Sha Tarachand Amichand, Vijayawada V. THE ACIT, Vijayawada

ITA 13/VIZ/2015

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9649 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 05-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T SATYANANDAM
• Assessee Lawyers: V SHIVA KUMAR
• Keywords: Fair market value
• Section: 142(1)

Judgement Text

ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.13/VIZAG/2015 ( / ASSESSMENT YEAR: 2010-11) SHA TARACHAND AMICHAND, VIJAYAWADA VS. ACIT, CIRCLE - 1(1), VIJAYAWADA [PAN: AARPT4585E ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI V. SHIVA KUMAR, AR / RESPONDENT BY : SHRI T. SATYANANDAM, DR / DATE OF HEARING : 26.12.2016 / DATE OF PRONOUNCEMENT : 30.12.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST ORDER OF THE CIT(A), VIJAYAWADA DATED 31.10.2014 AND IT PERTAINS TO THE ASSESSMENT YEAR 2010-11. ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF WHOLESALE DEALER IN PAPE R AND STATIONERY GOODS, FILED HIS RETURN OF INCOME FOR THE ASSESSMEN T YEAR 2010-11 ON 21.9.2009 ADMITTING TOTAL INCOME OF ` 70,07,650/-. THE CASE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICES U/S 1 43(2) & 142(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED AS 'THE AC T') ALONG WITH QUESTIONNAIRE WERE ISSUED. IN RESPONSE TO NOTICES, AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME AND FURNISHED BOOKS OF ACCOUNTS AND OTHER DETAILS CALLE D FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS PAID INTEREST TO UNSECURED LOAN CREDITORS RANGE D FROM 13.2% TO 24% AND ACCORDINGLY, DISALLOWED INTEREST PAID OVER AND ABOVE 13.2% AND ADDED TO TOTAL INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS. THE ASSESSEE FURTHE R CONTENDED THAT THE A.O. WAS ERRED IN DISALLOWING INTEREST PAYMENTS TO NON-RELATED PARTIES UNDER THE PROVISIONS OF SECTION 40A(2)(B) OF THE AC T. THE ASSESSEE FURTHER CONTENDED THAT IN RESPECT OF RELATED PARTIE S, THE ASSESSEE HAS PAID INTEREST RANGED FROM 18% TO 24% WHICH WAS IN L INE WITH ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 3 COMMERCIAL RATE OF INTEREST PAID TO NON-RELATED PAR TIES AND HENCE, THE A.O. WAS ERRED IN APPLYING THE PROVISIONS OF SECTIO N 40A(2)(B) OF THE ACT FOR DISALLOWING INTEREST OVER AND ABOVE 13.2%. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HELD T HAT OUT OF THE TOTAL 37 MEMBERS IN RESPECT OF WHOM DISALLOWANCE U/S 40A( 2)(B) OF THE ACT WAS MADE, ONLY 9 MEMBERS ARE RELATED TO THE ASSESSE E AND HENCE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT ARE NOT APPLICABLE IN CASE OF INTEREST PAID TO NON-RELATIVES, ACCORDINGLY, DIRECT ED THE A.O. TO DELETE ADDITIONS MADE TOWARDS INTEREST PAYMENT TO NON-RELA TIVES. IN SO FAR AS INTEREST PAYMENT TO RELATIVES IS CONCERNED, THE CIT (A) BY FOLLOWING HIS PREDECESSOR CIT(A) ORDER IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008-09, DIRECTED THE A.O. TO RESTRICT DISALLO WANCE TO THE AMOUNT OF INTEREST PAID IN EXCESS OF 15%. AGGRIEVED BY THE C IT(A) ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. A.R. FOR THE ASSESSEE SUBMITTED THAT THE LD. CIT(A) FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE HAS NOT PA ID INTEREST TO RELATED PARTIES, WHICH IS EXCESSIVE OR UNREASONABLE TO INVO KE THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THE A.R. FURTHER SUB MITTED THAT THE A.O. HIMSELF HAS ADMITTED THE FACT THAT THE ASSESSEE HAS PAID INTEREST RANGED FROM 13.2% TO 24% TO RELATED PARTIES AS WELL AS NON -RELATED PARTIES. ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 4 WHEN SUCH BEING THE CASE, COMPARISON OF INTEREST PAI D TO ONE OF THE CREDITORS TO THE MARKET RATE FOR APPLYING THE PROVI SIONS OF SECTION 40A(2)(B) OF THE ACT IS INCORRECT. TO INVOKE THE P ROVISIONS OF SECTION 40A(2)(B) OF THE ACT, THE A.O. HAS TO ALLEGE THAT T HE ASSESSEE HAS PAID INTEREST OVER AND ABOVE THE FAIR MARKET RATE OF INT EREST TO RELATED PARTIES. IN THIS CASE, THE ASSESSEE HAS PAID COMMO N RATE OF INTEREST TO RELATED AS WELL AS NON-RELATED PARTIES AND HENCE TH E A.O. WAS ERRED IN DISALLOWING INTEREST PAID TO RELATED PARTIES OVER A ND ABOVE 13.2%. ON THE OTHER HAND, THE LD. D.R. STRONGLY SUPPORTED THE ORDER OF LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED INTEREST PAID OVER AND ABOVE 13.2% UNDER THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, BY HOLD ING THAT THE ASSESSEE HAS PAID EXCESSIVE AND UNREASONABLE INTEREST TO REL ATED PARTIES. IT IS THE CONTENTION OF THE ASSESSEE THAT HE HAD PAID COMMON RATE OF INTEREST TO RELATED PARTIES AS WELL AS NON-RELATED PARTIES. TH E ASSESSEE FURTHER CONTENDED THAT THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, MANDATES DISALLOWANCE OF PAYMENTS MADE TO PERSONS REFERRED T O IN THAT SECTION, IF THE A.O. IS OF THE OPINION THAT EXPENDITURE IS EXCE SSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 5 OR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSE SSEE OR BENEFIT DERIVED OR AGREED TO THE ASSESSEE. IT IS FURTHER S UBMITTED THAT HAVING REGARD TO THE FAIR MARKET VALUE INDICATES THAT A CO MPARABLE INSTANCE NEEDS TO BE LOOKED INTO AND IF THE EXPENDITURE IS M ADE IN EXCESS OF THE VALUES PREVAILING IN THE OPEN MARKET UNDER SIMILAR CONDITIONS, SUCH EXCESS IS DISALLOWED. 6. HAVING HEARD BOTH THE SIDES, WE FIND FORCE IN TH E ARGUMENTS OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE HAS PAID INTEREST RANGED FROM 13.2% TO 24% TO RELATED PARTIES AND NON-RELATED PAR TIES. THIS FACT WAS NOT DISPUTED BY THE REVENUE. THE A.O. IS ON THE PO INT THAT THE ASSESSEE HAD PAID DIFFERENT RATE OF INTEREST TO DIFFERENT PE RSONS AND IN ONE SUCH CASE, HE HAD PAID 13.2% RATE OF INTEREST AND ACCORD INGLY, APPLIED THE SAME RATE OF INTEREST FOR REMAINING PERSONS. WE DO NOT FIND ANY MERITS IN THE FINDINGS OF THE A.O., FOR THE REASON THAT WH ERE ASSESSEE HAS HIMSELF RAISED BORROWINGS BY PAYING INTEREST @ 13.2 % TO 24%, SIMILARLY PLACED UNRELATED PARTIES, DISALLOWANCE OF INTEREST PAYMENTS TO RELATED PARTIES OVER AND ABOVE 13.2% IS NOT CORRECT. WE FU RTHER OBSERVED THAT THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, MAN DATES DISALLOWANCE OF ANY EXPENDITURE INCLUDING INTEREST PAYMENTS TO RELA TED PARTIES, IF THE ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 6 A.O. IS OF THE OPINION THAT EXPENDITURE IS EXCESSIV E OR UNREASONABLE, HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES. 7. IN THIS CASE, ON PERUSAL OF THE FACTS AVAILABLE ON RECORD, WE FIND THAT THE ASSESSEE HAS PAID SIMILAR RATE OF INTEREST TO NON-RELATED PARTIES. WHEN THE ASSESSEE IS HAVING NO CONTROL OVER NON-RELA TED PARTIES AND RATE OF INTEREST IS COMMON IN BOTH THE CASES, PAYME NT OF INTEREST TO NON-RELATED PARTIES CANNOT BE CONSIDERED AS NOT PRE VAILING IN THE OPEN MARKET DURING SUCH PERIOD. SINCE, THE RATE OF INTE REST PAID TO RELATED PARTIES IS ON PAR WITH THE RATE OF INTEREST PAID TO NON-RELATED PARTIES, THE A.O. WAS ERRED IN APPLYING THE PROVISIONS OF SECTIO N 40A(2)(B) OF THE ACT, TO HOLD THAT INTEREST PAYMENT MADE TO RELATIVE S IS EXCESSIVE OR UNREASONABLE. THE CIT(A) WITHOUT APPRECIATING THE FACTS SIMPLY, FOLLOWED ADHOC RATE OF INTEREST OF 15% TO RESTRICT THE DISALLOWANCE MADE BY THE A.O. TOWARDS INTEREST PAYMENTS TO RELATED PA RTIES. THEREFORE, WE ARE OF THE VIEW THAT THE A.O. WAS ERRED IN DISALLOW ING INTEREST PAYMENTS TO RELATED PARTIES OVER AND ABOVE 13.2%. 8. THE ASSESSEE HAS RELIED UPON THE DECISION OF HON BLE HIGH COURT OF GUJARAT, IN THE CASE OF PRINCIPAL CIT-1 VS. CAMA HO TELS LTD. (2016) 240 TAXMAN 770, WHEREIN THE HONBLE HIGH COURT, HELD TH AT WHERE ASSESSEE HAS HIMSELF RAISED BORROWINGS BY PAYING INTEREST @ 18% FROM SIMILARLY ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 7 PLACED UNRELATED PARTIES, ENTIRE INTEREST PAYMENT @ 16% TO VARIOUS RELATIVES OF DIRECTORS WAS REASONABLE AND HAD TO BE ALLOWED AS DEDUCTION. THE RELEVANT PORTION OF THE ORDER IS EX TRACTED BELOW: THE TRIBUNAL HAS NOTED THAT SECTION 40A(2)(B) CONTE MPLATES THAT IF SOME UNDUE BENEFIT IS BEING EXTENDED BY THE ASSESSE E TO THE PERSONS MENTIONED IN SUB-CLAUSE (2)(B) OF SECTION 40A ON AC COUNT OF THEIR ASSOCIATION WITH THE ASSESSEE, THEN THE DEDUCTION C LAIMED FOR THAT BENEFIT OUGHT TO BE DISALLOWED TO THE ASSESSEE. IN OTHER WO RDS, IF THE ASSESSEE CAN AVAIL THE FACILITY FROM THE OPEN MARKET AT A LO WER PRICE THAN SIMILAR FACILITY AVAILED FROM THE PERSONS COVERED UNDER SEC TION 40A(2) (B), THEN THAT EXCESS PAYMENT WOULD NOT BE ALLOWED TO THE ASS ESSEE AS DEDUCTION. THE QUESTION THAT AROSE BEFORE THE TRIBUNAL WAS T HAT WHAT WAS THE FAIR MARKET VALUE OF INTEREST PAID B) ASSESSEE ON T HE LOANS OBTAINED FROM THE PERSONS COVERED UNDER SECTION 40A(2)(B). THE AS SESSING OD WAS OF THE VIEW THAT THE LOANS OUGHT TO HAVE BEEN TAKEN AT THE INTEREST RATE OF 12 PER CENT AND NOT AT INTEREST RATE OF 15 OR 16 PER C ENT. ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT THE BANK INTEREST W BETWEEN 15 TO 16.08 PER CENT AND IN RESPECT THEREOF, THE ASSESSEE WAS R EQUIRED TO PRODUCE SECURITY AGAINST SUCH LOANS, WHEREAS THE LOANS SECU RED BY THE ASSESSEE WERE UNSECURED LOANS. THUS, BY AVAILING OF LI FROM ASSOCIATE CONCERNS, IT HAD AVOIDED A LOT OF FORMALITIES. THE TRIBUNAL WAS OF THE OPINION THAT THE PAYMENT OF INTEREST AT A LITTLE HIGHER RATE TO THE PERSONS EV COVERED UNDER SECTION 40A(2)(B) CANNOT BE TERMED AS EXORBITANT WHEN THE FAIR MARKET VALUE OF INTEREST COST IS BEING CONSIDERED. THE TRIBUNAL FOUND, AS A MATTE R OF FACT, THAT THE ASSESSEE HAD INTEREST COMMENSURATE WITH THE INTERES T RATE PREVAILING IN THE OPEN MARKET. IN THE LIGHT OF THE AT FINDINGS OF FACT RECORDED BY IT, THE TRIBUNAL FOUND THAT THE ASSESSEE HAD NOT EXTENDED A NY UNDUE BENEFIT THE PERSONS COVERED UNDER SECTION 40A(2)(B) AND REJECTE D THE SAID GROUND OF APPEAL. [PARA 5] THUS, THE TRIBUNAL HAS RECORDED A FINDING OF FACT TO THE EFFECT THAT THE INTEREST PAID BY THE ASSESSEE TO PERSONS MENTIO NED UNDER SECTION 40A(2)(B) WAS COMMENSURATE WITH THE INTEREST RATE P REVAILING IN OPEN MARKET. IN THE LIGHT OF SUCH FINDING OF FACT, IT IS NOT POSSIBLE TO STATE THAT THE CONCLUSION ARRIVED A THE TRIBUNAL THAT THE ASSE SSEE HAS NOT EXTENDED ANY UNDUE BENEFIT TO THE PERSONS COVERED UNDER SEC 40A(2)(B), SUFFERS FROM ANY LEGAL INFIRMITY WARRANTING INTERFERENCE. T HE REVENUE'S APPEAL IS, THEREBY DISMISSED. [PARA 6] ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 8 9. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE HIGH COURT OF GUJARAT, IN THE CASE OF SURGEON REALITIES LTD. VS. CIT (2014) 227 TAXMAN 225, WHEREIN HONBLE HIGH COURT UNDER SIMILA R CIRCUMSTANCES, HELD THAT UNLESS PAYMENT OF INTEREST WAS IN EXCESS OF MARKET RATE, MERELY BECAUSE ASSESSEE PAID INTEREST AT DIFFERENT RATES TO DIFFERENT COMPANIES, PAYMENT OF INTEREST COULD NOT BE HELD TO BE EXCESSIVE AND UNREASONABLE. 10. IN THIS VIEW OF THE MATTER AND ALSO BY FOLLOWIN G THE RATIOS OF THE CASE LAWS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE A.O. WAS ERRED IN DISALLOWING INTEREST PAYMENTS OVER AND ABOVE 13. 2% TO RELATED PARTIES. HENCE, WE DELETE THE ADDITIONS MADE BY TH E A.O. TOWARDS DISALLOWANCE OF INTEREST UNDER THE PROVISIONS OF SE CTION 40A(2)(B) OF THE ACT. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30 TH DEC16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 30.12.2016 VG/SPS ITA NO.13/VIZAG/2015 SHA TARACHAND AMICHAND, VIJAYAWADA 9 )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT SHA AMICHAND TARACHAND, 11-54-1/ 20, NANDIPATIVARI STREET, VIJAYAWADA-520 001. 2. / THE RESPONDENT THE ACIT, CIRCLE-1(1), VIJAYAWA DA 3. + / THE CIT, VIJAYAWADA 4. + ( ) / THE CIT (A), VIJAYAWADA 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM