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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 2012-13.
The solitary issue for my consideration is whether the disallowance of
interest paid to related concern amounting to Rs.8,99,190/- by invoking the
provisions of sec. 40A(2) is justified or not.
2 I.T.A. No.14/Coch/2017
The brief facts in relation to the case are as follows:
The assessee is a partnership firm engaged in the wholesale distribution of
ITC products. For the assessment year 2012-13, the return of income was filed
on 10-08-2012 declaring, total income of Rs. 10,56,080/-. The assessment was
completed vide order dated 28/01/2015 u/s. 143(3) of the I.T. Act. In the
assessment completed, the Assessing Officer had disallowed a sum of
Rs.8,99,190/- being excessive interest paid to related party’s concern. The
relevant finding of the Assessing Officer reads as follows:
“4. I have considered the contention of the learned AR. The similar case was discussed in the case of the assessee for the AY 2009-10 and assessment was completed after disallowing the interest paid over and above 12% to M/s. MP & sons as excessive. The appeal filed by the as against the order is pending for disposal. I have no other reason to deviate the decision taken by my predecessor. I have gone through the details furnished by the assessee and after taking into consideration all of the above the assessment is completed as under:
Excessive interest paid: On going through the P&L accounts it is seen that you have claimed an amount of Rs.60,12,358.98 as financial costs. Out of this an amount of Rs.31,88,025/- is seen paid as interest @19.5% to MP & Sons HUF and its members which is over and above the normal rates prevailing and is excessive, unreasonable and nor for the legitimate needs of the business. Therefore, the interest payment in excess of 14% of the interest paid is to be disallowed by invoking provisions of section 40A of the IT Act, 1961. Accordingly, an addition of Rs.8,99,193/- is made to the total income.”
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.
3 I.T.A. No.14/Coch/2017
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 14% on the credit
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 14%, 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 14%. 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 payment in the relevant
4 I.T.A. No.14/Coch/2017
assessment year is justified. Hence, orders of the I.T. authorities are confirmed.
It is ordered accordingly.
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
(ASSISTANT REGISTRAR) I.T.A.T., Cochin