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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY
Aforesaid cross appeals are against common order dated 3rd November 2017, passed by the learned Commissioner (Appeals)–29, Mumbai, for the assessment year 2013–14.
The common issue in dispute in the present appeals relates to the decision of the learned Commissioner (Appeals) in partly sustaining the addition made by the Assessing Officer under section 40A(2)(b) of the Income Tax Act, 1961 (for short “the Act”) towards interest paid on loans.
Brief facts are, the assessee a partnership firm is engaged in the business of builders and developers. For the assessment year under dispute, the assessee filed its return of income on 21st September 2013, declaring total income of ` 1,12,800. In course of assessment proceedings, the Assessing Officer noticing that in the relevant previous year, the assessee has claimed deduction of ` 6,43,24,694, on account of interest payment called for the necessary details. After verifying the details furnished by the assessee he observed that the assessee has paid interest @ 15% on unsecured loans availed from related parties. Further, he observed that the assessee has paid interest @ 6% in respect of unsecured loans taken from one unrelated party. Thus, he called upon the assessee to explain why interest rate
3 Park View Developers on unsecured loans in respect of all the parties should not be taken @ 6%. In response, it was submitted by the assessee, interest paid @ 6% to one unrelated party is due to the fact that the said unsecured loan was for short term and has to be paid back on demand. It was submitted, the rate of interest at which the assessee availed the unsecured loans even from related parties is as per the market rate, hence, cannot be considered excessive or unreasonable. It was submitted, even the banks while providing working capital facilities to real estate enterprises charged interest @ 18% per annum. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, interest paid @15% to related parties is excessive and unreasonable, hence, covered under section 40A(2). He observed, since, the assessee has paid interest @ 6% to Mamta Enterprises which is an unrelated party, interest paid to all other related parties has to be bench marked @ 6%. Accordingly, he computed the interest payment on the unsecured loans availed from all the parties @ 6%. This resulted in disallowance of interest payment to the tune of ` 2,08,63,210. Being aggrieved of the aforesaid disallowance made by the Assessing Officer, the assessee preferred appeal before the first appellate authority.
Before the learned Commissioner (Appeals), the assessee contended that the Assessing Officer has wrongly assumed that all the 4 Park View Developers unsecured loans on which interest @ 15% was paid are from related party. Furnishing the details of persons/entities from whom the assessee has availed unsecured loan, it was submitted that out of eight parties from whom the assessee has availed unsecured loans only three parties viz. Amal Corporation, Bhumi Realtors, Option Developers and Builders are related parties. It was submitted, since the assessee has paid interest @ 15% even to unrelated parties, the interest paid to related parties at the same rate cannot be considered as unreasonable and no disallowance under section 40A(2) of the Act can be made. After considering the submissions of the assessee in the context of facts and material on record, the learned Commissioner (Appeals) directed the Assessing Officer to restrict the disallowance of interest expenditure under section 40A(2) of the Act to the related parties only. Further, the learned Commissioner (Appeals) observed, the average rate of interest paid to unrelated parties works out to 12.6%. He, therefore, directed the Assessing Officer to apply the same rate of interest to the unsecured loans availed from related partites while applying the provisions of section 40A(2) of the Act. Being aggrieved with the aforesaid decision of the learned Commissioner (Appeals), both the assessee and the Revenue are in appeal before the Tribunal.
5 Park View Developers
The learned Authorised Representative submitted, during the relevant assessment year the assessee has availed unsecured loans from eight parties out of which three are related parties as defined under section 40A(2)(b) of the Act. Whereas, five parties are unrelated. She submitted, the assessee has paid interest on unsecured loans both to related and unrelated parties @ 15% except in case of two unrelated parties viz. Ashok Commercial Enterprises and Mamta Enterprises to whom interest has been paid @ 12% and 6% respectively. The learned Authorised Representative submitted, the provisions of section 40A(2)(b) of the Act cannot be applied to the interest paid to unrelated parties. She submitted, even as regards interest paid to related parties @ 15%, the same cannot be considered as excessive or unreasonable considering the fact that the assessee has paid interest at the same rate to unrelated parties. She submitted, interest paid @ 6% paid to Mamta Enterprises cannot be considered as bench mark since the said unsecured loan is on short term basis and is re–payable on demand. Whereas, the other unsecured loans were for longer period. The learned Authorised Representative submitted, in respect of real estate enterprises Banks are charging interest @ 18% on working capital facilities. Therefore, interest paid @ 15% cannot be considered to be high and excessive compared to the market rate of interest. The learned Authorised Representative submitted, even while
6 Park View Developers applying section 40A(2) of the Act, the Assessing Officer has not brought any material on record to demonstrate the market rate of interest on such type of loan. Finally, the learned Authorised Representative submitted, in subsequent assessment years the Assessing Officer has accepted interest payment @ 15% on the unsecured loans taken from related parties. In this context, he drew our attention to the assessment orders passed under section 143(3) of the Act for the assessment years 2014–15 and 2015–16. Further, she also relied upon the decision of the Hon'ble Gujarat High Court in case of PCIT v/s Cama Hotels Ltd., [2016] 68 taxmann.com 153 (Guj.).
The learned Departmental Representative relying upon the observations of the Assessing Officer submitted that the assessee having paid interest @ 6% to one party, the Assessing Officer was justified in applying the same rate to the interest paid to the related parties.
I have considered rival submissions and perused materials on record. It is evident from the facts on record that the assessee has availed unsecured loans from eight parties as mentioned in Para–5 of the assessment order. However, the Assessing Officer has considered all such parties except Mamta Enterprises as related parties. Before the first appellate authority as well as before me, it is the specific
7 Park View Developers contention of the assessee that out of the eight parties from whom unsecured loan was availed, only three viz. Amal Corporation, Bhoomi Realtors and Option Developers and Builders are related parties. The learned Commissioner (Appeals) has directed the Assessing Officer to verify the aforesaid fact and apply the average rate of interest paid to unrelated parties for computing disallowance under section 40A(2)(b) of the Act. Be that as it may, the core issue arising for consideration is whether the interest paid @ 15% to related parties can be considered as excessive and unreasonable to invoke the provisions of section 40A(2) of the Act. It is evident from the facts and material on record, the assessee has paid interest @ 15% to both related and unrelated parties. Of–course, in case of two unrelated parties, the assessee has charged interest @ 12% and 6%. As regard the interest paid @ 6% to one of the unrelated parties, the assessee’s claim that the said unsecured loan is on short term basis and payable on demand has not been controverted by the Departmental Authorities. Further, the assessee has paid interest to unrelated parties mostly @ 15%. The assessee has also demonstrated that the interest payment @ 15% to related parties is neither unreasonable nor excessive considering the interest charged by Bank @ 18% while providing working facility loan to real estate enterprises. The aforesaid contention of the assessee has also not been controverted. The most crucial factor which needs to 8 Park View Developers be considered is, as per the provisions of section 40A(2) of the Act the Assessing Officer has to establish on record that the payment made by the assessee is unreasonable and excessive compared to the market rate. Nowhere in the assessment order, has the Assessing Officer brought any material to establish the market rate of interest on such types of loan. The learned Commissioner (Appeals) has also ignored this aspect. Therefore, there is no reason why interest payment to related party should be confined to 12.6%. More so, when the loans are not secured against any asset unlike bank loans and the lender always runs a risk of recovery of loan, therefore, charges interest at a bit higher rate. The decision cited by the learned Authorised Representative also supports this view. Moreover, it is a fact on record that the assessee has paid interest @ 15% even to unrelated parties. That being the case, interest paid @ 15% to related parties should be allowed. Ground raised by the assessee is allowed and grounds raised by the Revenue are dismissed.
In the result, assessee’s appeal is allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 05.10.2018