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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
This appeal by the assessee is directed against the order of the CIT(A)- 28, Mumbai dated 09.03.2015 for A.Y. 2011-12.
The facts of the case, briefly, are as under: - 2.1 The assessee, a firm engaged in the business of trading in rubber, rubber chemicals, solvents, etc., filed its return of income for A.Y. 2011-12 on 22.09.2012 declaring income of `6,15,82,930/-. The case was selected for scrutiny and the assessment was completed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dated 05.02.2014 wherein the income of the assessee was determined at `6,71,33,340/- in view of the following additions/disallowances: - ` (i) Interest received as per AIR information 60,746/- But not disclosed ` (ii) Capital Expenditure – Interest on 5,13,806/- Borrowed capital (iii) Excess interest to relatives ` 45,77,640/- (iv) Expenses disallowed ` 2,00,000/- (v) Personal expenditure ` 1,98,220/- M/s. B.P. Chemicals 2.2 Aggrieved by the order of assessment for A.Y. 2011-12 dated 05.02.2014, the assessee preferred an appeal before the CIT(A)-28, Mumbai who disposed off the appeal vide the impugned order dated 09.03.2015 allowing the assessee partial relief.
Aggrieved by the order of the CIT(A)-28, Mumbai dated 09.03.2015, the assessee preferred this appeal raising the following grounds: - “(I) DISALLOWANCE OUT OF INTEREST OF Rs. 45,77,640/- u/s. 40A(2)(b) (1). On the facts & circumstances and in law, the learned Commissioner of Income Tax (Appeals)- 28, Mumbai [referred as CIT(A)"] erred in confirming disallowance of Rs. 45,77,640/- out of interest under the provisions of section 40A(2)(b) merely following earlier year's decision of the hon'ble ITAT for the A.Y. 2004-05. (2). On the facts and circumstances and in the interest of justice, the learned CIT(A) ought to have considered the relevant evidences submitted in view of the CBDT Circular No. 6-P, dated 6/7/1968. It is humbly stated that they were submitted purely with a view to substantiate that the conditions of the said circular and the judgments relied upon were fulfilled. (3). On the facts and circumstances and in law Your Appellant prays that the addition on account of the alleged disallowance may be deleted. (II) AD-HOC DISALLOWANCE OF RS. 2,00,000/- OUT OF CONVEYANCE, STAFF WELFARE, OFFICE & ENTERTAINMENT EXPENSES - (1) On the facts and circumstances, the learned CIT(A) erred in confirming ad-hoc disallowance of Rs. 2,00,000/- out of conveyance, staff welfare, office and entertainment expenses. (2) On the facts & circumstances Your Appellant prays that the alleged addition of Rs. 2,00,000/- may be deleted. (III) DISALLOWANCE OF RS. 1,25,125/- OUT OF TOTAL Rs. 1,98,220/- OUT OF VARIOUS EXPENSES ON THE GROUND OF PERSONAL NATURE — (1) On the facts and circumstances the learned CIT(A) erred in confirming disallowance at 15% out of motor car, telephone and travelling totaling to Rs.1,25,125/- out of Rs. 1,98,220/- arbitrarily on the ground of personal use. (2) On the facts & circumstances Your Appellant prays that the alleged addition of Rs. 1,25,125/- may be deleted. (IV) DISALLOWANCE OF RS. 1,25,426/- U/S. 37- (1) The learned CIT(A) erred in confirming disallowance of Rs. 1,25,426/- [erred in mentioning Rs. 12,75,426/-] u/s. 37 of the Act M/s. B.P. Chemicals disregarding the fact that the was no finding or any basis in the impugned assessment order. (3) On the facts & circumstances Your Appellant prays that the alleged addition of Rs. 1,25,426/- may be deleted. (V) DISALLOWANCE OF BONUS TO PARTNERS RS. 65,000/- (1) On the facts and circumstances and in law, the learned CIT(A) erred in confirming disallowance of Rs. 65,000/-, being bonus to partners under the provisions of section 37 of the Act. (3) On the facts & circumstances Your Appellant prays that the alleged addition of Rs. 65,000/- may be deleted. (VI) ADDITION OF RS. 60,746/- AS PER AIR INFORMATION — (1) On the facts and circumstances and in law, the learned CIT(A) erred in confirming addition made merely on the basis of the AIR information. (2) On the facts & circumstances Your Appellant prays that the alleged addition of Rs. 60,746/- may be deleted. (VII) Your Appellant craves leave to add, amend, alter and/or delete any of the above grounds of appeal
.”
4. Grounds II to VII (supra) 4.1 At the outset of the hearing, the learned A.R. of the assessee submitted that the grounds raised at II to VII in this appeal (supra) are not being pressed. Since the aforesaid grounds are not being pressed, they are rendered infructuous and accordingly dismissed.
5. Ground I (1 & 2) – Disallowance of interest under section 40A(2)(b) 5.1 In this ground, the assessee assails the finding of the learned CIT(A) in the impugned order confirming the disallowance of `44,77,640/- out of interest under the provisions of section 40A(2)(b) of the Act. It is further contended that the learned CIT(A) ought to have considered the relevant evidences submitted in view of CBDT circular No. 6-P dated 06.07.1968 and judgements relied upon by the assessee, The learned A.R. submitted that this issue was considered and held in favour of the assessee by the decisions of the Coordinate Bench of the Tribunal in the assessee’s own case in dated 18.05.2016 for A.Y. 2009-10 and in ITA No. 6214/Mum/2013 dated 22.08.2016 for A.Y. 2010-11. The learned A.R. further submitted that the Coordinate Bench decision for A.Y. 2004- 05, relied on by the learned CIT(A) in the impugned order has been discussed by the Coordinate Bench in its order for A.Y. 2009-10 (supra)
M/s. B.P. Chemicals and therefore this issue is covered in favour of assessee. It was prayed that the assessee’s appeal on this issue be accordingly allowed. 5.2 Per contra, the learned D.R. for Revenue supported the orders of the authorities below. 5.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find from a perusal of the cited judgements that the issue before us in respect of disallowance of interest under section 40A(2)(b) of the Act is covered in favour of the assessee by the decisions of the Coordinate Bench in the assessee’s own case in dated 18.05.2016 for A.Y. 2009-10 and in ITA No. 6214/Mum/2013 dated 22.08.2016 for A.Y. 2010-11. In its order for A.Y. 2010-11 (supra), the Coordinate Bench has considered this issue, including the Tribunal’s order for A.Y. 2004-05 in the assessee’s case relied on by the learned CIT(A) and following the Coordinate Bench order for A.Y. 2009-10 has decided the issue in favour of the assessee, holding as under at paras 3 to 5 thereof: - “3. At the time of hearing, the ld.AR submitted that the present case of the assessee is covered by the decision of Co-ordinate Bench of the Tribunal in assessee’s own case in ITA No.466/Mum/2013 (AY-2009- 10) vide order dated 18.5.2016. The ld. AR further submitted that the decision of the ld.CIT(A) based on assessment year 2004-05 confirming the disallowance has also been discussed by the Co- ordinate Bench of the Tribunal in its decision for the assessment year 2009-10 and therefore the issue is directly covered in favour of the assessee and accordingly the disallowance be deleted. On the contrary, the ld.DR reiterated the submissions as made before the ld.CIT(A) and heavily relied on the decisions of authorities below.
We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below. We find that the decision referred by the ld.AR in the case of ITA No.466/Mum/2013 (supra) in assessee’s own case was passed by the co-ordinate Bench of the Tribunal after considering the decision for the assessment year 2004-05 which was the basis for dismissing the appeal of the assessee and thus, the facts of the case in hand and relied upon by the assessee are identical. For the sake of convenience and clarity we reproduce below the operation part of the decision as under : “4. The CIT(A) relying on ITAT decision in assessee’s own case for assessment year 2004-05 confirmed the action of the Assessing Officer by observing in Para 3.3.4 as under:-
M/s. B.P. Chemicals “ 3.3.4 The issue relating to genuineness of the payment of interest is not relevant while deciding the amount of deduction allowable to the assessee u/s 40A(2) of the LT. Act, 1961. The disallowance has not been made for the reason that the expenditure is not genuine. The disallowance has been made by virtue of the provisions of sec. 40A(2) whereby any expenditure which is excessive or unreasonable is required to be disallowed. The assessee has not shown as to how the interest @ 18% paid to persons specified u/s 40A(2)(b) was not excessive and unreasonable in light of the opinion of the Assessing Officer that the interest at the rate of 12% was reasonable and the findings of the Hon'ble Tribunal in the case of the assessee itself for the A.Y. 2004-05 on the same set of facts. Charging of interest at a given rate from trade debtors cannot be taken to be the market rate for the purposes of loans since these are not comparables. The assessee has not been able to demonstrate as to how the interest rate of 18% was the market rate”. Aggrieved, now assessee is in second appeal before the Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, Ld. Counsel for the assessee clearly stated that the interest payment is neither doubted by the lower authorities or ITAT in assessment year 2004-05. The only issue, according to Ld. Counsel for the assessee is that interest payment is excessive i.e.18% and Tribunal has restricted the same at 12%. However, Ld. Counsel for the assessee stated that in assessment year 2004-05 assessee’s appeal is pending before the Hon'ble Bombay High Court, wherein the substantial question of law on this issues has been admitted by Hon’ble High Court. He also argued that the Tribunal has not considered the decision of Hon'ble Bombay High Court in the case of CIT vs. Indo Saudi Services (Travel) Pvt. Ltd. 310 ITR 306(Bom), wherein CBDT Circular No.6-P dated 06/07/1968 was considered, wherein the Board has taken categorical view that no disallowance is to be made in respect of interest payment to sister concern where there is no attempt to evade tax. Ld. Counsel for the assessee drew our attention to assessee’s Paper Book page– 22, wherein comparative chart of interest paid to family members and others and also details of interest paid to various persons during the relevant assessment years are filed. According to Ld. Counsel those persons have included the interest paid by assessee as income in their respective return of income and paid taxes accordingly. The details are enclosed at pages 22 to 24 of assessee’s Paper Book. According to the Ld. Counsel for the assessee, the interest payment was genuine and incurred wholly and exclusively for the purpose of business and the lower authorities have not elaborated that how this expenditure of interest is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made.
M/s. B.P. Chemicals 6. On the other hand, Ld. Sr.DR argued that this issue is covered by the Tribunal’s order in assessee’s own case for assessment year 2004- 05 and which has been followed in assessment year 2005-06, 2006-07, 2007-08 and 2008-09. According to him, the disallowance made by the Assessing Officer and confirmed by CIT(Appeals) is perfectly as per the provisions of the Act.
We have gone though the details of interest paid to the family members and noticed that these parties have included the receipts of interest in their respective return of income. The details are filed at pages 23-24 of the assessee’s paper book. We find that most of the payees are taxed in highest tax bracket and there is no attempt made by the assessee to evade tax by excessive payment to related parties. We find that the assessee has been paying such interest to some of the parties’ right from the beginning and in the past no such disallowance was made by the Department i.e. the Assessing Officer while framing assessment under section 143(3) of the Act himself has allowed interest at 21% to the assessee for the assessment year 2001-02 and 2002-03, we are of the view that payment of interest to all the parties is purely out of business necessity and decision to pay interest @18% per annum is guarded by commercial consideration and in the interties of its business necessities and exigencies. Ld. Counsel for the assessee before us demonstrated that the prevailing rate of interest of commercial transaction is 18% or more and for this purpose he produced some bills issued to the assessee by various suppliers for this year, in which it is clearly mentioned that in case of late payment interest @18% to 26% to be charged. Similarly, he has also explained that the assessee itself has stipulated the charging of interest @24% from its customers for late payment. Before us Ld. Counsel for the assessee also explained that the interest rate charged by banks @ 12% to 15% on C.C limits or bank loans, which includes some other hidden charges and it is also fact that bank while sanctioning loan put quite onerous liabilities like submission of stock statements, project report by Chartered Accountant, timely payment of instalments and also satisfactory securities of equal amount or more of loan. According to Ld. Counsel for the assessee this loan taken from bank is for fixed period and payment is made by the end of the period with constant monitoring and checks. Whereas, the loan from the family members and relatives can be obtained and returned without any hustles so there is premium on the same and this a normal market practice. We find that the assessee has tried to explain his case from all angles and moreover the decision relied upon by Ld. Counsel for the assessee of Hon'ble Bombay High Court in the case of Indo Saudi Services (Travel) Pvt. Ltd.(supra), wherein it is held as under:- “5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the Commissioner Of Income Tax(Appeals) was wrong in disallowing M/s. B.P. Chemicals half percent commission to the sister concern of the assessee during the assessment years 1991-92 and 1992-93. The learned advocate appearing for the appellant is also not in a position to point out how the assessee evaded payment of tax by the alleged payment of higher commission to its sister concern was also paying tax at a higher rate and copies of the payment orders of the sister concern were taken on record by the tribunal”. Similar view is taken by Hon’ble Gujarat High Court in the case of CIT vs. Gujarat Gas Financial Services Ltd. (2015) Taxman 532 (Guj). In view of the above facts and circumstances, we are of the view that since the assessee as well as the relatives, to whom assessee has paid interest are being taxed higher rates, the entire exercise undertaken by the Assessing Officer is neutral exercise as far as the payment of tax is concerned and there is no question of evading of payment of tax by any of the parties. Further, Hon'ble Bombay High Court has clearly laid down that CBDT in its circular No.6-P dated 06/07/1968 debars the Assessing Officer from not allowing such payment made to relatives and sister concerns, where there is no attempt to evade the tax. Respectfully following the decision of the Hon'ble Bombay High Court (supra) and going by the facts of the case, we allow the claim of the assessee.”
5. In view of the above decision of the Tribunal in assessee’s own case, we set aside the order of the ld.CIT(A) and direct the AO to delete the addition.” 5.3.2 Following the decision of the Coordinate Bench of the Tribunal in the assessee’s own case in dated 18.05.2016 for A.Y. 2009-10 and ITA No. 6214/Mum/2013 dated 22.08.2016 for A.Y. 2010-11, we set aside the order of the learned CIT(A) and allow the assessee’s claim on this issue. The AO is accordingly directed. Consequently, ground No. 1 of assessee’s appeal is allowed.