M/s. Sumanagal Forgings Pvt. Ltd., RAJKOT-GUJARAT V. The Additional Commissioner of Income Tax, Range-1, RAJKOT-GUJARAT

ITA 108/RJT/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76390 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 02-01-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 26-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J B JHAVERI D R
• Assessee Lawyers: DM RINDANI
• Keywords: Diversion of income; Question of law; Fair market value

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBULAL; RAJKOT BENCH, RAJKOT. BEFORE SHRI T. K. SHARMA JM AND SHRI B. R. JAIN AM ITA NO. 108/RJT/2012 / ASSESSMENT YEAR 2005-06. M/S SUMANGAL FORGINGS PVT. LTD., 8-B, NATIONAL HIGHWAY, VERAVAL (SHAPER), RAJKOT PAN : AADCS0020N ( / APPELLANT V/S THE ADDITIONAL CIT, RANGE-1, RAJKOT. / RESPONDENT ! ' #$ / ASSESSEE BY SHRI D.M. RINDANI, C.A. % ! ' #$ / REVENUE BY SHRI J.B. JHAVERI, D.R. # & ' ! ( / DATE OF HEARING 02-01-2014 ) ! ( / DATE OF PRONOUNCEMENT 02-01-2014 / ORDER PER B. R. JAIN, A. M. : THIS APPEAL BY THE ASSESSEE AGAINST THE ORDER DATE D 09/02/2012 OF SRI N.R. SONI, LEARNED CIT(A)-II, RAJKOT RAISES THE SOLITARY GROUND AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-II, RAJKOT HAS ERRED IN DISMISSING THE APPEAL AND UPHOLDING TH E DISALLOWANCE MADE U/S 40A(2)(B) OF THE I.T. ACT, BY THE ASSESSING OFFICER OF RS. 8,34,077/-, IS UNWARRANTED , UNJUSTIFIED AND BAD IN LAW. 2. BRIEFLY THE FACTS ARE THAT THE ASSESSEE IS IN TH E BUSINESS OF MANUFACTURE OF FORGING PARTS. THE ASSESSEE HAS DECL ARED INCOME OF RS. 21,27,520/- AND ITS ACCOUNTS ARE AUDITED. THE RETUR N WAS ACCOMPANIED WITH THE REPORT OF AUDITORS. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE A.O. FOUND THAT THERE IS INCREASE IN UNSECURED LOANS BY RS. 54,65,206/- AND OUTFLOW OF INTEREST PAID @ 18% AMOUNTING TO RS. 25,02,230/-. ALL THESE PERSONS WERE FOUND COVERED U/S 40A(2)(B) OF THE I.T . ACT, 1961 (HEREINAFTER ITA 108/RJT/2012 2 REFERRED AS THE ACT). ACCORDINGLY VIDE ORDERSHEET E NTRY DATED 13/12/2007, THE ASSESSING OFFICER RAISED SPECIFIC QUERY AS UNDE R:- EXPLAIN WHY INTEREST ON UNSECURED LOANS PAID TO RE LATIVES OF DIRECTORS RS. 25.02 LACS @ 18% SHOULD NOT BE CONSID ERED EXCESSIVE AS BANK LOANS ARE AVAILABLE AT MUCH CHEAPER RATE OF INTEREST. IN RESPONSE THERETO, THE ASSESSEE FURNISHED REPLY D ATED 17/12/2007 AND ARGUED THAT IT HAS INSUFFICIENT SECURITY TO RAISE A LARGER LOAN FROM THE BANK AND HENCE IT HAD TO TAKE UNSECURED LOANS AT HIGHER RATE OF INTEREST. THIS EXPLANATION OF THE ASSESSEE, HOWEVER, WAS NOT FOUND SATISFACTORY AS THERE WERE SUFFICIENT ASSETS AVAILABLE WITH THE ASSESSEE TO RAISE A LARGER LOAN AT CHEAPER RATES. THE A.O., HOWEVER, CONSIDERING THE A SSESSEES EXPLANATION THAT THERE ARE CERTAIN ADDITIONAL EXPENSES BY WAY O F PROCESSING AND RENEWAL CHARGES, STAMP DUTY CHARGE, STOCK INSURANCE ETC. THAT HAVE TO BE INCURRED ON RAISING SECURED LOANS AND THE FACT THAT THE ASSESSEE HAS RAISED LOAN FROM BANK @ 10.5% PER ANNUM, CONSIDERED IT REASONABLE TO ALLOW THE DEDUCTION OF INTEREST @ 12% BY INVOKING P ROVISIONS OF SECTION 40A(2)(B) OF THE ACT. HE PROCEEDED TO MAKE DISALLOW ANCE OF 6% OF INTEREST OUT OF INTEREST PAYMENT MADE @ 18% PER ANNUM ON THE LOANS AS CONTAINED IN PARA 6 OF THE ASSESSMENT ORDER REPRODU CED AS UNDER:- SR. NO. NAME OF DEPOSITOR INTEREST 18% INTEREST 12% EXCESS INT. PAID 1. ARVINDBHAI S SORATHIA (HUF) 67500 45000 22500 2. BIPINBHAI S SORATHIA (HUF) 67500 45000 22500 3. GEETABEN K SORATHIA 126230 84153.33 42077 4. HEMAXIBEN V SORATHIA 218250 145500 72750 5. HETALBEN H SORATHIA 207000 138000 69000 6. HITESH B SORATHIA (HUF) 67500 45000 22500 7. JAYSHREEBEN R SORATHIA 216000 144000 72000 8. KALPESH B SORATHIA (HUF) 67500 45000 22500 9. KAMLESH B SORATHIA (HUF) 90000 60000 30000 10. NILESH M SORATHIA (HUF) 90000 60000 30000 11. PRAFULABEN P SORATHIA 207000 138000 69000 12. PRAVIN D SORATHIA (HUF) 90000 60000 30000 13. RAMJIBHAI G SORATHIA (HUF) 67500 45000 22500 14. RANJANBEN A SORATHIA 198000 132000 66000 15. REKHABEN N SORATHIA 218250 145500 72750 16. SHANTABEN B SORATHIA 207000 138000 69000 17. SHILPABEN K SORATHIA 207000 138000 69000 18. VINOD D SORATHIA (HUF) 90000 60000 30000 TOTAL 2502230 1668153 834077 ITA 108/RJT/2012 3 THE TOTAL DISALLOWANCE, THUS, STOOD MADE AT RS. 8,3 4,077/-. 3. THE LD. CIT(A) CONSIDERING THE ARGUMENTS AND THE MATERIAL LAID BEFORE HIM, FOUND NO MERIT IN THE CLAIM OF THE ASSE SSEE. HE ALSO PLACED RELIANCE ON THE JUDGMENT BY THE HONBLE SUPREME COU RT IN THE CASE OF BRITISH PAINTS INDIA LTD. 188 ITR 44 (SC) AND ALSO THE JUDGMENT BY THE HONBLE DELHI HIGH COURT IN THE CASE OF SIDDHO MAL & SONS 122 ITR 839 (DEL), THE RELEVANT PASSAGE OF WHICH IS REPRODUCED AT INTERNAL PAGE 8 OF THE IMPUGNED ORDER IS AS UNDER:- RELATIONSHIP BY ITSELF, WITHOUT MORE, CANNOT LEAD TO INFERENCE OF EXCLUDING THE POSSIBILITY OF A PAYMENT BEING WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. DEALING WITH RELATIVES IN CONTRAST WITH OR IN PREFERENCE TO STRANGERS IS NEITHER PROHIBITED BY LAW NOR CAN BE TABOOED. INDEED, IT IS NATURAL TO DO SO BUT THIS DO ES NOT GIVE A LICENCE TO COVER UP DISHONEST TRANSACTION OR IMPERMISSIBLE TRANSFERS. THE COURTS AND AUTHORITIES ARE NOT TO WEAR BLINKERS TO OVERLOOK OR CONDONE THE PASSING OFF OF PUBLIC REVENUE TO ONES OWN KITH AND KIN BY SUBTERFUGE OR CLANDESTINE OR CLEVER DEVICES CLOT HED IN LEGALISTIC JARGON. INSTEAD IT IS THERE DUTY TO LIFT THE VEIL O F APPARENT LEGALITY AND GET TO THE TRUTH OR SUBSTANCE OF A TRANSACTION TO D EAL WITH IT IN ACCORDANCE WITH LAW. IT IS ONLY APPROPRIATE, INDEED NORMAL, THE DEALINGS INVOLVING TRANSFER OF FUNDS TO NEAR AND DE AR ONES NEED TO BE LOOKED INTO WITH CARE AND CAUTION AND NECESSARY INFERENCE DRAWN IF THERE ARE ABNORMALITIES ATTACHING TO SUCH TRANSA CTION. RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF HONBLE MADRAS HIGH COURT IN THE CASE OF MOFUSIL WAREHOUSE & TRADING COMPANY LTD. VS. CIT 238 ITR 867 (MAD) AND THE RELEVANT PASSAGE, WHICH IS RE PRODUCED AT INTERNAL PAGE 8 OF HIS ORDER IS AS UNDER:- ACCORDING TO SECTION 40A(2)(B), IF THE AO IS OF TH E OPINION THAT ANY EXPENDITURE IS EXCESSIVE OR UNREASONABLE, HAVING R EGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES A VAILED OF, FOR WHICH PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSI NESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED B Y OR ACCRUING TO HIM THEREFROM, THEN SO MUCH OF THE EXPENDITURE AS I S SO CONSIDERED BY THE AO TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. THE LD. CIT(A) FOR REACHING HIS CONCLUSION ALSO TOO K SUPPORT FROM THE JUDGMENT RENDERED BY THE HONBLE KERELA HIGH COURT IN THE CASE OF SHRI ITA 108/RJT/2012 4 ANANDJI SHAH VS. CIT 51 TAXMAN 29. IN THE RESULT, H E DISMISSED THE APPEAL OF THE ASSESSEE. 4. IN APPEAL BEFORE US, THE ASSESSEES COUNSEL PLAC ED RELIANCE ON TRIBUNAL ORDERS IN OTHER CASES AS WELL AS THE ORDER S OF THE HIGH COURT THAT ARE KEPT ON RECORD. THE ASSESSEE ALSO PLACED ON REC ORD A THIRD MEMBER DECISION IN THE CASE OF ACIT VS. SHIRISH MAGANLAL R AVANI REPORTED AT (2013) 143 ITD 25 (RAJKOT)(TM). THE ASSESSEE ALSO TOOK SUPPORT FROM HIS OWN CASE DECIDED BY THE LD. CIT(A), GANDHINAGAR FOR SUBSEQUENT YEAR WHERE THE LD. CIT(A), GANDHINAGAR HAS CONSIDERED TH E PAYMENT @ 18% AS REASONABLE AND DELETED THE DISALLOWANCE. SINCE T HE A.O. FAILED TO DISCHARGE HIS ONUS THAT PAYMENT OF INTEREST BY ASSE SSEE IS UNWARRANTED OR EXCESSIVE, THE DISALLOWANCE NEEDS TO BE DELETED. 5. ON THE OTHER HAND, THE LD. D.R. CONTENDS THAT TH E IMPUGNED ORDER BEING REASONED AND SUPPORTED BY JUDICIAL PRONOUNCEM ENTS, CANNOT BE INTERFERED WITH AS THE ASSESSEE HAS NOT GIVEN ANY J USTIFICATION OR STAND TO SHOW THAT THE PAYMENT OF INTEREST @ 18% IS REASONAB LE. THE SUBSEQUENT YEARS, ORDER BY THE LD. CIT(A) CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE AS THE IMPUGNED ORDER IS OF A LATER DATE. RELI ANCE OF HONBLE SUPREME COURT JUDGMENT IN THE CASE OF BRITISH PAINT S INDIA LTD. 188 ITR 44 WHEREIN IT IS HELD THAT: IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESS ING OFFICER TO CONSIDER WHETHER OR NOT THE BOOKS DISCLOSE THE TRUE STATE OF ACCOUNTS AND THE CORRECT INCOME CAN BE DEDUCED THER EFROM. IT WAS FURTHER ARGUED THAT THE PAYMENT HAS BEEN MAD E TO THE RELATIVES AND PERSONS COVERED U/S 40A(2)(B) OF THE ACT, WHICH NOT BEING REASONABLE IS ONLY DIVERSION OF INCOME FROM THE COMPANY TO ITS OW N RELATIVES. IN CASE, THE HIGHER DEDUCTION OF INTEREST IS ALLOWED, IT WIL L SET A WRONG PRECEDENCE IN SUBSEQUENT YEARS AND LEGITIMATE TAX WILL NOT COME T O THE REVENUE. 6. HEARD PARTIES WITH REFERENCE TO MATERIAL ON RECO RD AND THE CASE LAWS BROUGHT TO OUR NOTICE. THE A.O. BY FINDING THAT THE ASSESSEE HAS PAID ITA 108/RJT/2012 5 INTEREST @ 10.5% ON SECURED LOANS AND CONSIDERING T HE FACTUM OF PAYMENT OF INTEREST AT 18% WAS SATISFIED THAT THE ASSESSEE HAS MADE EXCESSIVE PAYMENT OF INTEREST TO RELATED PARTIES. HE, THUS, R EQUIRED THE ASSESSEE TO JUSTIFY HIS CLAIM. UNDER SUCH FACTS AND CIRCUMSTANC ES OF THE CASE, THE BURDEN THAT LAY UPON THE A.O. STANDS DISCHARGED. TH EREAFTER BURDEN HAD SHIFTED ON THE ASSESSEE TO SHOW THAT THE PAYMENT OF INTEREST @ 18% IS REASONABLE. THIS BURDEN HAS NOT BEEN DISCHARGED BY THE APPELLANT. SUCH A VIEW FINDS SUPPORT FROM THE JUDGMENT RENDERED BY TH E BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHATRUNJAY DIAMONDS (2003) 2 61 ITR 258 (BOM.). THE APPELLANT, IN THE PRESENT CASE IN APPEAL, HOWEV ER, HAS NOT SHOWN NOR BROUGHT ON RECORD TO SHOW THAT THERE WAS PAYMENT OF INTEREST @ 18% TO OUTSIDE PARTIES IN THE YEAR UNDER CONSIDERATION OR IN ANY OF THE EARLIER OR SUBSEQUENT YEARS. NO OTHER JUSTIFICATION TO SHOW TH AT PAYMENT OF INTEREST @ 18% RATE IS REASONABLE WAS GIVEN NOR ANY COMPELLI NG CIRCUMSTANCES HAVE BEEN BROUGHT TO OUR NOTICE. THE VARIOUS TRIBUN AL JUDGMENTS DO NOT ADVANCE ANY SUPPORT TO THE CASE OF THE APPELLANT AS ALL SUCH CASES REVEAL THAT THESE PARTIES HAD RAISED LOANS FROM PERSONS OT HER THAN RELATIVES ALSO AT A RATE HIGHER THAN THAT WAS PAID TO RELATED PERS ONS. THE FACTS ARE ALSO NOT SHOWN TO BE SIMILAR TO THE CASE OF THE APPELLAN T BEFORE US. LIKEWISE THE TWO HIGH COURT JUDGMENTS BROUGHT ON RECORD BEFORE U S DO NOT LAY ANY RATIO AS THE DECISION IN THESE CASES HAVE BEEN TAKEN ON PECULIAR FACTS AND NO SUBSTANTIAL QUESTION OF LAW WAS FOUND INVOLVED. THE APPELLANT ALSO SEEKS TO RELY ON THE ORDER OF LD. CIT(A) IN HIS OWN CASE FOR A SUBSEQUENT YEAR FOR ANSWERING THE ISSUE IN HIS FAVOUR. THE OPERATIVE PO RTION OF THE ORDER DATED 24/01/2011 OF THE LD. CIT(A) GANDHINAGAR IN ASSESSM ENT YEAR 2006-07 IN ASSESSEES OWN CASE IS REPRODUCED AS UNDER:- 6. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND TH E SUBMISSIONS OF THE ASSESSEE. CONSIDERING THE FACTS THAT THE LOANS FROM RELATED PERSONS WERE UNSECURED LOANS FOR WHICH NO SECURITY IS REQUIRED TO BE GIVEN OR PROPERTY IS TO BE PLEDGED A ND SAVES THE ASSESSEE CERTAIN EXPENSES AND EFFORT; I HOLD THAT P AYMENT OF INTEREST ITA 108/RJT/2012 6 @ 2 TO 3% HIGHER THAN THE RATE AT WHICH SECURED LOA NS ARE AVAILABLE FROM BANKS IS REASONABLE. THEREFORE, IN THE LIGHT O F FACTS OF THE PARTICULAR CASE, PAYMENT OF INTEREST @ 18% IS HELD REASONABLE; AND THE DISALLOWANCE IS DELETED. PERUSAL OF THIS ORDER, REVEALS THAT THE LD. CIT(A), THOUGH, CONSIDERED IT REASONABLE TO ALLOW DEDUCTION @ 18% ON LOANS RAISED FROM RELATED PARTIES, TOOK REASON TO ALLOW SUCH DEDUCTION OF INTEREST @ 2 TO 3% HIGHER THAN THE RATE AT WHICH SECURED LOANS ARE AVAILABLE. CONSIDER ING THE REASONING TAKEN BY THE LD. CIT(A) FOR ALLOWING DEDUCTION OF INTERES T @ 2 TO 3% HIGHER THAN THE RATE AT WHICH THE SECURED LOANS ARE RAISED FROM BANKS AND THE FACT THAT THE ASSESSEE RAISED LOANS FROM BANK @ 10.5% AND BY APPRECIATION OF ALL MATERIAL FACTS AND RATIO OF JUDGMENTS SOUGHT TO BE RELIED BEFORE US BY THE APPELLANTS COUNSEL, WE CONSIDER IT REASONABLE TO A LLOW A DEDUCTION OF INTEREST @ 15% AND REMIT THE MATTER BACK TO THE A.O . FOR MAKING THE DISALLOWANCE OF DEDUCTION OF INTEREST ACCORDINGLY. 7. IN THE RESULT, APPEAL BY ASSESSEE STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON 02-01-2014. SD/- SD/- ( T. K. SHARMA ) ( B. R. JAI N ) #*% /JUDICIAL MEMBER $( #*% / ACCOUNTANT MEMBER *$+ ,*-/ ORDER DATE 02/01/2014 /RAJKOT *RANJAN / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT- M/S SUMANGAL FORGINGS PVT. LTD., RAJKO T. . 2. /RESPONDENT- THE ADDITIONAL CIT, RANGE-1, RAJKOT. 3. #-2- & 3 / CIT-I, RAJKOT. 4. & 3 - / CIT (A)-II, RAJKOT. 5. 789 , , / DR, ITAT, RAJKOT 6. 9; <= / GUARD FILE. TRUE COPY *$+ #$ / BY ORDER , PRIVATE SECRETARY, , INCOME TAX APPELLATE TRIBUNAL, RAJKOT.