ACIT 4(1), INDORE vs. SHRI SATISH JAIN, INDORE

आदेश / O R D E R

Per B.M. Biyani, A.M.:

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 return of income of AY 2013-14 under consideration on 28.09.2013 declaring a total income of Rs. 63,66,110/-, which was subjected to scrutiny and statutory notices u/s 143(2) and 142(1) were issued from time to time. Finally, the Ld. AO passed order of assessment u/s 143(3) at a total income of Rs. 2,32,69,355/- after making certain disallowances. Being aggrieved, the assessee filed appeal to Ld. CIT(A), who allowed part-relief. Now, both revenue and assessee, being aggrieved by the order of Ld. CIT(A), are before us.

“1. Whether in the facts and in circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,50,22,016/- made on account of sales commission expenses u/s 37 of the Income Tax Act without appreciating the factual position of the issue.

2. Whether in the facts and in the circumstances of the case, Ld. CIT(A) has erred in law in restricting the disallowance made u/s 14A of the Income Tax Act in respect of interest expenses incurred for investment in subsidiaries and administrative expenses.” Further, the assessee has raised following grounds in its Cross-Objection:

“1. On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeal)-II erred in confirming the disallowance of interest expenses under section 40A(2)(b) of the Act. 2. Accordingly, the Appellant humbly prays that the said disallowance be deleted.” 4. We first adjudicate Revenue’s appeal and thereafter Assessee’s Cross- objection.

Revenue’s Appeal – Ground No. 1:

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 6. Facts qua this issue are such that the assessee paid a commission/brokerage of Rs. 1,50,22,016/- to its representatives (called “agents/brokers”) and claimed the same as a deduction in computing taxable income of business. During assessment-proceeding, when the Ld. AO called for details of this expenditure, the assessee submitted a statement showing names of the agents / brokers, their PANs, amount of commission paid and TDS. The assessee also made a detailed submission on the methodology of business and justification of commission-payment, which is reproduced by Ld. AO in assessment-order. The assessee pleaded before Ld. AO that the actual buyers of the products are farmers and the agents/brokers/representatives of assessee travel to various villages, contact the farmers to create demand, advertise products, complete the formalities, undertake payment-follow-up, etc. and for such services, the impugned commission was paid. However, the Ld. AO observed that the line of business of assessee is such that more than 80% of the sales is effected through nodal agencies of the Govt. and, therefore, no agent/broker is required. Holding such a view, the Ld. AO concluded that the assessee has claimed a bogus-deduction of commission-payment and disallowed deduction.

“3. This ground of appeal is with regard to disallowance of commission of Rs.1,50,22,016/-. I have carefully gone through the assessment order as well as submission of the appellant in this regard. 3.1 The appellant has submitted that the appellant’s case was covered in its own case by the order of Hon'ble Income Tax Page 3 of 9

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 Appellate Tribunal Indore Bench on the identical issue. The impugned reopening was made pursuant to assessment order for A.Y.2011-12 wherein the disallowance on the issue of commission was made. The said disallowance in order of AO for A.Y.2011-12 which forms the very basis of instant reopening and consequent disallowance of commission had been deleted by order of Ld. CIT(A) for A.Y.2011-12 and 2012-13. Further the order of Ld. CIT(A) deleting the disallowance for AY 2011-12 had been upheld by the I.T.A.T. following decision of jurisdiction HC in case of Pure Pharma (MP). Copy of I.T.A.T. order has been submitted by the appellant during the course of appellant proceedings. 3.2 The appellant has also relied on the decisions of CIT vs. Gobald Motor Services P. Ltd. (100 ITR 240) (Mad) and Amarjothi Pictures v. CIT [1968] (69 ITR 755)(Mad) in support his case. After carefully gone through the findings of the case, it is clear that this issue on commission has been covered by the order of I.T.A.T. Bench. Hence I don’t find any basis for sustainability of the disallowance of Rs.1,50,22,016/- on account of expenses under the head of commission and this ground of appeal is allowed.”

8. During hearing before us, both sides fairly agree that the issue is directly covered by the decision of ITAT, Indore Bench in assessee’s own case for AY 2011-12 and AY 2012-13 in order dated 16.01.2016 and ITA No. 1356/Ind/2016 order dated 12.07.2018, copies of orders are placed on record. Ld. AR also submitted that the decision of ITAT for AY 2011-12 has also been upheld by Hon’ble High Court of Madhya Pradesh in ITA No. 92 & 93/2017 dated 01.02.2018, a copy of the judgement is also filed. As the issue is squarely covered, we do not find any reason to deviate from the consistent view being taken and also upheld by the higher forum i.e. Hon’ble High Court. We are, therefore, inclined to uphold the action of Ld. CIT(A) in this regard and dismiss Ground No. 1 of the revenue.

Revenue’s Appeal – Ground No. 2:

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 10. During assessment-proceeding, the Ld. AO made a total disallowance of Rs. 9,75,779/- by invoking section 14A on the basis that the assessee made investment in shares of companies from which exempted-dividend was earned. The Ld. AO has worked out the amount of disallowance in terms of Rule 8D, which consists of two components, viz. (i) interest-component, and (ii) standard disallowance for other expenses.

“5.14 I have carefully gone through the AO’s findings as well as evidences which were submitted by the appellant during the course of appellate proceedings and I don’t agree with the view of the AO. It is also a fact that in the appeal for earlier assessment year, the disallowance under section 14A was restricted to 1 percent of average investments in terms of Rule 8D of the Act. Thus, in view of the above judicial decisions, this ground of appeal is allowed in favour of appellant and accordingly, the said disallowance u/s 14A of the IT Act is being restricted to 1% of average investments of Rs.1,19,567/- [1% (1,17,99,007+1,21,14,449)/2]=Rs.119567/-.”

12. Now the revenue is aggrieved by action of Ld. CIT(A).

13. Ld. AR drew our attention to Para No. 5.2 of the order of Ld. CIT(A) and submitted that as on 31.03.2013, the capital of assessee stood at Rs. 2,67,08,233/- and the investment in shares was just Rs. 1,17,99,007/-, which shows that the own capital of assessee is more than double of the investment in shares. Ld. AR submitted that these figures clearly establish that the assessee has not utilized borrowed funds for making investment in shares. According to Ld. AR, when the investments are not made out of borrowed funds, there is no justification in making disallowance on account of interest-component even while applying Rule 8D. Ld. AR also submitted that identical issue came up in assessee’s own case in preceding AY 2012-

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 13, order dated 12.07.2018 (supra), where the ITAT held as under:

“7. We, therefore, in the given facts and circumstances of the case and also the revenue being unable to controvert the findings of the learned Commission of Income-tax (Appeals), are of the considered view that no interest disallowance was called for u/s 14A of the Act as the assessee had sufficient interest-free funds in the shape of share capital to cover up the investment in equity shares and accordingly are not inclined to make any interference in the findings of the learned Commissioner of Income-tax (Appeals).” Ld. AR submitted that the decision of ITAT in assessee’s own case is directly favouring the claim of assessee that no disallowance is required to be made for interest-component. Ld. DR fairly agreed to this submission of Ld. AR.

Assessee’s Cross-Objection – Ground No. 1 and 2:

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 15% interest-rate is quite justified. However, being unsatisfied with the submission of assessee, Ld. AO made a disallowance of Rs. 6,82,710/-.

“7.2 I am satisfied with the contention of the AO because the bank interest rate is also fixed @ 12% which is lesser than the appellant’s interest rate on which he had taken the loan to his relatives. Thus, I don’t find any reason to interfere with the findings of the AO. Accordingly, this ground of appeal is dismissed.”

18. During hearing before us, Ld. AR submitted that the assessee has taken loans from specified persons @ 15% as per legitimate needs of business. Ld. AR submitted that the assessee has borrowed money from specified persons at different times then the borrowings made from other persons and as such there cannot be a blind comparison. Ld. AR also submitted that at the relevant time, the assessee was having credit facility from bank @12% interest rate and that too on providing security to the bank. Further, the bank was recovering several charges from assessee such as processing charges, inspection charges, renewal charges, etc. Further, several formalities had to be done for taking loan from bank. On the other hand, neither there is any security offered nor any formality or charges in the case of loans taken from specified persons. Ld. AR submitted that due to these material differences, the assessee was justified in paying 15% interest to specified persons. Ld. DR placed a strong reliance upon the order of Ld. AO and argued that the Ld. AO has rightly disallowed 3% excess interest.

“(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 Page 7 of 9

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 of the business or profession of the assessee or the benefit derived by or accuring 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 :” On a careful reading of this provision, we observe that disallowance under this section is attracted only if the Assessing Officer is of the opinion that the 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 therefrom. Thus, in the present case, the Ld. AO could have been well within the power to disallow 3% interest only if he could find that the interest was excessive or unreasonable having regard to its fair market rate, or considering the legitimate need of the business of assessee or the benefit derived by the assessee by borrowing funds. But it is very clear that the Ld. AO has not tested the situation on any of these yardsticks. Ld. AO has simply made a blanket comparison of the interest rate of 15% paid to specified persons against 12% interest-payment to other persons and came to a straight-forward conclusion that interest-payment is excessive. We feel that such a blanket comparison without going into the fair market rate or the legitimate needs of business or the benefit derived by assessee therefrom is not sufficient for section 40A(2). We also note that section 40A(2)(b) is a disallowance provision, therefore a heavy burden lies on the head of Ld. AO to prove the existence of required parameters and then only he can make a disallowance. Having failed to do so, in our view, the disallowance made by Ld. AO is not in accordance with the requirement of section 40A(2). Alternatively, the assessee is justified in claiming that the bank rate of interest is a universal rate of industry and can be said to be fair, subject to the adjustments on account of the variations between the terms like security-requirement by bank, levy of charges, fulfillment of formalities etc. Therefore, 3% margin on account of these factors cannot be said to be excessive or unreasonable. In view of this, we are satisfied that 15% interest-rate paid by assessee on unsecured loans taken from relative cannot be said to be unreasonable. In view of these reasoning, we do not Page 8 of 9

Satish Jain CO No.10/Ind/2018 Assessment Year 2013-14 find adequate reason for the disallowance made by Ld. AO. Accordingly, we are inclined to delete the disallowance. The Grounds raised by assessee in Cross-Objection are allowed.

Order pronounced as per Rule 34 of I.T.A.T. Rules, 1963 on 14/09/2022.