M/s. Ravi Ceramics, Kheda V. The Dy.CIT, Central Circle-1, Baroda

ITA 132/AHD/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 9552 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 05-01-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 13-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Maximum Marginal Rate; Proportionate interest

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER ./ ITA.NO.132/AHD/2014 / ASSTT. YEAR: 2011-2012 M/S.RAVI CERAMICS 32, NARAYANDEEP JIVANDEEP COLONY ANAND, DIST. KHEDA. PAN : AADFM 4513 D VS DCIT, CENT.CIR.1 BARODA. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : WITHDRAWAL SUBMISSIONS REVENUE BY : SHRI K. MADHUSUDAN, SR.DR / DATE OF HEARING : 05/01/2017 / DATE OF PRONOUNCEMENT: 09/01/2017 $%/ O R D E R ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AGAINST O RDER OF LD.CIT(A)- IV, AHMEDABAD DATED 11.11.2013 PASSED FOR THE ASSTT .YEAR 2011-12. 2. THOUGH THE ASSESSEE HAS TAKEN FOUR GROUNDS OF AP PEAL, BUT ITS GRIEVANCE IN BRIEF, IS THAT THE LD.CIT(A) HAS ERRED IN CONFIR MING THE DISALLOWANCE OF RS.4,88,725/-. 3. BRIEF FACT EMERGES OUT FROM THE RECORD IS THAT T HE ASSESSEE HAS PAID INTEREST TO SPECIFIED PERSONS UNDER SECTION 40A(2)( B) OF THE INCOME TAX ACT, 1961 AT THE RATE OF 18% ON THE LOAN RECEIVED FROM T HEM. THE LD.AO HAS DISALLOWED INTEREST PAYMENT OVER AND ABOVE 12% PER ANNUM. ON APPEAL, THE LD.CIT(A) HAS CONFIRMED THE DISALLOWANCE. THE LD.C OUNSEL FOR THE ASSESSEE AT THE VERY OUTSET SUBMITTED THAT SIMILAR DISALLOWANCE WAS MADE IN THE ASSTT.YEAR 2005-06 TO 2010-11 AND THE DISPUTE TRAVE LLED UPTO THE TRIBUNAL. ITA NO.132/AHD/2014 2 THE TRIBUNAL HAS DELETED THE DISALLOWANCE IN IT(SS) A.NO.24 TO 29/AHD/2014. THE LD.DR ON THE OTHER HAND IS UNABLE TO CONTROVERT THIS CONTENTION RAISED BY THE LD.COUNSEL FOR THE ASSESSEE. 4. I HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GON E THOUGH THE RECORD CAREFULLY. AFTER PERUSAL OF THE TRIBUNALS ORDER D ATED 26.12.2016 PASSED FOR THE ASSTT.YEAR 2005-06 TO 2010-11 IN ASSESSEES OWN CASE, I AM OF THE VIEW THAT DISALLOWANCE MADE BY THE AO AND CONFIRMED BY T HE LD.CIT(A) DESERVES TO BE DELETED. THE DISCUSSION MADE BY THE TRIBUNAL ON THIS ISSUE READS AS UNDER: 4. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS PAID INTEREST @ 18% ON BORROWINGS FROM SPECIFIED PERSONS U/S 40A(2)(B), BUT, THE ASSESSING OFFICER WAS OF THE VIEW THAT SUCH PAYMENT S SHOULD BE RESTRICTED TO 12% PER ANNUM AS IS THE MARKET RATE OF BORROWINGS FROM BANKS. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SHOW-CAUSE AS TO WHY THE AMOUNT OF INTEREST PAID IN EXCESS OF 12% PER ANNUM NOT BE DISALLOWED U/S 40A(2)(B) OF THE ACT. IT WAS EXPLAINED BY THE ASSES SEE THAT THE INTEREST PAID IS AT THE PREVAILING MARKET RATE, BASED ON NEGOTIATION, AND I T CANNOT BE EQUATED WITH LOANS FROM BANKS AND FINANCIAL INSTITUTIONS, BECAUSE THE ASSESSEE HAS IN SUCH A CASE TO GIVE EQUATABLE MARKET AND COLLATERAL SECURITIES ETC . IN ADDITION TO COMPLYING WITH VARIOUS DOCUMENTATION REQUIREMENTS. IT WAS ALSO EXP LAINED BY THE ASSESSEE THAT THE RECIPIENTS OF THE INTEREST ARE ANY WAY PAYING THE T AX AT THE MAXIMUM MARGINAL RATES AND AS SUCH THERE IS NO TAX AVOIDANCE MOTIVE IN MAK ING EXCESSIVE PAYMENTS ON ACCOUNT OF INTEREST. THE EXPLANATIONS SO GIVEN BY T HE ASSESSEE WERE REJECTED. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CONTENT ION OF THE ASSESSEE THAT THE LOAN WAS NOT AVAILABLE FROM THE BANKS CANNOT BE ACCEPTED AND THAT IT IS THE FACT THAT NO PRUDENT BUSINESSMAN WILL ALLOW INTEREST AT A VER Y HIGHER RATE AS IT WAS NOT IMPOSSIBLE TO GET SUCH LOAN AT LOWER RATE. THE ASSE SSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE WAS NOT ABLE TO GIVE ANY JUSTIFIC ATION FOR PAYMENT OF EXCESSIVE 18% WHEN THE BANK RATE IS 12%. IT WAS IN THIS BACKD ROP THAT THE IMPUGNED DISALLOWANCES OF INTEREST WERE MADE. 5. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE LD. CIT(A), BUT WITHOUT ANY SUCCESS. LD. CIT(A) REJECTED THE CLAIM OF THE ASSESSEE THAT 18% PER ANNUM INTEREST PAID BY THE ASSESSEE IS REASONABLE. WHEN THE ASSESSEE INVITED ATTENTION OF THE LD. CIT(A) TO THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CIT VS. M/S. NAVJIVAN ROLLER FLOUR & PULSE MILLS P. LTD IN ITA NO.2695/AHD/2009, LD. CIT(A) STATED THAT WITH DUE RESPECT TO THE JUDGMENT OF HONBLE ITAT, THERE ARE CONTRARY DECISIONS OF VARIO US HIGH COURTS IN THIS REGARD. HE THEN REFERRED TO THE JUDGMENTS OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO. [2002] 123 TAXMAN 894 (KER.) AN D HONBLE ALLAHABAD HIGH ITA NO.132/AHD/2014 3 COURT IN THE CASE OF CIT VS. H.R. SUGAR FACTORY (P. ) LTD. [1990] 53 TAXMAN 63 (ALL.). LD. CIT(A) WAS OF THE VIEW THAT THE ASSESSI NG OFFICER WAS JUSTIFIED IN DISALLOWING THE PROPORTIONATE INTEREST EXPENSES BY APPLYING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THE ASSESSEE IS NOT S ATISFIED AND IN FURTHER APPEAL BEFORE US. 6. AT THE TIME OF HEARING, NONE APPEARED ON BEHALF OF ASSESSEE, BUT WE HAVE HEARD THE LD. DR, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. WE F IND THAT THE QUESTION AS TO WHETHER 18% PER ANNUM INTEREST RATE CAN BE SAID TO BE REASO NABLE CAME UP BEFORE THE CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. M/S. NAVJIVAN ROLLER FLOUR & PULSE MILLS P. LTD (SUPRA) AND THE CO-ORDINATE BE NCH INTER ALIA HELD AS FOLLOWS:- 4. AT THE OUTSET, FROM THE SIDE OF THE RESPONDENT- ASSESSEE AN ORDER OF ITAT 'A' BENCH AHMEDABAD IN THE CASE OF SHRI RAMESH KANT ILAL SHETH VS. ITO BEARING ITA NO.109/AHD/2006 FOR ASSESSMENT YEAR 200 2-03 DATED 05/12/2008 HAS BEEN FILED, WHEREIN ALMOST ON IDENTI CAL FACTS IT WAS HELD AS UNDER:- ' 4. WE HAVE HEARD BOTH THE PARTIES. AT THE TIME OF H EARING IT WAS SUBMITTED THAT THIS TRIBUNAL, IN IDENTICAL CIRCUMST ANCES, HAS ALLOWED THE CLAIM OF THE ASSESSEE IN ITS ORDER DATED 25-4-2 008 (A.Y. 2000- 01). THE TRIBUNAL HAS MADE THE FOLLOWING OBSERVATIO NS IN THE AFORESAID CASE: 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION TH AT SO FAR AS PAYMENT OF INTEREST IS CONCERNED, IT IS TO BE PAID AS PER MUTUAL CONSENT OF THE PARTIES AND THE BUSINESS EXIGENCY OR EXPEDIENCY AND, THEREFORE, IT IS PREROGATIVE OF THE BUSINESS MAN TO SEE AS TO WHAT RATE THE INTEREST SHOULD BE PAID SO THAT ITS BUSINESS GE TS MAXIMUM BENEFIT AND THE REVENUE HAS NO PART TO PLAY IN THIS RESPECT . MANY A TIMES, SPECIALLY, WHEN A BUSINESS MAN HAS TO SEEK LOAN FRO M PRIVATE PARTIES, HE FAILED TO GET BECAUSE OF SO MANY REASON S AND IN THAT SITUATION, HE HAS NO OPTION BUT TO APPROACH THE CLO SE RELATIVE AND FRIENDS AND IF IN THAT SITUATION, HE IS COMPELLED T O PAY INTEREST AT A MARGINALLY HIGHER RATE, THERE IS NO ILLEGALITY IN A CCEPTING THE LOANS AND PAY A LITTLE BIT HIGHER INTEREST. THE OVER ALL POSITION TO BE SEEN IS AS TO WHETHER THE ASSESSEE HAS EARNED THE PROFIT OR NOT; I.E. WHETHER THE ASSESSEE IS PAYING INTEREST MORE THAN THE PROFI T OR NOT. THE FACT THAT SUCH LOANS ARE FROM CLOSE RELATIVES AND FRIEND S, IN OUR OPINION, IS OF NO USE TO COME TO THE CONCLUSION THAT HE SHOU LD NOT HAVE PAID INTEREST ON SUCH A HIGHER RATE. 6. IN THE PRESENT CASE, THERE IS DOUBT THAT THE ASS ESSEE WAS PAYING INTEREST TO OUTSIDERS @ 12%, BUT IF IT HAD TO PAY I NTEREST @ 18% TO THE DIRECTORS, IT CANNOT BE SAID THAT THE ASSESSEE WAS PAYING HIGHER INTEREST TO THE DIRECTORS INTENTIONALLY. THE REVENU E, IN THE PRESENT CASE, HAS NOT DISPUTED THE ASSESSEE'S CLAIM THAT TH E INTEREST TO ITA NO.132/AHD/2014 4 DIRECTORS AS WELL AS THE OUTSIDERS WAS BEING PAID A S PER MUTUAL CONSENT AND IF THAT WAS THE CASE, THEN IN OUR OPINI ON, THE ASSESSEE HAD NOT COMMITTED ANY DEFAULT WHICH COULD CLOTHE TH E ASSESSING OFFICER TO INVOKE THE PROVISIONS OF SECTION 40A(2)( B) OF THE ACT. CONSEQUENTLY, WE DO NOT SEE ANY INFIRMITY IN THE OR DER OF THE LEARNED CIT(APPEALS), WHICH IS CONFIRMED.' 5. THE MATERIAL FACTS IN THE PRESENT CASE ARE SIMIL AR TO THESE INVOLVED IN THE AFORESAID CASE DECIDED BY THIS TRIBUNAL. IN THIS VI EW OF THE MATTER, GROUND NO.1 TAKEN BY THE ASSESSEE IS ALLOWED AND THEREFORE , GROUND NO.2 TAKEN BY THE ASSESSEE DOES NOT REQUIRE ANY ADJUDICATION BY U S.' 7. CLEARLY, THEREFORE, THERE IS A CO-ORDINATE BENCH DECISION HOLDING THAT THE PAYMENT OF INTEREST @ 18% CANNOT BE SAID TO BE EXCE SSIVE OR UNREASONABLE FOR THE PURPOSES OF SECTION 40A(2)(B) OF THE ACT. IN ANY EV ENT, THE RATE AT WHICH BANKS ARE LENDING ADVANCES TO IT BORROWERS CANNOT BE TREATED AS A BENCHMARK FOR LOANS TAKEN BY THE ASSESSEE FROM INDIVIDUALS WHO ARE NOT CARRYI NG ON THE BUSINESS OF BANKING. ESSENTIALLY, A LOAN TAKEN FROM THE BANK NOT ONLY IN VOLVES FURNISHING OF SECURITIES AND DOCUMENTATION BUT ALSO IS ADVANCED AFTER SAFEGU ARDING THE INTEREST OF THE LENDERS IN A ROBUST MANNER. QUITE UNLIKE SUCH TRANS ACTIONS/BORROWINGS FROM INDIVIDUALS ARE MUCH LESS ORGANIZED AND WITHOUT THE CUMBERSOME REQUIREMENTS OF DOCUMENTATION AND COLLATERAL SECURITIES ETC. IN OUR CONSIDERED VIEW, THE VERY ACTION OF THE ASSESSING OFFICER IN HOLDING THAT THE BORROW INGS FROM THE SPECIFIED PERSONS AT A RATE HIGHER THAN THE RATE AT WHICH BANK WOULD LEND ITS LOANS TO THE BORROWERS, WOULD BE EXCESSIVE AND UNREASONABLE AND THE DISALLO WANCE MADE BY THE ASSESSING OFFICER WAS, THEREFORE, DEVOID OF LEGALLY SUSTAINAB LE BASIS. 8. WE HAVE NOTICED THAT THERE ARE CO-ORDINATE BENCH DECISIONS HOLDING THAT 18% PER ANNUM INTEREST IS REASONABLE AND IT CANNOT HIT THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, YET THE CIT(A) DECLINED TO FO LLOW THESE DECISIONS ON THE BASIS OF JUDGMENTS OF HONBLE KERALA HIGH COURT IN THE CA SE OF CIT VS. V.I. BABY & CO (SUPRA) AND ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H.R. SUGAR FACTORY (P.) LTD (SUPRA). NONE OF THESE HIGH COURTS DECISIONS, HOWEVER, HELD ANYTHING TO THE CONTRARY OF WHAT HAS BEEN DECIDED BY THE CO-ORDINAT E BENCH. THE QUESTION AS TO WHETHER 18% INTEREST PER ANNUM IS REASONABLE OR NOT IS AN ESSENTIAL QUESTION OF FACT. LD. CIT(A) HAS BEEN SUPERFICIAL IN HIS APPROA CH IN DISREGARDING THE DECISIONS OF COORDINATE BENCH. 9. IN ANY EVENT, IT IS NOT IN DISPUTE THAT INTEREST IS TAXED IN THE HANDS OF THE RECIPIENTS AT THE SAME RATE. ON THIS FACT, AND IN T HE LIGHT OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF PWS ENGINEERS LIMITED VS. DCIT (TAX APPEAL NO.209 OF 2015; JUDGMENT DATED 06.06.2016), THE DISALLOWANCE UNDER SECTION 40A(2) CANNOT BE MADE. IN THE SAID CASE, TH EIR LORDSHIPS HAD, INTER ALIA, OBSERVED AS FOLLOWS:- 6. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES. THE QUESTION OF APPLICABILITY OF SECTION40A(2) OF THE ACT TO THE RE STRICTED DISALLOWANCE OF RS. 47,90,178/- IS ALREADY CONCLUDED BY THIS COURT BY THE SAID ORDER DATED 31.3.2015. WE MAY THEREFORE, PROCEED ON THAT BASIS. DESPITE THIS, THE ITA NO.132/AHD/2014 5 QUESTION THAT STILL SURVIVES IS WHETHER THE REVENUE CAN TAX THE SAME INCOME IN THE HANDS OF THE COMPANY ON WHICH THE DIRECTORS HAD ALREADY PAID THE TAX AT THE SAME RATE AT WHICH THE COMPANY WOULD HAV E BEEN LIABLE TO BE ASSESSED. IN THIS CONTEXT, WE MAY RECALL THAT CONSI STENTLY BEFORE ASSESSING OFFICER, CIT(APPEALS) AND TRIBUNAL, THE ASSESSEE HA D CANVASSED THAT ALL THE FOUR DIRECTORS WHO HAD RECEIVED SUCH REMUNERATION, WERE TAXED IN THE HIGHEST BRACKET OF 30%; AT THE SAME RATE AT WHICH T HE ASSESSEE COMPANY AT THE RELEVANT TIME WAS ASSESSED. IN FACT, THE ASSESS EE HAD DEMONSTRATED BEFORE CIT(APPEALS) THAT THE TAX LIABILITY OF THE C OMPANY ON SUCH DISPUTED REMUNERATION AMOUNT WAS EXACTLY THE SAME AS THE TAX THE FOUR DIRECTORS HAD PAID TO THE REVENUE. TO THESE FACTUAL ASPECTS, EVEN THE REVENUE HAS, AT NO STAGE RAISED ANY DISPUTE. WE MAY THEREFORE, PROC EED ON THE BASIS THAT THE ELEMENT OF EXCESSIVE REMUNERATION REPRESENTS THAT I NCOME OF THE COMPANY WHICH WAS EVENTUALLY TAXED IN THE HANDS OF THE DIRE CTORS AT THE SAME RATE AT WHICH; HAD IT NOT BEEN SO DISTRIBUTED; WOULD HAVE B EEN TAXED IN THE HANDS OF THE COMPANY. IN THAT VIEW OF THE MATTER, THE QUESTI ON OF REVENUE NEUTRALITY WOULD IMMEDIATELY ARISE. A CERTAIN INCOME HAS ALREA DY BEEN TAXED IN THE HANDS OF THE DIRECTORS. PERMITTING THE REVENUE TO T AX THE SAME INCOME AGAIN AT THE SAME RATE IN THE HANDS OF THE PRINCIPA L PAYER WOULD AMOUNT TO DOUBLE TAXATION. ONLY ON THIS COUNT, WE ANSWER QUES TION IN FAVOUR OF THE APPELLANT-ASSESSEE AND AGAINST REVENUE, ALLOW THE A PPEAL AND SET ASIDE THE ORDER OF THE TRIBUNAL. THE TAX APPEAL IS DISPOSED O F ACCORDINGLY. 10. ONCE THERE WAS CATEGORICAL FINDINGS BY THE TRIB UNAL THAT 18% PER ANNUM INTEREST WAS REASONABLE AND THERE WAS NOTHING CONTR ARY THERETO SUCH FINDINGS IN THE DECISION OF THE HONBLE COURTS ABOVE, THE CIT(A) OU GHT TO HAVE FOLLOWED THE SAME. IN VIEW OF THE ABOVE DISCUSSION AND BEARING IN MIND ENTIRETY OF THE CASE, WE ARE OF THE CONSIDERED VIEW THAT THE IMPUGNED DISALLOWANCE U/S 40A(2)(B) IN RESPECT OF INTEREST PAID IN EXCESS TO 12% PER ANNUM DESERVES T O BE DELETED. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE. 11. IN THE RESULT, ALL THE SIX APPEALS ARE ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 26TH DAY OF DE CEMBER, 2016. 5. RESPECTFULLY FOLLOWING THE ORDER OF DIVISION BEN CH, I ALLOW THIS APPEAL OF THE ASSESSEE AND DELETE DISALLOWANCE OF RS.4,88, 725/-. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE COURT ON 9 TH JANUARY, 2017 AT AHMEDABAD. SD/- (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 09 /01/2017