M/s.Empee Credit Corporation, Calicut V. The ACIT, Calicut

ITA 12/COCH/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3932 (ITAT-COCHIN)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: SMC
• Next Hearing Date: 19-04-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 16-01-2017
• Court: TRIBUNAL
• Department Lawyers: A DHANARAJ
• Assessee Lawyers: P RAGHUNATHAN
• Keywords: Reason to believe
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER I.T.A. NO.12 /COCH/2 017 ASSESSMENT YEAR : 200 8 - 0 9 M/S. EMPEE CREDIT CORPORATION, SILK STREET, 8/189, CALICUT-673 082 [PAN: AAAFE 5988M] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), CALICUT. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT ) ASSESSEE BY SHRI P. RAGHUNATHAN, ADV . REVENUE BY SHRI A. DHANARAJ, SR. DR DATE OF HEARING 20/04/2017 DATE OF PRONOUNCEMENT 21 ST /04/2017 O R D E R 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 2008-09. 2. THE SOLITARY ISSUE THAT ARISES FOR MY CONSIDERA TION IS WHETHER THE CIT(A) IS JUSTIFIED IN CONFIRMING THE ASSESSMENT ORDER DISALL OWING A SUM OF RS.3,71,890/- U/S. 40A(2)(A) OF THE I.T. ACT BEING EXCESS INTERES T PAID TO THE ASSOCIATE CONCERNS AND RELATED PARTIES. I.T.A. NO.12/COCH/2017 2 3. THE BRIEF FACTS IN RELATION TO THE CASE ARE AS FOLLOWS: THE ASSESSEE IS A FIRM. IT IS ENGAGED AS AN WH OLESALE DEALER OF CIGARETTES, BISCUITS, ETC. FOR THE RELEVANT ASSESSMENT YEAR 20 08-09, THE RETURN OF INCOME WAS FILED ON 29/08/2009, DECLARING A TOTAL INCOME O F RS.12,35,720/-. THE ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT VID E ORDER DATED 14/12/2010. IN THE ASSESSMENT COMPLETED, THE ASSESSING OFFICER HAD DISALLOWED A SUM OF RS.3,71,890/- BY INVOKING THE PROVISIONS OF SECTIO N 40A(2)(A). THE ASSESSEE- FIRM HAD A TOTAL LOAN LIABILITY OF RS.235 LAKHS. OU T OF RS.235 LAKHS OF TOTAL LOAN LIABILITY, RS.121 LAKHS WAS LOANS FROM SCHEDULED BA NKS WHICH WERE SECURED LOANS HAVING INTEREST AT THE RATE OF 12.5%. THE BALANCE LOAN OF RS.114 LAKHS WAS RAISED MAINLY FROM A RELATED PARTY HUF FOR WHICH TH E ASSESSEE WAS PAYING INTEREST AT THE RATE OF 16%. THE ASSESSING OFFICER WAS OF THE VIEW THAT WHEN LOANS ARE AVAILABLE FROM SCHEDULED BANKS FOR 12% IN TEREST, THE PAYMENT OF INTEREST AT THE RATE OF 16% TO THE RELATED PARTIES WAS UNNECESSARY AND EXCESSIVE. THE ASSESSING OFFICER HELD THAT INTEREST ABOVE 12.5 % IS TO BE DISALLOWED. ACCORDINGLY, 3.5% (I.E. 16% - 12.5%) WAS DISALLOWED ON LOAN TAKEN AMOUNTING TO RS.114 LAKHS. 4. AGGRIEVED BY THE ORDER OF THE ASSESSMENT, THE ASSESSEE PREFERRED AN APPEAL TO THE FIRST APPELLATE AUTHORITY. BEFORE THE CIT(A) , IT WAS CONTENDED THAT THE LOANS RECEIVED FROM BANKS WERE SECURED LOANS WHEREA S LOANS FROM RELATED PARTIES WERE UNSECURED LOANS WHICH NATURALLY WILL B EAR HIGHER RATE OF INTEREST. I.T.A. NO.12/COCH/2017 3 IT WAS CONTENDED THAT BUSINESS EXIGENCIES WOULD NEC ESSITATE AVAILING LOANS ON SHORT NOTICE AND THE LOANS ARE AVAILABLE READILY ON LY FROM RELATED PARTIES. IT WAS FURTHER CONTENDED THAT THERE CANNOT BE COMPARISON B ETWEEN SECURED LOANS AND UNSECURED LOANS SINCE THE RATE OF INTEREST FOR THE SECURED LOANS WILL BE MUCH LOWER THAN THE UNSECURED LOANS. 5. THE CIT(A) HOWEVER REJECTED THE CONTENTIONS R AISED AND DISMISSED THE APPEAL OF THE ASSESSEE. THE CIT(A) WAS OF THE VIEW THAT DURING THE CURRENT YEAR, SECURED LOANS FROM THE BANKS WAS REDUCED WHEREAS TH E UNSECURED LOANS CARRYING A HIGHER RATE OF INTEREST HAD INCREASED TO THE TUNE OF RS.23 LAKHS. THE CIT(A) WAS OF THE VIEW THAT THERE WAS NO NECESSITY OF THE ASSESSEE TO HAVE BORROWED MONEY FROM THE RELATED PARTIES WHICH IS CARRYING A HIGHER RATE OF INTEREST WHEN THERE IS NO EVIDENCE ON RECORD TO SHOW THAT THE BAN KS HAD DENIED LOANS TO THE ASSESSEE. THE CIT(A) FURTHER CONFIRMED THE ASSESSI NG OFFICERS FINDING THAT WHEN INTEREST INCOME IS BIFURCATED BETWEEN VARIOUS CONCERNS/INDIVIDUAL, THEY WOULD GET THE BENEFIT OF NON TAXABLE MAXIMUM MARGIN AND THE BALANCE IS ONLY TAXED. THE RELEVANT FINDING OF THE CIT(A) READS AS FOLLOWS: 8. ON GOING THROUGH THE BALANCE SHEET OF THE APPE LLANT, IT IS SEEN THAT THE OPENING BALANCE OF SECURED LOANS WAS RS.1,37,46,686 .54 AND THE CLOSING BALANCE IS RS.1,20,98,076.19. THE AVERAGE OF THIS AMOUNT WO RKS OUT TO RS.1,29,22,381. DURING THIS YEAR, THE APPELLANT PAID INTEREST OF RS .12,33,039/- TO THE BANKS, WHICH WORKS OUT TO LESS THAN 10%. THE OPENING BALAN CE OF THE UNSECURED LOANS LOANS, I.E., LOANS FROM RELATED CONCERNS WAS RS.91, 95,957.61 WHILE THE CLOSING BALANCE IS RS.1,14,02,257.61. THE AVERAGE OF THIS WORKS OUT TO RS.1,02,99,107/- AND ON THIS THE APPELLANT PAID INTEREST OF RS.16,95 ,317.54 DURING THE YEAR, WHICH WORKS OUT TO 16.5%. I.T.A. NO.12/COCH/2017 4 8.1 FROM THE ABOVE, IT IS VERY CLEAR THAT DURING TH E YEAR, THE BANK LOANS WHICH WERE AVAILABLE AT CHEAPER RATE WAS DECREASED BY AN AMOUNT OF RS.16.5 LAKHS WHILE THE COSTLIER LOANS FROM THE RELATED CONCERNS WERE INCREASED BY RS.23 LAKHS. THE APPELLANT WAS NOT ABLE TO FURNISH ANY EVIDENCE TO SHOW THAT THE BANKS DENIED LOANS REQUESTED BY THE APPELLANT FIRM. AS BU SINESS AND PROFIT OF THE APPELLANT WAS INCREASING FROM YEAR TO YEAR, IN MY O PINION, THERE WAS NO REASON TO BELIEVE THAT BANKS WERE RELUCTANT TO GIVE MORE L OANS TO THE APPELLANT. 8.2 FROM THE ABOVE FACTS, IT APPEARS THAT THE FIND INGS OF THE ASSESSING OFFICER THAT FIRMS PARTNERS ARE ALSO MEMBERS OF THE ASSOCI ATE CONCERN AND UNDUE BENEFIT IS GIVEN TO THE RELATIVES AND ALSO REDUCED TAX LIABILITY OF THE FIRM IS CORRECT. I ALSO AGREE WITH THE ASSESSING OFFICER TH AT WHEN THE INTEREST INCOME IS BIFURCATED TO VARIOUS CONCERNS/INDIVIDUALS, THEY WI LL GET THE BENEFIT OF NON- TAXABLE MAXIMUM AND BALANCE IS ONLY TAXED. IN VIEW OF THIS, I AGREE WITH THE ASSESSING OFFICER IN DISALLOWING THIS AMOUNT AS PER THE PROVISIONS OF SECTION 40A(2)(A) OF THE INCOME TAX ACT, 1961. THEREFORE, T HE ADDITION IS CONFIRMED. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASS ESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE REITERA TED THE SUBMISSIONS BEFORE THE INCOME TAX AUTHORITIES. HE HAD ALSO GIVEN A BRIEF N OTE CONTAINING VARIOUS JUDICIAL PRONOUNCEMENTS. THE RELIANCE ON THE JUDICIAL PRONO UNCEMENTS ARE ESSENTIALLY FOR THE PROPOSITION THAT FOR INVOKING SECTION 40A(2 ), NECESSARILY ASSESSING OFFICER HAS TO GIVE A FINDING THAT PAYMENTS MADE TO RELATED PARTIES IS IN EXCESS OF MARKET VALUE. IT WAS CONTENDED BY THE LD. AR THAT I N THE INSTANT CASE, THE ASSESSING OFFICER DID NOT ESTABLISH WHAT IS THE MAR KET RATE OF INTEREST FOR UNSECURED LOANS. 7. THE LD. DR ON THE OTHER HAND STRONGLY RELIED O N THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A). I.T.A. NO.12/COCH/2017 5 8. I HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE-FIRM HAD A TOTAL LOAN LIABILITY OF RS.235 LAKHS, OUT OF WHICH 121 LAKHS W ERE SECURED LOANS FROM SCHEDULED BANKS CARRYING A R ATE OF INTEREST @ 12.5% AND BALANCE RS.114 LAKHS WERE UNSECURED LOANS MAINL Y FROM THE RELATED PARTY HUF. THE UNSECURED LOANS FROM RELATED PARTIES WERE HAVING A RATE OF INTEREST @ 16%. THE RATE OF INTEREST FOR THE SECURED LOANS AND UNSECURED LOANS CANNOT BE COMPARED. THE GENERAL TRADE PRACTICE IS THAT UNSECU RED LOANS CARRY HIGHER RATE OF INTEREST COMPARED TO THE SECURED LOANS, BECAUSE, TH E LENDER IN CASE OF SECURED LOANS HAS MORE SECURITY AND CHANCES OF RECOVERY OF PRINCIPAL AND INTEREST ARE MUCH MORE. BUSINESS EXIGENCIES REQUIRE TAKING LOAN S ON SHORT NOTICE. ON SHORT NOTICE LOANS MAY NOT BE READILY AVAILABLE FROM THE SCHEDULED BANKS. IN THE INSTANT CASE, SANCTIONED LOANS FROM THE SCHEDULED B ANKS HAVE BEEN FULLY UTILIZED AND THE DEPARTMENT DOES NOT HAVE A CASE OTHERWISE. THE ASSESSEE CANNOT BE COMPELLED TO TAKE LOANS ONLY FROM THE SCHEDULED BAN KS. AVAILING LOANS FROM THE RELATED PARTIES FOR BUSINESS EXIGENCIES IS TO BE JU DGED FROM BUSINESSMANS POINT OF VIEW. THEREFORE, COMPARISON OF RATE OF INTEREST ON SECURED LOANS WITH THE INTEREST FOR UNSECURED LOANS IS NOT JUSTIFIED. IN THE INSTANT CASE, THE ASSESSING OFFICER HAS NOT BROUGHT ANYTHING ON RECORD TO SHOW THAT THE RATE OF INTEREST FOR UNSECURED LOANS @ 16% IS EXCESSIVE OF THE MARKET RA TE. HAVING FAILED TO DO SO, INVOKING PROVISIONS OF SECTION 40A(2)(A) FOR THE RE LEVANT ASSESSMENT YEAR IS NOT JUSTIFIED. THEREFORE, THE DISALLOWANCE OF EXCESS I NTEREST AMOUNTING TO RS.3,71,890/- IS SET ASIDE. IT IS ORDERED ACCORDI NGLY. I.T.A. NO.12/COCH/2017 6 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESS EE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 21 ST -04-2017. SD/- (GEORGE GEORGE K.) JUDICIAL MEMBER PLACE: KOCHI DATED: 21 ST 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),KOZHIKOD E. 4. THE PR. COMMISSIONER OF INCOME-TAX,KOZHIKODE. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T ., COCHIN