said payment by invoking the provisions of section 40A(2)(b) of the Act. When the matter was taken to the Ld. CIT(A), it was stated that amount of Rs.15,000/- p.m was paid to Shri Deepak Gupta for the use of Innova Car, as lease rent, which cannot be termed as unreasonable and that had the assessee purchased the car of its own, then the interest and depreciation burden would have been much more. However, the Ld. CIT(A) did not find any merit in the submissions of the assessee and sustained the disallowance made by the AO.
Now, the assessee is in appeal.
The Ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that no comparable case was cited by the AO while making the disallowance u/s. 40A(2)(b) of the Act. It was further submitted that in the preceding year similar payment on account of 6 ITA No.251/Chd/2021 AY 2017-18
lease rent of the car was accepted by the department while framing the assessment u/s. 143(3) of the Act.
In her rival submissions, the Ld. Sr.DR reiterated the observations made by the Ld. CIT(A) at para 5.7 of the impugned order, which read as under:-
“ 5.7 With respect to the payment made towards the lease rent for the car, owned by one of the directors, the appellant did not furnish any supporting evidence regarding how the same was used in the business of the appellant. Appellant did not furnish any logbook to show that the car was used for the purpose of the business. In the absence of such documentary evidences, the Assessing Officer’s inference that the payment was on the higher side cannot be interfered with. There is enough scope for such a disallowance even under Section 37 of the Act. In view of the above, the disallowance on the lease rent for the car is confirmed. 14. We have considered the submissions of both the parties and gone through the material available on record. In the present case, it is an undisputed fact that similar payment in the preceding years had been accepted by the department while framing the assessments u/s. 143(3) of the Act for the A.Ys 2012 to 2014-15 and the AO did not bring any material on record to substantiate that lease rent paid by the assessee for Innova car was excessive in comparison to the market rate. In that view of the matter, the disallowance made by the AO and sustained by the Ld. CIT(A) is deleted.
In the result, appeal of the Assessee is allowed.
(Order pronounced in the open Court on 27/04/2022 )
Sd/- Sd/- सुधांशु �ीवा�तव एन.के.सैनी, (SUDHANSHU SRIVASTAVA) ( N.K. SAINI) �या�यक सद�य/ JUDICIAL MEMBER उपा�य� / VICE PRESIDENT Date: 27 /04/2022 7 ITA No.251/Chd/2021 AY 2017-18
**PP/SPS आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :
अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar
8 ITA No.251/Chd/2021 AY 2017-18