No AI summary yet for this case.
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: SHRI GEORGE GEORGE K.
Per GEORGE GEORGE K.,JUDICIAL MEMBER:
This appeal, at the instance of the assessee, is directed against the order of
the CIT(A), Kozhikode dated 06/10/2016. The relevant assessment year is 2009-
10.
The solitary issue for my consideration is whether the disallowance of
interest paid to related concern amounting to Rs.8,67,766/- by invoking the
provisions of sec. 40A(2) is justified or not.
2 I.T.A. No.13/Coch/2017
The brief facts of the case are as follows:
The assessee is a partnership firm engaged in the wholesale business of
cigarettes, biscuits, confectionaries etc. For the assessment year 2009-10, the
return of income was filed on 06-07-2009 declaring, total income of Rs.
7,38,310/-. The assessment was completed vide order dated 12/12/2011 u/s.
143(3) of the I.T. Act. In the assessment completed, the Assessing Officer had
disallowed a sum of Rs.8,67,767/- being excessive interest paid to related party’s
concerns. The relevant finding of the Assessing Officer reads as follows:
“During the year, the assessee incurred an expenditure of Rs.44,27,661/- towards finance costs. A perusal of this account reveals that out of the total finance costs, an amount of Rs.22,59,569/- is seen as paid to M/s. Maneklal Purushotham & Sons. It is reported in the prescribed audit report that M/s. Maneklal Purushotham & Sons falls under the purview of section 40A(2)(b). The assessee was specifically directed to furnish the computation of interest amounting to Rs.22,59,569/- paid to M/s. Maneklal Purushotham & Sons.
2(a). Assessee submitted that they have paid interest @ 19.21% to M/s. Maneklal Purushotham & Sons. But from the submitted computation of interest statement, it is noticed that the assessee has paid interest to M/s. Maneklal Purushotham & Sons @ 19.47%. The interest is seen as charged on a daily basis.
2(b) A perusal of the partners current account reveals the following. All the partners namely Ms Sarala R Mehta, Ms Purnima M Mehta, Ms Sonali alia Henas S Mehta, Sandeepkumar Mehta and Ms Ms Neeru M Mehta together have transferred Rs.44,03,065.88 (the credit balance available in their current account) to M/s. Maneklal Purushotham & Sons narrated as to Maneklal on 01.04.2008. The very same amount is again introduced into their current account narrated as by Maneklal on 31.03.2009.
2(c) The submitted account copy of the loan account of M/s. Maneklal Purushotham & Sons reveals that the transfer of Rs.44,03,065.88 from the partners current is not towards the loan liability of the firm. The opening loan liability as on 01.04.2008 is Rs.1,12,42,537.61. M/s. Maneklal Purshotham &
3 I.T.A. No.13/Coch/2017
Sons has advanced the very same amount of Rs.44,03,065.88 received on transfer from the partners current account to the firm as loan on 01.04.2008 and the opening loan liability is worked out as Rs.1,56,45,603.49 and charged interest @ 19.47.
2(d) If the partners have not transferred the amounts standing in their current account, the firm has to pay interest to the partners @ 12% only as per the statute. More importantly, if the partners have not transferred the amounts standing in their current account, the liability of the firm towards unsecured loan will not be increased from Rs.1,12,42,537.61 to Rs.1,56,45,603.49 as on 01.04.2008.
2(e) The assessee has not furnished any evidence to prove that the payment of interest @ 19.5% to M/s. Maneklal Purushotham & Sons is for the benefit or the interest of its business. In view of the above facts, I am of the view that the payment of interest over and above the rate 12% to M/s. Maneklal Purushotham & Sons is excessive., unreasonable and not for the legitimate needs of the business. As such, the interest payment to M/s. Maneklal Purushotham & Sons has to be restricted to the prevailing rate of interest @ 12%. Accordingly, an addition of Rs.8,67,766/- being interest paid over and above 12% is made to the total income returned by invoking the provisions of Section 40A of Income Tax Act, 1961.”
Aggrieved by the assessment order, the assessee preferred an appeal
before the first appellate authority. The CIT(A) confirmed the addition and
dismissed the appeal filed by the assessee.
Aggrieved by the order of the CIT(A), the assessee is in appeal before the
Tribunal. The Ld. Counsel for the assessee reiterated the submissions m ade
before the IT authorities. The Ld. DR on the other hand relied on the findings of
the Assessing Officer and the CIT(A).
I have heard the rival submissions and perused the material on record. In
the instant case, the assessee was paying interest @ of 12% on the credit
4 I.T.A. No.13/Coch/2017
balance to the partners. These credit balances were withdrawn from the
partners’ account and were given to the related concern, namely, M/s. Maneklal
Purushotham & Sons. M/s. Maneklal Purushotham & Sons, in turn, advanced
the money to the assessee-firm at a higher rate of interest at 19.5%. The
CIT(A) in the impugned order had reproduced the current account of the
partners of the assessee-firm. The CIT(A) has given a categorical finding that
the money kept in the current account of the partners which were entitled to
interest of only 12%, were withdrawn and reinvested in the assessee-firm
through the related concern at an interest rate of 19.5%. Had the partners’
capital account not been withdrawn, the assessee would have been liable only
for interest at a rate of 12%. By withdrawing from the partners’ capital account
and placing these funds with the related party HUF and thereafter advancing to
the assessee as loan for higher rate of interest at 19.5% is only a devise/ruse to
divert the assessee’s income to related party namely, HUF. Therefore, invoking
the provisions of section 40A(2) and disallowing interest payments in the
relevant assessment year is justified. Hence, orders of the I.T. authorities are
confirmed. It is ordered accordingly.
5 I.T.A. No.13/Coch/2017
In the result, the appeal filed by the assessee is dismissed. Pronounced in the open court on 21st-04-2017.
Sd/- (GEORGE GEORGE K.) JUDICIAL MEMBER
Place: Kochi Dated: 21st April, 2017 GJ Copy to: 1. M/s. Empee Credit Corporation, Silk Street, 8/189, Calicut-673 082. 2. The Assistant Commissioner of Income-tax, Circle-1(1), Calicut. 3. The Commissioner of Income-tax(Appeals), Kozhikode. 4. The Pr. Commissioner of Income-tax, Kozhikode. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order 9 (ASSISTANT REGISTRAR) I.T.A.T., Cochin