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Income Tax Appellate Tribunal, DELHI BENCH “G, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI O.P. KANT
ORDER ORDER ORDER ORDER PER H.S. SIDHU: JM PER H.S. SIDHU: JM PER H.S. SIDHU: JM PER H.S. SIDHU: JM
These appeals by the Revenue are directed against the separate orders of the Ld. Commissioner of Income Tax (Appeals)-XII, New Delhi both dated 30.5.2014 pertaining to assessment year 2011-12 & 2010-11 respectively. Since the issues involved in these appeals are common and identical, hence, the appeals were heard together and are being disposed of by this common order for the sake of convenience, by dealing with (AY 2011- 12). 1
The grounds raised in (AY 2011-2012) read as under:-
i) The Ld. CIT(A) has erred in law and on facts in deleting the addition on account of excess interest paid to persons specified u/s. 40A(2)(b) amounting to Rs. 46,55,593/-. ii) The appellant craves to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
The grounds raised in (AY 2010-11) read as under:-
i) On the facts and in the circumstances of the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 52,82,792/- made by the AO out of interest u/s. 40(a)(i) for non deduction of TDS. ii) The appellant craves to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
Briefly stated the facts of the case are that the assessee paid interest on certain persons covered u/s. 40A(2)(b) at the rates of ranging from 15-16%.
Following his view taken in the immediately preceding year, the AO held that the interest paid to such persons should be restricted to 12%. The excess interest paid amounting to Rs. 46,55,593/- for AY 2011-12 was disallowed and assessment was made at an income of Rs. 48,30,090/- vide order dated 12.2.2014 passed u/s. 143(3) of the I.T. Act, 1961.
Aggrieved with the aforesaid assessment order, assessee preferred an appeal before the Ld. CIT(A), who vide his impugned order dated 30.5.2014 has deleted the disallowance in dispute by relying on the other passed by the Tribunal for the immediately three preceding assessment years, namely 2007- 08 to 2009-10 and allowed the appeal of the assessee.
Against the order of the Ld. CIT(A), Revenue is in appeal before the Tribunal.
Ld. DR relied upon the order of the AO and could not produce any contrary decision on the issue in dispute passed by the higher Court.
Ld. Counsel of the assesee at the time of hearing has stated that the issue in dispute has already adjudicated and decided in favour of the assessee by the ITAT in assessee’s own case for the assessment years 2007-08 to 2009-10. He also filed the copies of the Tribunal’s order dated 28.2.2014 passed by the ITAT ‘G’ Bench, Delhi in (AY 2009-10) title as DCIT vs. Sports Station India Pvt Ltd. and order dated 30.3.21012 of the ITAT ‘G’ Bench passed in ITA No. 3262 and 3256/Del/2011 assessment years 2007-08 and 2008-09 title as DCIT vs. Sports Station India Pvt. Ltd and ITA No. 2936/Del/2011 (AY 2007-08) title as M/s Sports Station (India) Pvt. Ltd. vs. DCIT.
We have heard both the parties and perused the records especially the order of the revenue authorities alongwith the orders cited by the Ld. Counsel of the assesee of the Tribunal in assessee’s own case i.e. Tribunal’s order dated 30.3.21012 of the ITAT ‘G’ Bench passed in and 3256/Del/2011 assessment years 2007-08 and 2008-09 title as DCIT vs. Sports Station India Pvt. Ltd and ITA No. 2936/Del/2011 (AY 2007-08) title as M/s Sports Station (India) Pvt. Ltd. vs. DCIT. For the sake of convenience, on the issue in dispute the relevant portion of the Tribunal’s finding at page no. 13 to 17 vide para no. 7 to 12.1 are reproduced as under:-
“7. Ground No. 2 in the appeal of the Revenue for the AY 2007-08 and ground no. 1 in their appeal for the AY 2008- 09 relate to disallowance u/s. 40A(2)(a) of the Act. During the course of assessment proceedings for the AY 2007-08, the AO noticed that the assessee paid interest @15% per annum on the borrowing from the persons covered u/s. 40A(2)(b) of the Act. To a query by the AO as to why the interest paid @15% paid be not considered as excessive and unreasonable, the assessee replied that rate of interest was reasonable since the Citi bank at the relevant time granted working capital, carrying interest @14.5% per annum while the unsecured loan carried higher risk element. However, the 4
AO did not accept these submissions of the assessee and disallowed an amount of ~5,47,596/- in terms of provision of section 40A(2)(a) of the Act, considering interest @12% as reasonable in the A Y 2007-08.
8. Similarly, in the AY 2008-09, the AO disallowed an amount of Rs. 10,64,461/- in terms of provision of section 40A(2)(a) of the Act, considering interest @12% as reasonable.
9. On appeal, the learned CIT(A) deleted the disallowance in the AY 2007-08 in the following terms:-
"6.3 The submission given by the appellant and the objections of the Assessing Officer have been considered. In order to make a disallowance uls 40A(2)(b) it is necessary that the Assessing Officer should establish that the benefits given to the related parties are more than the fair market value. If the appellant is making payments to other persons @15% then there is no special favour which is being given to the related parties. Further, the Assessing Officer has not been able to establish as to what was the market rate of interest. It is further seen that the appellant has paid an interest of 14.5% to the bank, thus, there is no justification in making a disallowance of Rs. 5,47,596/- uls 40A(2)(b). The addition of Rs. 5,47,5961- is hereby deleted."
10. Similarly in the AY 2008-09, the Id. CIT(A) deleted the disallowance, holding as under:-
"4.3 The submission given by the appellant and the objections of the Assessing Officer have been considered. In order to make a disallowance uls 40A(2)(b) it is necessary that the Assessing Officer should establish that the benefits given to the related parties are more than the fair market value. If the appellant. is making payments to other persons @ 15% then there is no special favour which is being given to the related parties. Further, the Assessing Officer has not been able to establish as to what was the market rate of interest. It is further seen that the appellant has paid a interest of 14.5% to the bank and this being an unsecured loan will certainly command a higher rate of interest thus, there is no justification in making a disallowance of Rs. 10,64,461/- u/s. 40A(2)(b). The addition of Rs. 10,64,461/- is hereby deleted.”
The Revenue is now in appeal before us against the aforesaid findings of the Id. CIT{A) .The Id. DR supported the order of the AO while the Id. AR on behalf of the assessee supported the findings of the Id. CIT(A).
We have heard both the parties and gone through the facts of the case. As is apparent from the impugned order, we find that the AO did not bring any material on record for holding that the payment of interest @15% per annum to unsecured creditors was excessive and how interest @12% pa was reasonable or represented fair market value for the services and facilities. Before proceeding further, we may refer to the provisions of section 40A(2) (a) of the Act, the relevant portion of which reads as follows :
"40A(2 (a). Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in 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 or profession of the assessee or the benefit derived by or accruing, to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction."
12.1 A mere glance at the aforesaid provision reveals that the expenditure mentioned therein is in relation to any person referred to in clause (b) of the sub- section and the expenditure has to be considered in relation 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 to the assessee therefrom. Hon'ble Gujrat High Court observed in Coronation Flour Mills vs. ACIT,188 Taxman 2?7 that in relation to the disallowance under the provisions of section 40A(2)(a) of the Act, a plain reading of the provision reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such 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 of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to anyone of the three requirements prescribed, which are independent and alternative to each other. All the three requirements need not exist simultaneously. In a given case, if anyone condition is shown to be satisfied the provision can be invoked and applied, if the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Steel Manufacturing And Engineering Co. Private Limited, 117 ITR 569(SC). In the instant case, there is nothing to suggest that the AO found the payment of interest excessive having regard to either (a) fair market value of the services or facilities; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. Not a whisper has been made by the AO in respect of any of these three ingredients in his assessment orders. There is nothing to suggest that the AO ever brought any material on record on this aspect before concluding that interest @15% was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the interest on unsecured loans. In view the foregoing, especially when there is no material on record to hold that payment of interest @15%pa to unsecured creditors was excessive, we have no hesitation in upholding the findings of the Id. CIT(A). Therefore, ground no. 2 in the appeal of the Revenue for the AY 2007-08 and ground no. 1 in their appeal for the AY 2008-09 are dismissed.”
9.1 Keeping in view of the aforesaid order passed by the Tribunal on 30.3.21012 passed in and 3256/Del/2011 assessment years 2007-08 and 2008-09 title as DCIT vs. Sports Station India Pvt. Ltd and ITA No. 2936/Del/2011 (AY 2007-08) title as M/s Sports Station (India) Pvt. Ltd. vs. DCIT, we are of the considered view that the issue in dispute is squarely covered in favour of the assessee. Therefore, respectfully following the above precedent, we uphold the order of the Ld. CIT(A) and dismiss both the appeals of the Revenue.
In the result, both the Appeals filed by the Revenue stand dismissed.
Order pronounced in the Open Court on 16/12/2016.