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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 28- 12-2015 passed by Ld CIT(A)-21, Mumbai. The assessee is challenging the disallowances made u/s 40(a)(ia) and 40A(2)(b) of the Act.
The assessee is in real estate business. During the year under consideration it did not construct any project and has acquired rights in certain properties. All expenditures incurred by the assessee have been shown as “Work in progress”.
Both the issues urged by the assessee are inter-related. The assessee borrowed loan from a relative concern named M/s Suryoday Buildwell and Farms Pvt Ltd and the said concern is covered by sec. 40A(2)(b) of the Act. The AO noticed that the assessee has paid interest of Rs.81,23,329/- to the above said concern during the year under consideration. The AO noticed that the assessee has paid the interest @ 27% p.a. and further the assessee did not deduct TDS there from. The AO determined the reasonable rate of interest at 2 Shravasti Developers & Agro Private Limited 14.50% by considering the Basic Prime Lending Rate (BPLR) of State Bank of India as on 31.3.2012. Accordingly he restricted the interest expenditure to Rs.43,62,529/-. Since the assessee did not deduct tax at source from the above said payment, the AO held that the same is disallowable u/s 40(a)(ia) of the Act. The AO noticed that the assessee has capitalised the interest expenditure of Rs.81,23,329/- by including it in Work in Progress. Hence the AO held that the amount of Work in Progress will be reduced by Rs.81,23,329/-.
The Ld CIT(A) also confirmed the same and hence the assessee has filed this appeal before us.
With regard to the disallowance made u/s 40(a)(ia) of the Act, we notice that the assessee has taken support of the proviso to sec. 40(a)(ia) inserted by Finance Act, 2012, but the AO has taken the view that the said proviso shall be applicable from AY 2014-15 only. Before us Ld A.R placed reliance on the decision rendered by Hon’ble Delhi High Court in the case of CIT Vs. Ansal Land mark Township P Ltd (2015)(377 ITR 635) and submitted that the Hon’ble Delhi High Court has held that the second proviso inserted in sec. 40(a)(ia) by Finance Act 2012 is declaratory and curative in nature and hence would apply retrospectively. The Ld A.R fairly submitted that a contrary view has been expressed by Hon’ble Kerala High Court in the case of Prudential Logistics and Transports (2014)(364 ITR 689). He submitted that the view in favour of the assessee is required to be followed, in case of divergent views expressed by different High Courts, as per the decision rendered by Hon’ble Supreme Court in the case of Vegetable Products Ltd (88 ITR 192). He submitted that the Pune bench of ITAT has considered an identical issue in the case of Yamazaki Mazak India Ltd (ITA No.153/PN/2016 dated 28.10.2016). After considering the decisions rendered by Hon’ble Delhi and Kerala High Courts (referred supra), the Pune bench of ITAT has followed the decision rendered by Hon’ble Delhi High Court as per the principles laid down by Hon’ble Supreme Court in the case of Vegetable Products Ltd (supra).
3 Shravasti Developers & Agro Private Limited Accordingly the assessee submitted that the benefit given in second proviso to sec. 40(a)(ia) should be extended to the assessee in this year. He further submitted that the Hon’ble Supreme Court has considered about the applicability of the proviso inserted in sec. 40(a)(ia) by Finance Act 2010 in the case of CIT vs. Calcutta Export Company (Civil appeal Nos. 4339 – 4340 of 2018 and others dated 24-04-2018) and the Hon’ble Supreme court has held that the above said amendment shall have retrospective Application. The Ld A.R submitted that the principles laid down by Hon’ble Supreme Court in the above said case should be applied to the amendment brought in by Finance Act 2012 in sec. 40(a)(ia) of the Act also.
On the contrary, the Ld D.R supported the order passed by Ld CIT(A) on this issue.
We have heard rival contentions on this issue and perused the record. We notice that divergent views have been expressed by Hon’ble Delhi and Kerala High Courts on applicability of second proviso inserted to sec. 40(a)(ia) of the Act, i.e., whether it will have retrospective or prospective application. As per the principle laid down by Hon’ble Supreme court in the case of Vegetable Products Ltd (supra), the view in favour of the assessee is required to be followed in case of divergent views expressed by two different non- jurisdictional High Courts. Accordingly we follow the decision rendered by Hon’ble Delhi High Court and hold that the second proviso to sec. 40(a)(ia) shall have retrospective application. Since the applicability of the second proviso to sec. 40(a)(ia) has not been examined by the AO, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh.
The next issue relates to the disallowance made u/s 40A(2)(a) of the Act. As noticed earlier, the assessee paid interest to its relative concern @ 27% and the AO restricted the same to 14.50%. The Ld A.R submitted that the assessee did not pay any interest to M/s Suryoday Buildwell and Farms Pvt Ltd in the 4 Shravasti Developers & Agro Private Limited immediately preceding year, i.e., in AY 2011-12. He submitted that if the interest paid during the year under consideration is spread between AY 2011- 12 and 2012-13, the same would work out to 20.66% only. He further submitted that the assessee has paid interest @ 6.80% and 12% in AY 2013-14 and 2014-15 respectively. Accordingly he submitted that the interest rate was determined as per market conditions and business necessity. He submitted that the Hon’ble Delhi High Court has held in the case of Hive Communications P Ltd (2013)(353 ITR 200) that the benefit accruing to the assessee must also be considered from the angle of a businessman and it is not for the AO to dictate what the business needs of the company should be and he is only to judge the legitimacy of the business needs of the assessee from the point of view of a prudent businessman. Accordingly he submitted that the disallowance made by the AO u/s 40A(2)(a) is not justified.
The Ld A.R placed reliance on the decision rendered by Jaipur bench of Tribunal in the case of M/s Uttam Polyrubs India (P) Ltd vs. ACIT (ITA No.570/JP/15 dated 18-04-2016), wherein the interest payment of 21% was held to be reasonable. With regard to the BPLR of State Bank of India considered by AO, the Ld A.R submitted that the above said rate of interest is applicable only to secured loans. He submitted that the unsecured loans usually carry higher rate of interest. He submitted that this distinction has been recognised by the Delhi bench of Tribunal in the case of Jalandhar Jewellery House (ITA No.1329/Del/2014 dated 7-8-2014). He also relied on decisions rendered by Tribunal in other cases, wherein interest rate ranging from 20% to 24% was held to be reasonable.
On the contrary, the Ld D.R submitted that the various decisions relied upon by the assessee relate to different assessment years. He submitted that the market rate of interest is not static and it keeps on changing. Accordingly he submitted that the assessee cannot fully rely upon those decisions. He submitted that the Tribunal is concerned with the interest expenditure relating to the year under consideration. He submitted that the back working of 5 Shravasti Developers & Agro Private Limited interest expenditure made by the assessee by spreading the interest expenditure to the earlier year cannot be considered when determining the reasonableness of the interest expenditure in terms of sec. 40A(2)(a) of the Act.
We have heard rival contentions and perused the record. We agree with the contentions of the ld D.R that the market rate of interest does not remain static and it keeps on changing. It can be noticed that the interest rate offered by the banks on deposits also keeps on changing according to the policy announced by the RBI. We notice that the various decisions relied upon by the assessee in order to contend that the interest rate of 20% to 24% is reasonable, relate to AY 2010-11 and earlier years. We are concerned with the AY 2012-13 and hence, we agree with the contentions of Ld D.R that the assessee cannot take support of those decisions. What is required to be seen is whether the interest paid by the assessee at the rate of 27% can be considered as payment in terms of prevailing market rates or not?.
The provisions of sec. 40A(2)(a) shall apply when the assessee incurs any expenditure in respect of which payment is made or to be made to any person specified in sec. 40A(2)(a) of the Act. In that case, the AO is required to examine whether the said expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made or (b) the legitimate needs of the business or profession of the assessee or (c) the benefit derived by or accruing to him therefrom.
If the AO comes to the conclusion that the expenditure is excessive or unreasonable from the angle of any of the three conditions listed out, then the AO is entitled to disallow the excess or unreasonable portion of the expenditure.
In the instant case, we are concerned with the first condition listed above, as the AO has invoked the same only to make the impugned disallowance. The 6 Shravasti Developers & Agro Private Limited legitimate needs or the benefit accrued there from are not in dispute. With regard to the “fair market rate” of interest expenditure, we notice that the AO has taken support of BPLR of State Bank of India and accordingly determined the fair market rate of interest at 14.50%.
We notice that the assessee has taken loan from its relative concern not only during the year under consideration, but also in the earlier year and in subsequent years. In the earlier year, it did not pay any interest and in subsequent years, it has paid interest @ 6.80% and 12%. Only during the year under consideration, the assessee has paid interest @ 27%. When compared with the rate of interest charged in the subsequent years, the interest rate of 27% is very much on the higher side. However, as noticed earlier, the rate of interest would depend upon market conditions and it does not remain static in the present day situations.
We also do not agree with the theory of allocation of interest expenditure to the earlier year canvassed by Ld A.R. The rate at which interest should be paid would depend upon the terms and conditions agreed to by the parties. From the varying interest rate paid by the assessee to M/s Suryoday Buildwell and Farms Pvt Ltd, it can be noticed that the rate of interest appears to have been determined every year. Accordingly during the year under consideration, the assessee has paid interest @ 27%, which is required to be tested in terms of sec. 40A(2)(a) of the Act. Hence the payment made at lower rate of interest in the succeeding years, in our view, is not relevant.
We notice that the BPLR of State bank of India was 12% to 15% during the year under consideration. Hence the AO has adopted interest rate at 14.50%. However, as rightly submitted by Ld A.R, the same is applicable to secured loans. It is the contention of the assessee that it has availed unsecured loan from its related concern. In case of unsecured loans, the rate of interest is bound to be higher. Accordingly we are of the view that the reasonable rate of interest in terms of sec. 40A(2)(a) may be taken at 18% p.a.,
7 Shravasti Developers & Agro Private Limited since the rate of interest for secured loans is in the range of 12% to 15%. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to compute the disallowance by adopting rate of interest of 18% p.a. We order accordingly.
In the result, the appeal of the assessee is treated as partly allowed. Order has been pronounced in the Court on 7.6.2018.