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Facts
The assessee, M/s. ANS Jewelry, appealed against the CIT(A)'s order confirming the disallowance of interest paid on unsecured loans from related parties at 21% instead of 12% as restricted by the AO. The assessee claimed the higher interest rate was justified due to commercial expediency and the nature of loans, while the AO considered it excessive compared to market rates. Another issue involved the disallowance of advertisement expenditure due to booking it in the wrong assessment year.
Held
The Tribunal held that the disallowance of interest paid on unsecured loans was unjustified, considering the business needs, the lack of collateral, and the consistency with previous years. The Tribunal also held that the disallowance of advertisement expenditure was not warranted as it was a minor amount, tax neutral, and the bills were received belatedly, despite the mercantile accounting system.
Key Issues
1. Whether the disallowance of interest paid to related parties at a rate higher than 12% is justified. 2. Whether the disallowance of advertisement expenditure for booking in the wrong assessment year is justified.
Sections Cited
40A(2)(b), 270A, 44AB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI MANOJ KUMAR AGGARWAL
आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "theLd.CIT(A)”), Delhi, both dated 26.12.2023 for the Assessment Years (hereinafter in short "AY”) 2020-21 & AY 2021-22.
Both sides agreed that the main grievance of the assessee in both Appeals are against the action of the Ld.CIT(A) confirming the disallowance made by the AO u/s.40A(2)(b) of the Income Tax Act, 1961 (hereinafter in short ‘the Act’) and they agree that the facts/law relating & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry :: 2 ::
to the said issue are identical/similar. Therefore, the decision in one assessment year would decide the fate of the other, since there is no change in law or facts except difference in figures. Therefore, appeal for AY 2020-21 is taken as the lead case and the decision of which will be followed for AY 2021-22.
The main grievance of the assessee for AY 2020-21 is against the action of the Ld.CIT(A) confirming the disallowance of Rs.2,72,12,143/- u/s.40A(2)(b) of the Act by restricting the interest paid towards unsecured loan taken from related parties at 12%, whereas, assessee firm claims to have paid interest @21% to the lenders.
4. Brief facts related to this issue as noted by the AO are that the assessee-firm is a retail jewellery dealing in manufacture, purchase and sale of gold jewels, diamond jewellery and silver articles, etc. The assessee had filed its return of income (RoI) on 16.09.2020 for AY 2020- 21 declaring total taxable income at Rs.95,23,430/-. Later, the case was selected for complete scrutiny and the AO noted that the assessee has claimed business expenditure viz. interest payment made to unsecured creditors (related parties) @21% of the total loan taken by the assessee to the tune of Rs.6,35,02,000/-. According to the AO, the interest payments @ 21% was unreasonably high, because, it was claimed to have been paid to the related parties. The AO noted that interest & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry payments @21% is much more than market rate of interest for the unsecured loan; and the AO after giving details of the unsecured creditors and the interest payments at Page Nos.4-5 of his order noted that the interest expenditure on account of payments to unsecured loan creditors were excessive/unreasonable vis-a-vis the Fair Market Value (FMV) of the transaction; and taking note of the earlier assessment order of assessee for AY 2017-18, wherein, such interest payment was disallowed beyond interest rate @12% i.e. Rs.2,72,12,143/-, the AO followed the same path and on the same reasoning for earlier year (AY 2017-18) disallowed the interest expenditure which was paid in excess of @12% and thus, disallowed Rs.2,72,12,143/- by holding as under:
With regard to the issue of disallowance of interest expense of Rs.19,64,563/- paid to the persons covered u/s.40A(2)(b) of the Income-tax Act, 1961, it is observed that the assessee has substantial revenue generation by way of sales, and that the amount outstanding in the case secured loan creditors is about 1/50th the amount outstanding in the case of unsecured loan creditors, it is observed that the reasonableness of the interest expenditure on account of payment to unsecured loan creditors is high. Further, addition to the income of the assessee was made on a similar ground in AY 2017-18. Therefore, the disallowance beyond the interest rate of 12%, which works out to Rs 2,72,12,143/-, is being to the income for AY 2020-21. The assessee has failed to furnish any justification with regard to reasonableness of the interest payment in excess of 12%. Hence, the reply of the assessee is not tenable and therefore, the addition of Rs.2,72,12,143/- on account of excess interest payments should be made to the total income of the assessee. Therefore, the disallowance beyond the interest rate of 12%, which works out to Rs.2,72,12,143/-, is being to the income for AY 2020-21. Accordingly, Penalty Proceedings u/s.270A of the Act is initiated separately for under reporting of income.
(Addition: Rs. 2,72,12,143/-)
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who was pleased to confirm the action of the AO.
& 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry :: 4 ::
At the outset, Ld.AR of the assessee pointed out that the assessee being in the business of gold/diamonds, silver, required heavy capital to hold stocks and therefore, in order to run its business efficiently and for smooth functioning of the business has to necessarily take loans from banks/financial institutions which was a cumbersome process and required furnishing of ‘collateral security’ to secure such loans (mortgage of immovable properties/pledging of gold, etc.). According to the Ld.AR, due to commercial expediency, for legitimate needs of the business, the assessee has borrowed money from family/relatives which required ‘no collateral security’. And since, loans were taken for a long period, interest payment of @21% was contended to be reasonable and justifiable and according to the Ld.AR can’t attract the mischief u/s.40A(2)(a) of the Act.
The Ld.AR also pointed out that the assessee firm had been availing such loans from the family members from earlier years and the AO while framing assessment for AY 1987-88 had made similar disallowance, where the assessee had paid @22% and the Ld.CIT(A) had deleted the same considering the fact that the loans were given for long period of time. And the Ld.AR has also placed an order of this Tribunal dated 03.04.2024 for AY 2017-18 in the assessee’s own case (ITA No.1151/Chny/2023), wherein, similar disallowance was made by the AO and the Tribunal was pleased to uphold the action of the Ld.CIT(A) deleting the disallowance/addition made on this account and therefore, & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry the Ld.AR pleaded that the disallowance made by the AO, which was upheld by the Ld.CIT(A) may be deleted on the ground of consistency.
Per contra, the Ld.DR submitted that the assessee had booked unreasonable/excessive interest expenditure on the unsecured loan taken from the related parties. According to the Ld.DR, the interest payment of @21% can’t be justified and it is excessive. The Ld.DR also drew our attention to the copy of the ledger account for AY 2020-21, relating to the unsecured creditors [which is reproduced at Page Nos.7-10 of the assessment order for AY 2021-22], showed that assessee had incurred payments in respect of tax liabilities on behalf of the loan givers.
According to the Ld.DR, these payments made by assessee can’t be said to be incurred for business purpose and therefore, the AO rightly restricted the purported interest payments towards unsecured loans taken from related parties @12% rather than allowing interest expenditure @21%; and he doesn’t want us to interfere with the impugned action of the Ld.CIT(A) confirming the action of the AO.
We have heard both the parties and perused the material available on record. We note that the assessee-firm is retail jewellery which purchases and sell of gold jewels, diamond jewellery and silver articles. It had filed its return of income on 16.09.2020 for AY 2020-21 declaring taxable income of Rs.95,23,430/- (for AY 2021-22 assessee had declared & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry income of Rs.1,48,17,850/-). The AO noted that the assessee had claimed interest expenditure to the tune of Rs.6,35,02,000/- which was interest payment made to unsecured creditors @21%. The AO noted that the unsecured creditors were related parties and the interest payments were excessive/unreasonable and more than fair market interest rate.
The AO proposed to invoke sec.40A(2)(b) of the Act and pursuant to that the assessee submitted that since it is into the business of gold/diamonds/silver which requires huge capital to hold stocks and due to commercial expediency, funds couldn’t be arranged from the banks/financial institutions at short notice, which prompted the assessee to borrow money from the relatives/family members without giving any ‘collateral security’; and since, the loan was for a long-period, the interest rate was fixed @21% which was paid to the lenders which was reasonable when compared to the cumbersome procedure in availing loan from banks/financial institutions which undisputedly required furnishing of ‘collateral security’ in the form of mortgage/immovable property/pledging of gold, etc. According to the Ld.AR, the amount borrowed was used for the purpose of business and such interest payments are allowable expenditure. And brought to our notice that similar action taken by the AO for AY 1987-88, wherein, the assessee had paid interest @22% to related parties and similar disallowance was resorted to by the AO which was deleted by the Ld.CIT(A). The Ld.AR has also placed on record, the & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry recent order of this Tribunal dated 03.04.2022 in the assessee’s own case for AY 2017-18, wherein, similar disallowance was made by the AO and deleted by the Ld.CIT(A) and the Department came in appeal before the Tribunal and the Tribunal confirmed the action of the Ld.CIT(A) deleting the addition/disallowance u/s.40A(2)(b) of the Act, by holding as under:
Excessive interest paid on unsecured loan creditors Another issue in the appeal is excessive interest paid to loan creditors. The Ld. AO observed that the assessee paid interest of 21% to loan creditors which are tabulated on page no.21 of the assessment order. The interest so paid aggregated to Rs.639.61 Lacs. The Ld. AO, invoking the provisions of Se.40A(2)(b) r.w.s. 37 of the Act, restricted the same to 12% and disallowed a sum of Rs.274.11 Lacs and finalized the assessment.
8. The disallowance of excessive interest disallowance was deleted on the ground that the assessee would always need the funds to run its business. Taking loans from financial institutions would involve lot of procedures and documents including pledging of properties. The loans from family members would be easy to take and no collateral security would be required. Aggrieved, the revenue is in further appeal before us.
Our findings and Adjudication
From the fact, it emerges that the assessee is dealing in precious metals. It transpired that the assessee deposited cash during demonetization period, the source of which was stated to be out of sales generated by the assessee up-to 08-11-0216. In support, the assessee furnished details of total cash deposited during earlier financial year as well as during this financial year with break-up of cash deposited before demonetized period as well as cash deposited after demonetized period and cash deposited during those corresponding periods in earlier year. The assessee also furnished monthly summary of sales along with summary of opening and closing cash balances. From the tabulation, it could be seen that the assessee is always conducting substantial sales in cash which are regularly being deposited in the bank account. The assessee is maintaining healthy opening cash balance since financial year 2015-16. The assessee has maintained opening cash balance of Rs.25.31 Lacs in this year. During financial year 2016-17 also, the assessee is carrying out cash sales and maintaining healthy cash balance throughout the year. The assessee has incurred cash sales up-to 08-11-2016 which has been utilized to make impugned cash deposits in the bank accounts. Such sales have been offered in the Sales Tax Return as well as in the Income Tax Return which has been accepted. The stock-in-trade has moved out of assessee’s books of account. The books have not been rejected by Ld. AO and in fact, no single defect could be pointed out by Ld. AO in the books or financial statement of the assessee. When the sales has been reflected in the books of accounts and offered to tax, adding the same would amount to double taxation which is impermissible in law. The books are subjected to Tax Audit u/s 44AB and the assessee has maintained quantitative details of the stock-in trade. The cash sales proceeds have been credited in the books of accounts and the same form part of assessee’s cash & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry :: 8 ::
book. On these facts, it could very well be said that the assessee’s claim was backed up by sufficient documentary evidences. The allegation of Ld. AO is that such abnormal sales could not be achieved by the assessee immediately upon announcement of demonetization by the Government. However, such allegations are bereft of any concrete evidence on record. It is trite law that no addition could be made merely on the basis of suspicion, conjectures and surmises. In the present case, the assessee has duly discharged the burden of establishing the source of cash deposit and the onus was on Ld. AO to disprove the same. However, except for mere allegation and few statistics, there is nothing on record to support the conclusions drawn by Ld. AO that the assessee’s own unaccounted money was introduced and accommodated under bogus customers’ name during the demonetization period. The demand of Ld. AO to produce CCTV recording after lapse of considerable period of time could not be said to be reasonable particularly when all the other evidences supports the case of the assessee. There is no finding by Ld. AO that any particular sales affected by the assessee exceeded threshold limit which would require collection of tax at source (TCS). Since cash generated out of sales has been credited in the books of accounts, the provisions of Sec.69A could not be invoked in the present case. The case laws as cited by Ld. CIT(A) duly supports the case of the assessee. Under these circumstances, the impugned additions have rightly been deleted by Ld. CIT(A). The same could not be faulted with. Therefore, the corresponding grounds raised by the revenue stand dismissed.
10. So far as the disallowance of excessive interest u/s 40A(2)(b) is concerned, we find that it the prime requirement of Sec.40A(2)(a) that the assessee incurs any expenditure in respect of which payment is to be made to a specified person 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 legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him the refrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction. Thus due regard has to be given to fair market value of the facilities or the legitimate needs of the business. Simply because bank loan rate is lower, the same would not entitle Ld. AO to invoke these provisions unless it was shown that the same was excessive having regards to the fair market value. As rightly held by Ld. CIT(A), taking loans from financial institutions would involve lot of procedures and documents including pledging of properties. The loans from family members would be easy to take and no collateral security would be required. Naturally, such loans are subjected to higher risk and therefore, carry higher rate of interest. The Ld. AR has also demonstrated that these loans have been offered the same rate of interest since long time and no such disallowance has been made in earlier years. The Ld. AR has placed on record first appellate order of the assessee for AY 1987- 88 wherein the assessee had paid interest @22% and similar disallowance was made by Ld. AO. However, Ld. CIT(A) deleted the same considering the fact that the loans were available to the assessee for larger period of time. Therefore, considering all these facts, we would concur with the adjudication of Ld. CIT(A).
9. Since there is no change in the facts or law, respectfully following the order of this Tribunal in the assessee’s own case for AY 2017-18, we & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry direct the deletion of addition of Rs.2,72,12,143/- for AY 2020-21 and Rs.3,12,95,571/- for AY 2021-22.
The next grounds of appeal of the assessee is against the action of the Ld.CIT(A) confirming the disallowance of advertisement expenditure incurred to the tune of Rs.1,03,118/-.
Brief facts on this issue are that the AO noted that the assessee had claimed expenditure of Rs.1,03,118/- as advertisement expenditure. The AO asked for details of expenditure and the assessee filed two invoices (Invoice No.92 of Rs.78,835/- and Invoice No.374 of Rs.24,273/- totaling Rs.1,03,118/-). The AO noted that both the invoices were in the name of Sri Venkateswara Bhakti Channel dated 31.03.2019. According to the AO, since the assessee has been following mercantile system of accounting and the expenditure claimed by the assessee was not pertaining to the relevant year under consideration, therefore, he disallowed the expenditure claimed to the tune of Rs.1,03,118/-.
On appeal, the Ld.CIT(A) confirmed the same.
Aggrieved, the assessee is in appeal before this Tribunal.
We have heard both the parties and perused the material available on record. It is noted that the assessee received bill of expenses incurred for AY 2019-20 only on 12.04.2019 and the TDS was deducted in the & 161/Chny/2024 (AY 2020-21 & 2021-22) M/s.ANS Jewelry month of April, 2019. Since the assessee received bills belatedly for expenses incurred in AY 2019-20 on 12.04.2019, the assessee couldn’t book bills as expenditure on 31.03.2019. In order to demonstrate its bona fide action of making the payment in April, 2019, the assessee brought to our notice that the tax was deducted at source in the month of April, 2019. Considering the volume of business expenditure claimed, it is noted that the expenditure disallowed is miniscule and it is noted that even though, the bills were dated to be that of 31.03.2019, assessee received it only on 12.04.2019 and therefore, there was no occasion to book the bill for AY 2019-20. It is true that the assessee is maintaining its accounts as per mercantile system of accounting and hence, it ought to have booked the expenditure in the AY 2019-20. However, considering the totality of the facts and circumstances of the case, and since the AO has not doubted the genuineness of the expenditure/claim and in any case, it is tax neutral, disallowance was not warranted in this year, and therefore it is directed to be deleted.
In the result, both the appeals filed by the assessee are allowed. Order pronounced on the 18th day of September, 2024, in Chennai.