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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI VIJAY PAL RAO & SHRI B.M. BIYANI
आदेश / O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by appeal-order dated 18.08.2023 passed by learned Commissioner of Income-Tax (Appeals), NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 04.12.2017 passed by ITO-4(1), Bhopal [“AO”] for Assessment-Year [“AY”] 2015-16, the assessee has filed this appeal on following grounds:
“(1) That the disallowance of Rs. 12,06,018/- out of interest on unsecured loans be held to be bad and unjustified on the facts and circumstances of the case. The disallowance made be quashed and deleted.
Raina Garg, Bhopal AY 2015-16 (2) That the addition of Rs. 4,00,000/- being amount received from M/s. AB Corporation be held to be bad and unjustified. The addition made be deleted. (3) That the addition of Rs. 3,88,790/- be held to be bad and unjustified. The addition made be deleted. (4) That the disallowance of Rs. 6,250/- being payment of VAT on sale of vehicle be held to be unreasonable and unjustified. The disallowance made be deleted. (5) In the alternative and without prejudice to the grounds stated above the additions and disallowances made by the ld. AO and upheld by Ld. CIT(A) be held to be high and unreasonable and be suitably reduced.”
The case was called twice but none appeared on behalf of assessee nor any adjournment request filed. The case-file shows that on an earlier hearing on 15.01.2024, the assessee filed a written request for adjournment and accordingly the case was adjourned to 30.01.2024 and a notice of new date was served upon assessee’s e-mail address given in Form 36. However, nobody appeared on 30.01.2024 from assessee’s side nor any adjournment application filed. Still, in the interest of justice, the hearing was again adjourned to 06.02.2024 (today) and the new date was notified to assessee on same e-mail id. Still nobody has appeared nor any adjournment application filed. The Ld. DR for revenue/respondent was ready and willing to argue the case. It is further observed that the assessee has made detailed submissions during first-appeal and assessee’s submissions are re- produced by CIT(A) in Para No. 3 of his order, hence the case can be decided on the basis of available material. Therefore, the hearing is proceeded ex- parte qua assessee and case is being disposed of after hearing Ld. DR for revenue and after considering the material available on record.
Raina Garg, Bhopal AY 2015-16
The background facts leading to present appeal are such that the assessee-individual is engaged in the business of tendu leaves under the proprietary concern named M/s Garg Trading Company. The assessee filed her return of income of AY 2015-16 declaring a total income of Rs. 58,70,090/- which was taken for scrutiny-assessment and statutory notices u/s 143(2)/142(1) were issued from time to time and duly complied by assessee. Ultimately the AO passed assessment-order u/s 143(3) assessing total income at Rs. 78,80,798/- after making certain additions. The assessee challenged those additions in first-appeal to CIT(A) but could not succeed fully. Now, the assessee has come in next appeal before us on various grounds as mentioned earlier.
Ground No. 1:
In this ground, the assessee challenges the disallowance of Rs. 12,06,018/- made by AO out of interest paid on unsecured loans.
Ld. DR for revenue carried us to para No. 4 of assessment-order where the AO has made this disallowance. Basically, the AO has observed that the assessee paid interest @ 15% on ‘unsecured loans’ taken from 6 related persons which was higher than the interest paid by assessee @ 12% on ‘secured loan’ taken from Punjab National Bank. Although the assessee submitted to AO that the interest rate of 15% was justified and reasonable in her business and common prevalent in market on ‘unsecured loans’, the AO rejected assessee’s reply and restricted deduction to 12% and disallowed
Raina Garg, Bhopal AY 2015-16 excess component of 3%. Ld. DR strongly supported the order of AO and prayed that the assessee has paid higher interest to related persons, therefore disallowance made by AO is very much in order in terms of section 40A(2) although the AO has not specifically mentioned section 40A(2) in assessment-order. Ld. DR prayed that the disallowance must be upheld.
We have considered submission of Ld. DR. At first, we find that the assessee made following submission to CIT(A):
“GROUND No. 1 (Disallowance of Rs. 12,06,018/- out of interest): During the relevant year, appellant debited interest payment of Rs. 71,73,659/- to her profit and loss account, the detail of which are as under :-
Raina Garg, Bhopal AY 2015-16
Raina Garg, Bhopal AY 2015-16
Raina Garg, Bhopal AY 2015-16 However, the CIT(A) passed following order rejecting asessee’s submission:
“4.1.1 On examination of this issue, it is observed that the appellant has obtained unsecured loan on higher rate from the related parties. Therefore, it is construed that the appellant is giving benefit to the related parties by paying interest on higher rate on account of unsecured loan. The appellant has accepted that it is easier to get unsecured loan from the family members in comparison to the market. However, this contention is contrasting in nature as these related parties have skin in the business of the firm, yet they are providing unsecured loan to the same firm on higher rate. The appellant has only tried to explain the procedure of obtaining unsecured loan from the market, however, there exist no difficulty of obtaining unsecured loan which suggests that the appellant has faced actual difficulty due to market condition to pay higher rate of interest. There is also no evidence on record which support that the appellant was not able to get additional loan from the banks which was available at lower rate. Therefore, the appellant has failed to explain the reason for paying lint on unsecured loan from the related parties. Further, the appellant has not furnished any comparative rate of interest prevailing in local market and made only general submission. Thus, this ground of appeal is hereby dismissed.”
7. On a careful consideration, we find that the assessee has rightly pointed out two fallacies in the order of AO, namely (i) The AO has compared interest rate of 15% paid by assessee on ‘unsecured loans’ taken from friends/relatives with interest rate of 12% paid on ‘secured loan’ taken from bank ignoring the fact for obtaining ‘secured loan’ from bank the assessee had to provide security. Further, loans from relatives/friends can be easily taken as per needs whereas taking loan from bank is cumbersome. The assessee has also submitted that interest rate as high as 24% or 21% had also been treated as fair and reasonable in certain judicial decisions; and (ii)
Out of 6 persons to whom interest was paid, only 3 persons were related persons in terms of section 40A(2) read with 2(41) but the AO has wrongly branded all 6 persons as ‘related persons’. We find very much substance in point (i) of assessee that the AO is wrong in making a blanket comparison of Raina Garg, Bhopal AY 2015-16 two unconnected variables i.e. interest rate of 15% paid by assessee on ‘unsecured loans’ with interest rate of 12% paid on ‘secured loans’ to bank.
Nobody can dispute that the interest rate on unsecured loans would always be higher because the lender would charge a premium for taking higher risk for not being secured. This risk factor coupled with other aspects like no documentation, ease of taking loan, etc. cannot be ignored. Even otherwise, section 40A(2) which is the only section prescribing for disallowance of payments made to related persons, empowers the AO to make disallowance only if “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 therefore..” Therefore, the AO can make disallowance with reference to the ‘fair market value’ and the AO is also required to consider the ‘legitimate needs of business’; the AO does not have authority to make a blanket disallowance just by comparing two unconnected variables. At the cost of repetition, we may mention that the fair market value i.e. interest rate on unsecured loans shall always be much higher as compared to the interest rate on secured loans. The submission (ii) of assessee is also very much correct that only 3 persons fall under the ambit of section 40A(2) read with section 2(41) and not all 6 persons for which the AO has made disallowance. The order of CIT(A) in para no. 4.1.1 re-produced above does not decide the assessee’s submission judicially. After taking into account
Raina Garg, Bhopal AY 2015-16 entire conspectus of issue, we find that the disallowance made by AO and upheld by CIT(A) is not warranted. Therefore, we delete the disallowance.
This ground is allowed.
Ground No. 2:
In this ground, the assessee challenges the addition of Rs. 4,00,000/- made by AO in respect of a loan taken from M/s AB Corporation treating the same as unexplained.
Ld. DR carried us to Para No. 5 of assessment-order where the AO has made this addition. Basically, the AO has observed that the assessee has taken a loan of Rs. 4,00,000/- from M/s AB Corporation. The AO has further noted that the assessee was required to furnish the copies of income-tax return, confirmation and bank a/c of the lender showing transactions and in response, the assessee submitted requisite details. But on perusal, the AO observed certain shortcomings, namely (i) the lender has declared Nil income in return of income, (ii) there were cash deposits made in Bank A/c of lender just before giving loan to assessee. Although the assessee submitted that the lender made cash sales, entered such cash sales in own cash-book and out of cash available in cash-book made cash- deposits in bank a/c but the AO was rejected assessee’s submission and held that the cash deposits made in lender’s a/c must be unexplained cash of assessee. The AO concluded that the reply of assessee is general; that the audited books of lender have not been produced for verification; that mere
Raina Garg, Bhopal AY 2015-16 filing of income-tax return by the lender is not enough and mere use of banking channel does not make the transaction sacrosanct. Ultimately, the AO concluded that the assessee has not proved creditworthiness of lender and genuineness of transactions and made addition. Ld. DR also carried us to the order of first-appeal, para No. 4.2.1, where the CIT(A) has upheld the addition by observing thus:
“4.2.1 On examination of this issue, it is observed that the appellant has tried to explain the source of Rs. 4,00,000/- received from M/s. AB Corporation as unsecured loan but the explanation was not found to be satisfactory by the AO. Also, the AO has elaborately discussed the issue in the assessment-order. During the appellate proceedings, the appellant furnished some extracts of cash book, profit and loss account, balance sheet etc. which is hand written and no audit or certification is available. Therefore, these documents are not reliable. Further, the appellant did not make any request for admitting as additional evidence as these evidences were never furnished before the AO. Also, the appellant has not furnished any documentary evidence to substantiate that it has paid interest on such unsecured loan. In view of these facts and circumstances, I am of the considered view that the appellant has failed to explain genuineness of transaction and creditworthiness of the lender and therefore, the addition of Rs. 4,00,000/- made by AO being unexplained cash credit is hereby confirmed. Therefore, this ground of appeal is also dismissed.” Ld. DR submitted that the assessee has failed to prove the creditworthiness of the lender as also the genuineness of transactions, therefore the lower- authorities were quite justified in making/upholding addition. He prayed to uphold the addition made by AO.
10. We have considered submissions of Ld. DR and also perused the orders of lower-authorities. At first, we find that the assessee made following submission to CIT(A) qua this issue:
Raina Garg, Bhopal AY 2015-16 “GROUND NO. 2 (Addition of Rs. 4,00,000/- as unexplained cash credit) Raina Garg, Bhopal AY 2015-16
From submissions of assessee, following facts emerge:
(i) The assessee took loan of Rs. 4,00,000/- on 16.03.2015 through a/c payee cheque drawn on lender’s Current A/c with bank; (ii) The lender is a partnership firm with PAN: AAUFA0411H and not an individual.
(iii) A/c confirmation, copy of ITR, bank statement and the financial statements of lender were filed by assessee.
(iv) It was submitted to AO that the lender is engaged in business of tobacco and the cash deposits in bank a/c were made out of sales done by the lender. The lender made cash deposits in bank a/c on 15.12.2014 and 16.02.2015 but issued cheque to assessee much later on 16.03.2015.
On a thoughtful consideration, we find that the documents filed by assessee are sufficient enough to prove all three ingredients of section 68, namely identity and creditworthiness of lender and genuine of transactions.
Further, the lender is a partnership firm, engaged in tobacco business and given loan to assessee through a cheque drawn on Current A/c. Therefore, there should not be any serious doubt with regard to creditworthiness and genuineness. Hence, we do not find any strength in the addition made by AO. Consequently, the same is deleted and this ground is also allowed.
Raina Garg, Bhopal AY 2015-16 Ground No. 3:
In this ground, the assessee challenges the disallowance of Rs. 3,88,790/- upheld by CIT(A) out of disallowance of Rs. 3,98,440/- made by AO in respect of interest expenditure for diversion of funds by giving interest-free loans/advances.
During assessment-proceeding, the AO observed that the assessee has given following interest-free loans/advances:
S.No. Name of the person to whom interest free Amount in loan/advance was given (Rs.) 1. M/s. Garg Industries 20,16,000/- 2. M/s.Chanda Enterprises 2,23,914/- 3. D.K.Jain, Sehore 5,00,000/- 4. Krishna Singh Arora 5,00,000- 5. Sakshi Garg 80,420/- Total 33,20,334/- The AO further observed that on one hand the assessee has taken interest- bearing loans from banks, relatives and friends and on other hand given the above interest-free loans/advances for non-business purposes. Therefore, when the AO show-caused assessee to explain justification of giving loans/advances, the assessee filed following reply which is re-produced in assessment-order:
“The assessee is a partner in M/s Garg Industries holding 25% shares in the P&L A/c of the said firm. No profit/interest etc. was received by the assessee from the said firm during the relevant year. The balance with M/s Chanda Enterprises is old and the amount of Rs. 2,23,914/- is recoverable against
Raina Garg, Bhopal AY 2015-16 interest. The principal amount from M/s Chanda Enterprises was already received in previous years. The amount to D.K. Jain has been provided on interest; however no interest was received from him during the relevant year. The amount to Shri Krishna Singh Arora is an advance against purchase of land. Copy of account of Sakshi Garg has already been placed on the record.
The amount of Rs. 80,420/- was paid to her in excess at the end of the year.
The said amount was recovered from her in FY 2015-16.”
During first-appeal also, the assessee filed same reply though in a detailed wording. The CIT(A), after due consideration, passed following order:
“4.3 Ground No. 3 relates to addition of Rs. 3,98,440/- being interest at the rate of 12% p.a. on advances of Rs. 33,20,334/-. During the assessment proceedings, the AO has noticed from the balance sheet of the appellant that it has given interest free loan/advance of Rs. 33,20,334/- to some related parties/concerns. These loans/advances were given to five persons. The appellant has submitted that she is a partner in M/s. Garg Industries holding with 25% share in Profit & Loss of the said firm and cannot be considered as interest free advance. In the case of loans/advances to M/s. Chanda
Enterprises, the Raina Garg, Bhopal AY 2015-16 (3,98,440-3,88,790). Thus, this grounds of appeal is partly allowed.” Raina Garg, Bhopal AY 2015-16
14. We find that the CIT(A) has passed a well-reasoned order giving details of the AO’s observations, assessee’s submissions and his own findings on this point. After due consideration, the CIT(A) has granted part-relief and upheld part-addition. Therefore, we do not have any reason to upset the well-reasoned order of CIT(A). Therefore, the addition sustained by CIT(A) is upheld. This ground is thus dismissed.
Ground No. 4:
In this ground, the assessee challenges the disallowance of Rs. 6,250/- being VAT paid by assessee on sale of a vehicle.
Ld. DR straightaway carried us to Page No. 8 of the order of CIT(A) where the assessee’s submission is re-produced. Referring to same, Ld. DR submitted that the assessee is having a depreciable block of vehicles held for business purpose and during the year, there was a sale of vehicle for Rs. 4,21,929/- which is deducted from block. However, the assessee has also purchased a new vehicle for Rs. 6,62,893/- and added the same to block, accordingly the assessee claimed depreciation u/s 32 which the AO has allowed. Ld. DR submitted that the block of vehicles was existing, still the assessee has claimed deduction of VAT paid on sale of vehicles as a revenue expenditure in P&L A/c instead of adjusting the same in block of assets. Ld.
Raina Garg, Bhopal AY 2015-16 DR submitted that the vehicle sold by assessee is a fixed asset forming part of depreciable block and not held by assessee as stock-in-trade, therefore the lower-authorities have rightly disallowed the same. On a careful consideration, we agree with submission of Ld. DR that the deduction of Rs. 6,250/- claimed by assessee is not a revenue expenditure and has been rightly disallowed by lower-authorities. At the same time, although we find that the if the VAT is adjusted in block of assets (by reducing sale proceed of vehicle sold), it would increase the WDV of block and consequently, the assessee would be entitled to a higher depreciation on Rs. 6,250/-. But since the amount involved is very petty and it would have a spiral effect on subsequent years, we think it appropriate to close this issue at this stage and do not make any disturbance to the depreciation and WDV of block. In conclusion, we only uphold the disallowance made by lower-authorities.
This ground is thus rejected.
Ground No. 5:
In this ground, the assessee makes a general plea that even if the additions/disallowances made by AO are upheld, the quantum of same is too high and must be reduced reasonably. Since we have already decided all grounds of assessee meticulously and deleted/upheld the additions/ disallowances made therein, we do not find any worth in this ground. The same is hereby dismissed.
Raina Garg, Bhopal AY 2015-16
Resultantly, this appeal is partly allowed.
Order pronounced in open court on 12.02.2024.