VARUN SATYAPAL SINGHAL,VADODARA vs. THE INCOMETAX OFFICER, WARD-1(2)(3( NOW THE DCIT, CIRCLE-1(1)(1), VADODARA

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Smt. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member

ITA No. 636/Ahd/2023 Assessment Year 2013-14

Varun Satyapal Singhal Income Tax Officer, 376-GIDC, Ward-1(2)(3), GIDC Makarpura, Vs Vadodara, Now Baroda, Gujarat- DCIT, 390010 Circle-1(1)(1), Vadodara PAN: AXZPS9257P (Appellant) (Respondent) Assessee Represented: Shri Parimalsinh B. Parmar, A.R. Revenue Represented: Ms. Saumya Pandey Jain, Sr.D.R. Date of hearing : 13-03-2024 Date of pronouncement : 10-06-2024 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-

This is an appeal filed by the assessee against the order of National Faceless Appeal Centre (NFAC), Delhi, in proceeding u/s 250 vide order dated 23/06/2023 passed for the Assessment Year 2013-14.

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appeal. Accordingly, Ground Nos. 3, 4 & 5 of assessee’s appeal are dismissed as not pressed.

During the course of assessment proceedings it was noticed by AO that the appellant has paid interest @15% and up on deposits and unsecured loans and most of the persons are covered u/s 40A(2)(b) of the Act. For instance, in the case of M/s Mariya Ship Breaking Pvt. Ltd, who is a person covered

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u/s 40A(2)(b) of the Act, the appellant has paid interest @15% however received interest from the same person @11% per annum.

The appellant stated that he has paid interest 15% to most of the persons who are not covered u/s 40A(2)(b) except Mariya Ship Breaking Pvt. Ltd. Subhadra Steel, Payal Singhal.

We have paid 15% interest to Mariya and Subhadra in line with the interest paid to outside parties so, there is no excess payment of interest. Appellant stated that they had received order from Reliance Industries so, they were in need of finance which they could not arrange from banks as it involves lengthy and time consuming procedures and without finance they might have lost contracts with Reliance Industries so, it was a prudent decision.

As per the provisions of section 40A(2)(a) of the I.T. Act, 1961, the appellant is not allowed any expenditure incurred in respect of which the payment has been made to the parties covered u/s. 40A(2)(b) if the same is excessive or unreasonable having regards 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 appellant or the benefit derived by or accruing to him there. The appellant has earned interest from M/s Mariya Ship Breaking Pvt. Ltd @11% and paid interest to the same party @15% and failed to substantiate the excess payment of interest as in the case of most of the outside parties, the appellant obtained loan in the month of February 2013, however, the appellant has made purchases from Reliance Industries between 17.08.2012 to 08.11.2012. The AO was very much right in disallowing interest expenses of Rs. 14,06,585/-.

In view of the above, this ground of appeal is, accordingly, dismissed and the addition made by the Ld. AO on this account is, hereby, confirmed.”

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assessee submitted that only three parties viz M/s. Mariya Ship Breaking Pvt. Ltd., M/s. Payal Singhal and Shree Subhadra Steel P. Ltd. are related parties, as is evident from the Tax Audit Report (at Page No. 12 of the Paper Book). Accordingly, the Ld. Counsel for the assessee submitted that disallowance u/s. 40A(2)(b) of the Act can be made only in respect of related parties. The said provisions cannot be invoked in order to make disallowance in respect of payments to unrelated parties. Therefore, on this count, disallowance u/s. 40A(2)(b) in respect of interest paid to 17 unrelated parties deserves to be deleted.

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cause notice and as to why the interest paid to unrelated parties should be disallowed. The Ld. Counsel for the assessee drew our attention to Page No. 22 of the Paper Book and submitted that as per Schedule 9 of the financial statements, the aforesaid parties are reflecting as debtors in the books of accounts on which the assessee was also paying interest.

8.1. Lastly, the Ld. Counsel for the assessee submitted that Section 40A(2)(b) of the Act envisages disallowance in respect of “excessive” amount paid to “related parties”. However, in the case of two unrelated parties “Amar Steel Industries and Mundra Sale Corporation, the A.O. has disallowed the entire interest expenses instead of making addition only with respect to “differential amount”. The Ld. Counsel for the assessee submitted that this fact was categorically brought to the notice of the assessing officer (reference Page 3 of Assessment Order and page 18 of Ld. CIT(A)’s

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order). However, the submission of the assessee was ignored. Accordingly, it was submitted that disallowance is clearly against the scheme of the Act and hence, deserves to be deleted.

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disallowance made u/s. 40A(2)(b) in respect to unrelated parties is liable to be deleted.

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were rendered by her for legitimate needs of business of assessee company, disallowance under section 40A(2)(b) being misconceived was to be set aside. In the case of Anilkumar P. Soni Vs ACIT (in ITA No. 2511/Ahd/2013), the ITAT made the following observations: “2. Facts of the case are in a narrow compass. The assessee-an individual trades in precious metal gold, jewellary etc. He filed return on 27-09-2008 declaring total income of Rs. 1,50,21,552/- along with agricultural income of Rs. 1,88,424/-. The Assessing Officer took up scrutiny. He noticed the assessee to have debited interest in P&L account @ 24% as paid to M/s. Devsatya Corporation, Geetaben D. Soni and Shardaben P. Soni amounting to Rs. 13,32,550/-, Rs. 6,73,930/- and Rs. 7,39,790/-; respectively as against that paid in other cases @ 18%. The Assessing Officer accordingly invoked section 40A(2) (b) of the act to benchmark assessee's interest payment @ 18% and computed the corresponding interest disallowance @ 6% coming to Rs. 6,86,717/- thereby treating 24% interest in question as excessive. The CIT(A) upholds Assessing Officer's action.

12.1. In the case of Sharma Cars P. Ltd. Vs DCIT (in ITA No. 1655/Ahd/2015), the ITAT made the following observations: “9. A bare perusal would indicate that provisions of section can be invoked mainly three situations; (a) of the expenditure is incurred is excessive or unreasonable considering fair market value, or (b) it is not incurred for the purpose of legitimate business need of the assessee, (c) it is excessive or

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unreasonable having regard to the benefits derived by the assessee. Sub- clause (b) of the section contemplates relationship of the persons to whom payment was made vis-à-vis the management of an assessee. In other words on account of their relationship with the management, they may not take undue advantage from the assessee. In other words, considering the payment made by an assessee to a particular person, who has an advantageous position on account of relationship with the assessee, then some undue advantage be not extended by the assessee to such person. That relationship has been explained in clause (b). Thus, in plain understanding, if an assessee availed service, goods or facilities from any person who falls within the ambit of sub-clause (b) of section 40A(2) and payment made to such related person is excessive in the understanding of the AO than the fair market value of such services, goods or facilities, then, excessive amount will not be allowed to an assessee as a deduction. The AO has to establish that services, goods and facilities availed by the assessee from such related party can be availed from the open market at a lesser price. Only then, he will disallow the claim of expenditure made by the assessee. If we apply this logic to the finding recorded by both the authorities, then it would reveal that both the authorities have miserably failed to demonstrate fair market value of services rendered by these related employees. Neither the AO nor the ld.CIT(A) had demonstrated anywhere that the person to whom salaries have been paid by the assessee could not command that salary in the open market or persons having more caliber could be employed at a lesser salary by the assessee. They have merely compared the payment of salary vis-à-vis turnover of the assessee as well as salary paid in earlier years. That is not the purpose of section 40A(2). Business needs have to be determined by the businessman and not by the Assessing Officer, and if it is appeared to the AO that a particular person could not fetch this much salary from the open market, only then he can disallow part of that salary.

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the AO. He has not disbelieved the relationship of employees and employer. He has disbelieved that salary was paid in excessive. Similarly, the ld.CIT(A) has observed that the assessee failed to produce any documentary evidence in support of the details of work, profile of the related person. A perusal of the chart reproduced above, the assessee has disclosed their qualification, branch in which they are working. It was for the AO to carry out a study, whether similar employees are getting lesser salary in the market. Onus was not upon the assessee, rather it was for the Revenue to demonstrate that salary paid by the assessee is excessive. They have not provided any evidence in that regard. The AO has simply made a comparison between the salaries paid in earlier years vis-à-vis this year. But that cannot be sole criterion. Therefore, taking into consideration the facts and circumstances, we are satisfied that the AO failed to bring evidence on record to demonstrate the fact that the assessee has availed services of related persons at a higher price than the one which could be availed at a lower rate from the open market. We allow this ground of appeal and delete disallowance of Rs.1,50,73,321/-.”

12.2. In the case of Kashi Exports Pvt. Ltd. Vs DCIT (in Tax Appeal No. 156 of 2003 order dated 15.12.2014), in this case, the Hon’ble Gujarat High Court made the following observations: “4. At the outset, Mr. Soparkar, learned Advocate for the appellant, invited our attention to a recent decision of this Court in Tax Appeal No. 1058 of 2006, Dated : 26.11.2014, in the case of “TAKTAWALA GLASS IND. PVT. LTD. VS. ACIT”, wherein, this Court, under similar circumstances, answered the question of law raised, therein, in favour of the assessee and against the Revenue. While disposing of the Tax Appeal No. 1058 of 2006, this Court placed reliance on the decision of this Court in “CIT III VS. AHKOK J. PATEL”, [2014] 43 Taxmann.com 227 (Gujarat), wherein, in Para-8 it is observed as under;

“8. That the assessee who is in the business of transportation claimed disallowance with respect to motor bus rent paid to various persons for transportation contracts. The AO was of the view that the assessee has failed to produce any comparative market price and that the nature of work carried out by the aforesaid persons is general in nature. The Rs.15,49,163/for AO AY disallowed 200506 and Rs.14,97,668/for AY 200607 out of the total payment of bus rent under section 40A(2)(b). With respect to AY 2006-07 AO also made disallowance of Rs.93,25,426 made

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under section 40(a) (ia) of the Act by holding that the amendment carried out by Finance Act, 2010 can be held to be retrospective from AY 2005- 06.

Now, so far as the disallowance made under section 40A(2)(b) of the Act on the ground of motor bus rent is concerned, it appears that the AO disallowed 5% of the total payments towards motor bus rent by observing that the assessee has failed to reconcile the difference in payments as per tax audit report and as submitted during the assessment proceedings and had also not produced any comparative prices. The learned CIT(A) deleted the said disallowances by observing that the AO has not made out any case for excessive or unreasonable payments to the related purpose towards the motor bus rent. The learned CIT(A) also observed that no comparative prices for similar transport services was cited by the AO and therefore, was not justified in making ad hoc disallowance of 5% under section 40A(2)(b) of the Act and therefore, the CIT(A) as such rightly deleted the disallowances made under section 40A(2)(b) of the Act. Considering the provisions of Section 40A(2)(b) of the Act and the Evidence Act, if the AO was of the opinion that the payment for which disallowance is claimed, is excessive or unreasonable. In that case, it was for the AO to assess fair market price and give comparative instances for payment for similar transport service. In absence of such comparative cases brought on record, as rightly observed by the ITAT it was not open for the AO to make disallowance under section 40A(2)(b) of the Act. While deleting disallowance made by the AO under section 40A(2)(b) of the Act, the learned ITAT has observed and held in para 7 as under :

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goods, services or facilities. Unless there is a categorical finding about the fair market value and the assessee has an opportunity to be heard on Assessing Officers finding about such fair market value, there cannot be an occasion to make a disallowance under section 40A(2). The very scheme of Section 40A(2) does not envisage an ad hoc disallowance as has been made in the present case. For this short reason alone, the impugned deletion of disallowance must stand confirmed. There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer, had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the AO has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assesses disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.

We are in complete agreement with the view taken by the ITAT and the observations made by the learned ITAT while deleting disallowances made by the AO under section 40A(2)(b) of the Act on motor bus rent. No error has been committed by the learned ITAT which calls for interference of this Court. No question of law much less any substantial question of law arises.”

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associates is concerned, it is required to be noted that it is the contention on behalf of the revenue that as such the company paid the interest at different rates from different persons / companies and therefore, the same was rightly disallowed under Section 40A(2) (b) of the Act. However, it is required to be noted that except aforesaid there was no basis for the AO to come to the conclusion that amount of interest paid at the rate of 12% would relate to the concerned parties was otherwise excessive and/or unreasonable. It is not the case on behalf of the revenue that considering the market rate the aforesaid interest charged at the rate of 12% can be said to be excessive and / or unreasonable. Under the circumstances, solely assessee for because whatever the reasons/ different rates by that itself cannot be a ground to come to the conclusion that charging of interest at higher rate than charged from other party was excessive and / or unreasonable. Under the circumstances, both the learned CIT(A) as well as learned ITAT have rightly deleted the disallowance of Rs. Rs.1,22,13,280/made by the AO u/s 40A(2)(b) of the Act. We are in complete agreement with the view taken by the learned Tribunal. Under the circumstances, question no. 2(a) is answered against the revenue.”

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allowance of labour charges paid to the female relatives of the Director of the assessee Company and that on facts and seeing that the law declared is in favour of the assessee, the disallowance could not have been made in the facts of the case. We held that the interpretation of Section 40A(2)(b) would not permit disallowance when there was no finding the effect that the labour charges paid were in excess of the fair market charges and that the authorities below disallowed the labour charges without ascertaining the fair market value of the same.”

12.3. Accordingly, in view of the facts of the instant case, we observe that the assessing officer and Ld. CIT(A) have not given any specific finding as to how the aforesaid interest rate paid by the assessee was excessive and unreasonable specially in the light of the facts that the funds obtained by the assessee were without any security, there was no immediate obligation to repay the funds in the near future and such loans were taken without any security. In addition, we note that the assessee had also filed application under Rule 46A, in which the assessee had filed additional evidences in the form of Benchmarking Prime Lending Rate of SBI and Personal loan rates of SBI (reference Page Nos. 226/227 of the Paper Book). However, it is observed that the assessing officer has not given any adverse remark in the remand report (reference Page Nos. 253-257 of Paper Book). Accordingly, looking into the instant facts and circumstances of the case, we are of the considered view that the impugned disallowance is not liable to be sustained.

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assessing officer made addition of Rs.46,79,882/- u/s 68 of the Act in respect of certain unsecured loans obtained from the following parties, which in turn has been confirmed by ld. CIT(A): Sr. No. Name of the party Amount 1 Jagruti H Mehta 709251 2 Kishor K Shah 500000 3 Rekhaben Modi 1500000 4 Shree Subhadra Steel P. Ltd. 1320631 5 Varshaben R Doshi Total 46,79,882

In view of the above, unsecured loans worth Rs.46,79,882/- is rightly treated as unexplained and the same is added to the total income of the appellant u/s 68 of the Act by AO.

In view of the above, this ground of appeal is, accordingly, dismissed and the addition made by the Ld. AO on this account is, hereby, confirmed.”

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before the Tax Authorities, the details of supporting evidences filed by the assessee are given below for ready reference: 1) Jagruti H. Mehta: Rs.7,09,251/- ➤ Confirmation-Pg.55 of P/B ➤ PAN details - Pg.55 of P/B ➤ Acknowledgment of ITR Pg.56 of P/B ➤ Bank statement Pgs.233 r.w. 255 of P/B;

2) Kishor K. Shah: Rs.5,00,000/- ➤ Confirmation - Pg.57 of P/B ➤ PAN details - Pg.57 of P/B ➤ Bank statement - Pgs.58-60 of P/B ➤ Acknowledgment of ITR-Pg.207 of P/B

3) Rekhaben Modi: Rs.15,00,000/-

➤ Correct name is "Rakshaben Modi"; ➤ Confirmation - Pg.61 of P/B ➤ Acknowledgment of ITR Pg.62 of P/B ➤ PAN details - Pg.62 of P/B ➤ Bank statement - Pg.63 of P/B

4) Shree Subhadra Steel P. Ltd.: Rs.13,20,631/- ➤ Confirmation - Pg.64 of P/B ➤ Acknowledgment of ITR Pg.65 of P/B ➤ PAN details - Pg.65 of P/B ➤No fresh funds have been received during the year;

5) Varshaben R. Doshi: Rs.6,50,000/- ➤ Confirmation - Pg.208 of P/B

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➤ PAN details - Pg.208 of P/B ➤ ITR & Address details - Pg.208 of P/B ➤ Bank statement - Pgs.209-210 of P/B

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allowed. The balance grounds of appeal raised by the assessee are general in nature and do not require any specific adjudication.

Order pronounced in the open court on 10-06-2024

Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 10/06/2024 True Copy आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद