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Income Tax Appellate Tribunal, DELHI BENCH “SMC-2” BENCH: NEW DELHI
Before: SHRI KUL BHARAT
This appeal, by the assessee, is directed against the order of the learned Commissioner of Income-tax (Appeals), dated 31-12-2018, pertaining to the assessment year 2015-16. The assessee has raised following grounds of appeal:
“1.1. THAT the impugned order dated 31.12.2018 passed by Ms Shikha Darbari, Commissioner of Income (Appeals)-17, New Delhi dismissing the appeal of the Appellant, thereby confirming the order dated 01.12.2017 making addition of Rs. 3,08,896/- u/s 250 of the Income Tax Act, 1961 is contrary to the law and on facts of the case.
2 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT 2.1 THAT the lerned Commissioner of Income (Appeals)-17, grosly erred in confirming the additon of Rs. 34,050/- by restricting the rate of interest paid @ 12% though the Assessee/appellant paid interest @ 15% to non- relative. TDS was deducted and recipient of interest has paid Income Tax on the said amount at maximum rate.
3.1 THAT the lerned Commissioner of Income (Appeals)-17, grosly erred in confirming the disallowance made by the Assessing Officer of Commission paid to shri Ishan Batra though he supervises the entire computer working of the business of the appellant. The two partners are not computer savvy. He managed entire business which now a days is conducted through computer. The said expenses being wholly and exclusively for the purpose of business deserve to be allowed. The recipient of commission has paid income tax at the maximum rate.
4.1 THAT the appellant craves leave to add, alter, omit to/from the grounds of objection at the time of hearing of this objection petition or at any time before that as he may be advised. The petitioner seeks to adduce further evidence and make oral arguments on facts and law at the time of hearing this petition.”
Ground no. 1.1 is general in nature and needs no separate adjudication.
Ground no. 2.1 is against disallowance of Rs. 34,050/- made by invoking the provisions of Section 40A(2)(b) of the Income-tax Act, 1961, hereinafter referred to as “the Act”. The facts relating to this ground are that the Assessing Officer during assessment proceedings called upon the assessee to explain the reason for making payment of interest at higher rate of 15% to Shri Arvind Sachdev. The explanation offered by the assessee was not accepted by the Assessing Officer and he made disallowance of interest expenditure exceeding 12%. On appeal to the learned CIT(Appeals) the disallowance was sustained.
3 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT 4. Learned counsel for the assessee vehemently argued that the approach of the authorities below is not justified. Learned counsel submitted that the AO restricted the allowance of interest to the extent of 12%, which is not justified. He submitted that the loan was taken from unrelated party. The same being unsecured loan, therefore, the assessee had to pay at a higher rate. He submitted that tax has been deducted on this amount. The amount was borrowed for business expediency. He submitted that the law is well settled. It is the assessee who is to see business expediency for borrowing any funds and at what rate of interest it is necessary in the facts and circumstances of the case. Therefore, there was no reason to restrict the expenditure to the extent of 12%.
Learned DR opposed the submissions and supported the orders of authorities below.
I have heard learned counsel for the assessee. I find that the Assessing officer has made addition by observing as under:
“Further, in order to verify the payments, assessee was asked to submit ageing of unsecured loans along with comprehensive chart for the interest payment. The assessee filed his reply vide letter dated 24.11.2017 and submitted details pertaining to custom duty along with challans, TDS return in order to substantiate payments made to related parties, and details of sale and purchase to related parties alongwith supporting invoices which have been placed on records. From the perusal of details filed by the assessee, it has come to notice that assessee has made payment in the nature of interest on loan of Rs. 1,70,250/- to Shri Arvind Sachdev a non related party being interest on loan @ 15% on outstanding balance of Rs. 11,35,000/-. However, assessee was asked as to why the payment of interest on loan @ 15% should not be restricted to 12% of the outstanding balance. The assessee was also asked to submit copies of computation of income of the persons to whom payment under section 40A(2)(b) was made. Further,
4 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT assessee filed his reply vide letter dated 30.11.2017 along with copy of computation of income of the persons to whom interest payments were made. In response to query regarding payment of interest @ 15% to Shri Arvind Sachdev, the assessee stated that the said person is not related to partners of the firm in any way. Firm required funds and he was not inclined to provide funds at a rate of less than 15%.
However, the submissions offered by the assessee is not found to be tenable and therefore, payment of interest on loan @ 15% is restricted to 12% of outstanding balance and an amount of Rs. 34,050/- is being added to the income of the assessee being difference in the interest amount.”
The same has been confirmed by the learned CIT(Appeals). I find that both the authorities made addition and confirmed the same on the basis that there was no written agreement. The Assessing Officer has not confronted the person who received the interest. In the absence of independent inquiry made by the Assessing Officer, the addition made is not justified. Moreover, it is the assessee who is the best judge in respect of borrowing of funds having regard to the facts and circumstances of the case. The condition for borrowing of funds cannot be super imposed on the tax payer that is not in the domain of the assessing authority. The Assessing Officer, however, is empowered to find out the genuineness of transaction for coming to the conclusion about the correctness and genuineness of the claim of the assessee. In the present case the Assessing Officer has not doubted about genuineness of transaction. What he questioned is about the rate of interest paid by the assessee. The Assessing Officer has not made further inquiry to ascertain the facts whether the payment of higher rate of interest was being used as a tool for reducing its tax liability by the assessee. The Assessing Officer has not brought such material on record. Therefore, in the absence of such material, the 5 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT disallowance made by the Assessing Officer and sustained by the learned CIT(Appeals) is hereby deleted.
Ground no. 3.1 is against confirming the disallowance made by the Assessing Officer in respect of commission paid to Shri Ishan Batra.
The facts relating to the ground are that during the course of assessment proceedings the Assessing Officer noticed that the assessee had made payment of Rs. 2,74,846/- being commission paid to Shri Ishan Batra. In response to the query of the Assessing Officer, the assessee had stated that Shri Ishan Batra was given commission at 0.5% of sales made by him. The Assessing Officer called upon the assessee to furnish any written agreement in this regard. It was stated before the Assessing Officer that there was no such written agreement. The commission was paid purely on the basis of oral agreement. The Assessing Officer did not accept this explanation of the assessee and disallowed the commission expenditure. On appeal to the learned CIT(A), same was confirmed.
Learned counsel for the assessee submitted that the authorities below were not justified in disallowing the claim merely on the basis that there was no written agreement. Learned counsel submitted that the commission was paid for making sales and there was no reason to make a false claim as the payment made to Shri Ishan Batra was also attracted tax at the highest slab. He submitted that it is not a case of evading tax.
Per contra learned Sr. DR opposed the submissions and supported the orders of authorities below.
6 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT 12. I have heard rival submissions and perused the material on record. Learned CIT(Appeals) has confirmed the addition by observing as under:
“7.1. AO has made this disallowance as it was found that payment of Rs. 2,74,846/- was paid to related party i.e. Sh. Ishan Batra as commission payment. Assessee could not filed any agreement entered into for the commission payment and also could not produce any documentary evidence relating to kind of services that were rendered by Sh. Ishan Batra, hence, AO treated this commission payment as not genuine. Even during the appellate proceedings, the appellant vide order sheet entry dated 26/12/2018 was specifically asked to file detailed reply relating to agreement for commission paid and proof of services rendered but it was accepted by the assessee that they did not have any agreement for payment of commission made to Sh. Ishan Batra. However, it was contended that he is a chemical engineer and computer saavy person, who is helping in the overall business of the assessee. It was further contended that the payment of commission is not for shifting any income out of the hands of the assessee as Sh. Ishan Batra is also in the tax slab of 30%.
7.2. I do not agreed with the contention of the assessee as any payment be if salary or commission, has to be paid based on some agreement or appointment letter. Since assessee does not have any agreement for payment of such commission and as such there is no proof for rendering of any specific services for the benefit of the business by Sh. Ishan Batra, AO is correct in making this disallowance of Rs. 2,74,846/- as payment of commission.”
I have given my thoughtful consideration to the finding of the authorities below. I find that the Revenue has not brought any material rebutting the claim of the assessee that the amount was paid as a commission. Undisputedly the Assessing Officer has not summoned Shri Ishan Batra for confronting him regarding payment of commission. Therefore, in the absence of any independent
7 ITA 1495/Del/2019 Batra Enterprises Vs. ACIT inquiry by the Assessing Officer on this issue, the addition so made cannot be sustained. This ground of the assessee’s appeal is allowed.
Assessee’s appeal is allowed.