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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD
Before: SMT.ANNAPURNA GUPTAShri Piyush Gordhanbhai Patel
(Applicant) (Responent) : Shri Anil Thakkar, AR Assesseeby : Shri N.J. Vyas, Sr.DR Revenue by सुनवाई क� तार�ख/Date of Hearing : 17/01/2024 घोषणा क� तार�ख /Date of Pronouncement: 24 /01/2024 आदेश/O R D E R The present appeal has been filed by the assessee against order passed by the Commissioner of Income Tax(Appeals), National Faceless Appeal Centre, Delhi [in short referred to as ld.CIT(A)] under section 250(6)of the Income Tax Act, 1961 dated 12.5.2023,pertaining to Asst.Year 2016-17.
The grounds raised by the assessee are as under:
“1. Learned Commissioner of Income Tax (Appeals) erred in upholding disallowance of interest of Rs.1100729 made by Assessing Officer. He ought to have allowed the same considering the reasonability of rate of interest paid. Assessee paid interest @15% to persons specified under section 40A (2) (b) of the Act and interest @18% to others who are doing business of financing.
2. Learned Commissioner of Income Tax (Appeals) erred in upholding that interest of Rs. 729200/- paid to Navneetlal Ambalal Chokshi and Rs.
2 985500/-paid to Pankaj N. Chokshi as paid to persons specified u/s 40A(2)(b) of the Act. 3. Learned Commissioner of Income Tax (Appeals) erred in upholding the disallowance of bad debts of Rs. 80030/- made by Assessing Officer though conditions specified u/s 36(1) (iii) are satisfied.” 3. At the outset, the ld.counsel for the assessee stated that he was not pressing ground no.3 raised before us. Therefore ground no.3 is dismissed as not pressed.
The effective grounds, therefore, raised before us are ground no.1 and 2 and perusal of the same, reveals that they relate to the issue of disallowance of interest paid to persons specified under section 40A(2)(b) of the Actfor the reason that they were paid unreasonably high rate of interest. The order of the AO reveals the issue to have been dealt at para-2 to 4.3 wherein the AO noted the assessee to have made the payment of interest to loan depositors on loans amounting to Rs.43,60,509/- and which loan depositors, he noted, were persons specified under section 40A(2)(b) of the Act. The list of the loan-depositors as mentioned in para-4 of the order and the amount of interest paid to them along with rate of interest on which it was paid, finds mention at para-4.2 of his order as under:
The interest paid to these persons, amounting to Rs.11,00,729/-, was found to be excessive, and since these persons were noted to be specified persons as per the section 40A(2)(b) of the Act, the AO disallowed the saidexcess interest paid to them amounting to Rs.11,00,729/-. As per the AO, the prevailing market rate of interest was 12% while the assessee had paid interest to these persons at the rate of 15% to 18%.The ld.CIT(A) confirmed the disallowances.
The assessee has challenged the disallowance on two grounds viz. – i) That out of five persons noted by the AO to be specified persons in terms of section 40A(2)(b) of the Act, two did not qualify as specified persons in terms of the said section; These two persons are – Shri Navneetlal Ambalalal Chokshi, and Shri Pankaj N. Chokshi ii) That there is no basis for holding that the assessee has paid excess rate of interest to these parties;
4 6. I have gone throughthe orders of the AO and also the ld.CIT(A) and have also heard contentions of boththe parties.
Taking up the first contention of the assessee against disallowance of interest u/s 40A(2)(b) of the Act, that two persons did not qualify as specified person under the said section the assessee mentioned names of two persons as Shri Navneetlal Ambalalal Chokshi, and Shri Pankaj N. Chokshi and interest paid to him amounting to Rs.2,43,067/- and Rs.3,28,500/- was found tobe in excess of the prevailing market rate and disallowed by the AO. A perusal of the assessment order reveals that there was no basis for the finding by the AO that these two persons qualified as persons specified under section 40A(2)(b) of the Act. On the contrary, the ld.counsel for the assessee pointed out that even tax audit report, which was there before the AO did not include the names of these two persons in the list of specified persons under section 40A(2)(b) of the Act as disclosed in the tax audit report. My attention was drawn to page no.87 of the Paper Book filed by the assessee,which was annexure-no.7 of the Tax audit report for the impugned year, which showed the names of only three persons i.e. Diptiben P. Patel, Mayank P. Patel and Rohan P Patel qualifying as persons specified u/s 40A(2)(b) of the Act. The order of the ld.CIT(A), I have noted, also does not reveal the basis for upholding these findings of the AO by him. The only observation of the ld.CIT(A) in this regard at para 3.3 of his order is to the effect that “the AO discharged the primary onus by observing that the person to whom interest amount has been paid are persons specified under section 40A(2)(b) of the Act.”. The ld.CIT(A) thereafter goes on to say that the onus was on the assessee to prove otherwise, and since the assessee did not produce any evidence to prove otherwise, therefore, finding of the AO needs
5 to be accepted. The finding of the ld.CIT(A) at page no.6 is of his order in this regard are as under:
….. In my humble opinion, the appellant has not produced any evidence which could prove that the persons to whom he had paid interest at higher rate are not persons specified u/s.40A(2)(b) of the Act….
On a consideration of the above, I am unable to agree with the Revenue authorities that these two persons viz. Shri Navneetlal Ambalalal Chokshi, and Shri Pankaj N. Chokshi classified as specified persons under section 40A(2)(b) of the Act. The assessee, has evidenced the fact of these persons not qualifying as specified persons under section 40A(2)(b) of the Act by producing certificate of an Accountant i.e. Chartered Accountant by way of tax audit report furnished by him excluding the names of the two persons in the list of persons specified under section 40A(2)(b) of the Act, specifically asked for to be reported in the tax audit report furnished under section 40A(2)(b) of the Act. The AO and the CIT(A) both have given no basis for finding that these two persons classified as specified persons under the said section. The onus cannot be on the assessee to prove the negative that these persons did not qualify as specified persons under section 40A(2)(b) of the Act. In the absence of any basis with the Revenue authorities to find so, and the assessee having furnished necessary evidence to prove to the contrary,I see no reasons to confirm the order of the ld.CIT(A) holding that Shri Navneetlal Ambalalal Chokshi, and Shri Pankaj N. Chokshi as persons specified under section 40A(2)(b) of the Act.
Inview of the above, since these two persons having not been established by the Revenue authorities to be persons specified under section 40A(2)(b) of the Act, the excessive interest allegedly paid
6 bythe assessee to these persons disallowed by the AO in terms of the said section cannot be sustained. The disallowance, therefore, made of the excessive interest paid to them amounting to Rs.2,43,067/- and Rs.3,28,500/- respectively is directed to be deleted.
Ground No.2 raised by the assessee, is therefore, allowed.
The contention raised by the assessee in ground no.1 is that the disallowance of excess interest made by the AO and confirmed by the ld.CIT(A) under section 40A(2)(b) of the Act is not sustainable for the reason that the Revenue has been unable to demonstrate that the assessee had paid more than the fair market rate of interest chargeable on loans.
I have perused the orders of the AO and also of ld.CIT(A), and I have noted that while the assessee paid interest on unsecured loans to the aforementioned five parties at the rate of 15% to 18%, the AO and the ld.CIT(A) found the fair market rateof interest on loans to be 12%, and surprisingly, as rightly pointed out by the ld.counsel for the assessee, there is no basis mentioned either by the AO or by the ld.CIT(A) for finding this 12% rateof interest to be prevailing market rate of interest. Except for making a mention of this fact, there is no basis mentioned either by the AO or the ld.CIT(A). Without a finding regarding the fair market rate of interest , the AO, I hold, could not have arrived at a conclusion that the rate of interest paid by the assessee to persons specified under section 40A(2)(b) at the rate of 15% or 18% was excessive warranting disallowance of expenditure under section 40A(2)(b) of the Act.
Inview of the same, finding merit in the arguments of the ld.counsel for the assessee, I hold that the disallowance of interest under section 40A(2)(b) of the Act is not sustainable for this reason
7 also. The entire disallowance of Rs.11,00,729/- is accordinglydirected to be deleted.
Ground no.1 is raisedby the assessee is allowed.
In the result, the appeal of the assessee is partly allowed. Order pronounced in the Court on 24th January,2024 at Ahmedabad.