Badrunisha, Jodhpur V. ACIT,Circle-2, Jodhpur

ITA 139/JODH/2019

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9256 (ITAT-JODHPUR)
• Duration Of Justice: 3 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 30-10-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 14-04-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Opportunity of being heard; Assessment record; TDS; Set aside
• Section: 263; 143(3); 40(a)(ia); 194A

Judgement Text

IN THE I NCOME TAX APPE LLATE TRIBU NAL JOD HPU R BE NCH, J OD HPU R BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER AND SHRI SANDEEP GOSAIN, JUDICIAL MEMBER ITA No. 139/ Jodh/2019 (ASSESSMENT YEAR- 2014-15) Smt. Badrunisha, Prop. M/s Kohinoor Enterprises, Plot No. 9,54 & 55, Upper Chopasani Road, Jodhpur Vs Asst. Commission er of Income-tax, Circle-02, Jodhpur (Appellant ) ( Respondent) PAN NO. ABVPB 2931 M Asse ssee By Shri N. R. Mertia (CA) Revenue By Smt. Al ka Rajvanshi Jain (CIT-DR) Date of hearing 31/10/2022 Date of Pro nounce ment 01/11/2022 O R D E R PE R: B.R. BASKARAN, AM The assessee has filed this appeal challenging the revision order dated 28.03.2019 for revision ld. PCIT-1, Jodhpur u/s 263 of the Act for the Assessment Year 2014-15. It is the contention of the assessee that the impugned revision order is not sustainable in the eyes of law. 2 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur 2. The facts relating to the case are stated in brief. The original assessment was completed by the Assessing Officer for the year under consideration u/s 143(3) of the Act on 26.12.2016. The ld. PCIT, on examination of assessment record, initiated revision proceedings u/s 263 of the Act on the reasoning that the assessment order so passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue. The ld. PCIT initiated revision proceedings in respect of 4 issues. However, after hearing the assessee, the Ld PCIT accepted the explanations given by the assessee in respect of two issues. Accordingly, he proceeded to pass revision order in respect of following two issues (i) disallowance u/s 40(a)(ia) of the Act in respect of loan processing fee paid by the assessee (ii) disallowance of interest on account of charging of interest at lower rate on the loan given to a related party. 3. In respect of the first issue, the ld. PCIT noticed that the assessee has availed loan of Rs. 14.60 crores from GRUH Finance Ltd. For the purpose of availing loan, the assessee had paid loan processing fee of Rs.16,41,306/- and claimed the same as deduction. The ld. PCIT noticed that the assessee has not deducted tax at source from the above said payment. He further took the view that the above payment is in the nature 3 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur of interest payment as per the definition of the term “interest” given in section 2(28A) of the Act. Accordingly, he took the view that the above said amount is liable to be disallowed u/s 40(a)(ia) of the Act. Since the Assessing Officer has not examined this issue, the ld. PCIT took the view that the assessment order is erroneous and prejudicial to the interest of the Revenue. 4. In respect of the second issue, the ld. PCIT noticed that the assessee has borrowed loan of Rs.14.60 crores from GRUH Finance Ltd at an interest rate of 14.50%. He further noticed that the assessee has given loan of Rs. 11.31 crores to Sh. Noor Mohammad, a related party u/s 40A(2)(b), and charged interest @ 12% per annum. The ld. PCIT took the view that the assessee has lent money to a related person at lower rate of interest than the rate at which it had borrowed money and thus has incurred unnecessary interest burden. Accordingly he took the view, the disallowance is required to be made out of the interest paid to GRUH Finance Ltd. Since the Assessing Officer has not examined this issue, the ld. PCIT took the view the same has rendered assessment order erroneous and prejudicial to the interest of the Revenue. Accordingly, he set aside the assessment order and directed the AO to pass order afresh, after giving opportunity of being heard to the assessee. The assessee is aggrieved by 4 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur the revision order so passed by Ld PCIT and hence challenged the same by filing this appeal before the Tribunal. 5. The Ld A.R submitted that the interpretation given by Ld PCIT in respect of both the issues is not in accordance with law and hence the impugned revision order is liable to be quashed on this count. With regard the first issue of Loan processing fee, the Ld A.R submitted that the Ld PCIT was not right in law in holding that the same would qualify as interest within the meaning of sec.2(28A) of the Act. Explaining further, the Ld A.R submitted that the interest liability shall accrue only after receipt of loan amount, i.e., after commencement of debtor and creditor relationship between the parties. He submitted that the said relationship shall commence only after incurring of debt or borrowing of money and thereafter only the interest liability would accrue. He submitted that the loan processing fee is a payment made prior to granting of loan and there is no assurance that the loan would be granted to the assessee upon payment of such fee. Further, it is one time charges paid to the financial institution for processing the loan application of the assessee and it is not refundable to the assessee, even if the loan is not sanctioned. Hence it is a payment made prior to incurring of debt or borrowing money and hence it cannot be characterized as interest payment, as presumed by Ld PCIT. Accordingly, he submitted that the said payment would not fall within the meaning of the definition of the term “interest” given in sec. 2(28A) and consequently, there was no liability to deduct TDS thereform under sec.194A of the Act. In this regard, he placed his reliance on the decision rendered by Hon’ble Kerala High Court in the case of Beacon Projects P Ltd vs. CIT (2015)(377 ITR 237)(Ker) and also the decision rendered by 5 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur Hon’ble Supreme Court in the case of Bikaram Singh (1977)(224 ITR 551)(SC). Accordingly, the Ld A.R submitted that the Ld PCIT was not right in holding that the assessee is liable to deduct tax at source u/s 194A of the Act from loan processing fee paid by it. 6. With regard to the second issue, the Ld A.R submitted that the assessee has availed loan from GRUH Finance Ltd @ 14.50% and it has charged interest @ 12% on the loan given to a related party. He submitted both transactions are independent transactions unconnected with each other. The assessee has contracted with GRUH Finance Ltd for paying interest @ 14.50%. Similarly, it has agreed for collecting interest @ 12% on the loan given to a related party. The rate of interest is charged according to the terms of agreement and hence there is no compulsion that the assessee should always collect interest a rate higher than that charged by the finance company. Hence payment of interest cannot be linked with the collection of interest, when the transactions of borrowing and lending are independent of each other. He submitted that the Ld PCIT has entered into an erroneous decision in linking both the transactions. Further, it is a factual aspect relating to independent transactions and there is no provision under the Act to make any addition. Accordingly, he submitted that no disallowance is called for out of interest expenditure paid to GRUH Finance Ltd either u/s 36(1)(iii) or u/s 40A(2)(b) of the Act on account of receipt of interest from the related party @ 12% p.a. Accordingly, the Ld A.R submitted that the Ld PCIT has misdirected himself in respect of this issue also. 7. The Ld D.R, on the contrary, supported the order passed by Ld PCIT. She submitted that the processing fee would partake the character of 6 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur interest, as per the definition given u/s 2(28A) of the Act and hence the assessee is liable to deduct tax at source u/s 194A of the Act. With regard to the second issue, the Ld D.R submitted that the assessee has charged interest at a rate lower than the rate it was paying on the loan taken by it, which is against prudent business principles. In any case, the AO has not examined both the issues and hence the Ld PCIT was justified in passing the impugned revision order. 8. We heard rival contentions and perused the record. The first issue is whether the Loan processing fee paid by the assessee would fall under the definition of interest given in sec.2(28A) of the Act or not. Sec. 2(28A) of the Act reads as under:- “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.” It is the contention of the assessee that the interest liability would accrue only after borrowing of money or incurring of debt, i.e., it is the say of Ld A.R that the payments, if any, made prior to borrowing of money or incurring of debt would not fall under the definition of the term “interest”, as given in sec.2(28A) of the Act. In support of this proposition, the Ld A.R has placed his reliance on the decision rendered by Hon’ble Supreme Court and Hon’ble Kerala High Court, referred supra. In the decision rendered by Hon’ble Kerala High Court, it has been held that before any amount paid be construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. It has been held by 7 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur Hon’ble Supreme Court that the definition of “interest” would be applicable only when the money is lent by a creditor and received by a debtor. 9. In the instant case, the payment made by the assessee is “Loan processing fee”, which is a payment made prior to granting of loan for the purpose of processing the loan application submitted by the assessee. We notice that, at the time of making said payment:- (a) the assessee has not borrowed any money or incurred any debt. (b) consequently, there was no debtor-creditor relationship created between the assessee and M/s GRUH Finance Ltd. A careful perusal of the definition of the term interest given in sec. 2(28A) would show that it uses the expression “service fee or other charge”. Hence it is possible to contend that the loan processing fee would fall under the category of “service fee or other charge”. However, a careful perusal of the definition would show that the the said payments (service fee or other charge) should also be ‘in respect of moneys borrowed or debt incurred’. Hence, any type of payment made after the borrowing of money or incurring of debt alone would be covered by the definition of sec.2(28A) of the Act. Hence, we are of the view that there is merit in the contentions of the Ld A.R that the loan processing fee cannot qualify as “interest” within the meaning of sec.2(28A) of the Act. In view of the decisions rendered by Hon’ble Kerala High Court and Hon’ble Supreme Court, referred supra, we are of the view that the interpretation given by Ld PCIT in respect of this issue is not sustainable and hence the Ld PCIT was not justified in initiating revision proceedings in respect of this issue. 10. In respect of the second issue, we noticed that the assessee had borrowed loans from GRUH Finance Ltd @ 14.50%. However, it has lent 8 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur money to a related person within the meaning of sec.40A(2)(b) of the Act @ 12%. It is the view of Ld PCIT that the assessee should have lent money to the related person @ 14.50% and above. First of all, the terms agreed between the parties would decide the rate of interest to be charged on the loan given/received. It is well settled proposition of law that a tax gatherer cannot sit in the arm chair of a business man and regulate affairs of the business. It is not the case of Ld PCIT that the terms of agreement entered between the assessee and related party provided for charging of interest rate of more than 12%. We notice that the Ld PCIT initiated enquiry on the ground that the provisions of sec.40A(2)(a) are attracted to the transaction of loan given to the related party. However, he concluded that the provisions of sec.40A(2)(a) are not attracted. However, he concluded that a part of interest paid to GRUH Finance Ltd should be disallowed. We are unable to understand as to how a part of interest expenditure paid to GRUH Finance Ltd could be disallowed merely on the reasoning that the assessee has charged lower interest on the loan given to a related party. The Ld PCIT has also not cited any of the provisions of the Act, which would warrant such a disallowance. Hence, we do not find any rationale in the view taken by Ld PCIT in respect of this issue and hence the Ld PCIT was not justified in initiating revision proceedings in respect of this issue. 11. The Hon’ble Delhi High Court in the case of CIT vs. Nagesh Knitwears (P) Ltd (2012)(345 ITR 135) has held that the CIT should conduct necessary enquiries and come to the conclusion that the assessment order is erroneous and the view taken by the AO is 9 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur unsustainable in law, i.e., the view expressed by Ld PCIT should be in accordance with law and then only, he could hold that the assessment order is erroneous. When the view taken by Ld PCIT itself is not in accordance with law, then the revision order passed by Ld PCIT could not be sustained. From the foregoing discussions, it can be noticed that the view taken by Ld PCIT in respect of the first issue is not sustainable in law. With regard to the second issue, the Ld PCIT has misdirected himself and in fact, there is no clarity at all in his directions. Hence, we are of the view that the view taken by Ld PCIT in respect of both the issues is not sustainable in law, in which case, the impugned revision order is liable to be quashed. Accordingly, we quash the impugned revision order passed by Ld PCIT. 12. In the result, this appeal of the assessee is allowed. Order pronounced in the open Court on 1 s t November, 2022. Sd/- Sd/- (SANDEEP GOSAIN) (B . R. BASKARAN) JUDICIAL ME MBER ACC OUNTANT MEMBER Dated : 01/11/2022 *Ganesh Kr Copy to: 1. The Appellant 2. The Respondent 3. The CIT 10 ITA 139/Jodh/2019 Smt. Badrunisha, Jodhpur vs. ACIT, Circle-02, Jodhpur 4. The CIT(A) 5. The DR 6. Guard File Assistant Registrar Jodhpur Bench