Assistant Commissioner of Income-tax, V. M/s. Khambete Kothari Cans & Allied Products P.Ltd., Jalgaon

ITA 1919/PUN/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0437 (ITAT-PUNE)
• Duration Of Justice: 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2010-2011
• Appeal Filed On: 30-08-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHAVAN
• Section: 234B

Judgement Text

- IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC , PUNE , BEFORE MS. SUSHMA CHOWLA, JM . / ITA NO. 1 919 /PN/201 6 / ASSESS MENT YEAR : 20 1 0 - 1 1 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE - 1, JALGAON . / APPELLANT VS. M/S. KHAMBETE KOTHARI CANS AND ALLIED PRODUCTS PVT. LTD., B - 5, MIDC AREA, JALGAON. . / RESPONDENT PAN: AABCK2005R / APPELLANT BY : SHRI B.Y. CHAVAN / RESPONDENT BY : SHRI NIKHIL PATHAK / DATE OF HEARING : 0 6 . 1 2 .201 6 / DATE OF PRONOUNCEMENT: 09 . 1 2 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF CIT (A) - 2 , NASHIK , DATED 17 . 0 6 .20 1 6 RELATING TO ASSESSMENT YEAR 20 1 0 - 1 1 AGAINST ORDER PASSED UNDER SECTION 1 4 3(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 2 2 . THE REVENUE HAS RAISED THE FOLLO WING GROUND S OF APPEAL : - 1. ON FACTS AND IN CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF EXCESS INTEREST U/S 40A(2)(B) OF THE ACT AT RS.22,20,958/ - . 2. ON FACTS AND IN CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF DIRECTORS REMUNERATION U/S 40A(2)(B) OF THE ACT AT RS.15,00,000/ - 3. THE ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE DISALLOWANCE MADE UNDER SECTION 40A(2)(B ) OF THE ACT ON ACCOUNT OF EXCESS INTEREST PAID AT RS.22,20,958/ - AND DIRECTORS REMUNERATION OF RS.15 LAKHS. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE HAD FILED THE RETURN OF INCOME DECLARING LOSS OF RS.1,15,37,881/ - . THE ASSESSEE WAS ENGAGED IN THE MANUFACTURING OF ALUMINUM AND STAINLESS STEEL CANS, SPARE PARTS AND ACCESSORIES. THE CASE OF ASSESSEE WAS TAKEN UP FOR SCRUTINY. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID INTEREST @ 18% ON UNSECURED LOANS / DEPOSITS TAKEN FROM THE DIRE C TORS AND OTHER RELATED PARTIES. THE LIST OF INTEREST PAID TO THE DEPOSITORS IS TABULATED AT PAGE 2 OF THE ASSESSMENT ORDER. THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY THE SAID RATE OF INTEREST @ 18% TO THE RELATED PARTIES SHOULD BE ALLOWED AS DEDU CTION. THE ASSESSEE EXPLAINED THAT IT HAD BORROWED MONEY FROM THE SAID PARTIES WHICH WAS NOT CUMBERSOME PROCEDURE AS AGAINST BORROWAL FROM THE BANKS AND OTHER CONCERNS. IT WAS ALSO POINTED OUT THAT THE RATE OF BANK LOAN WAS BETWEEN 14% - 14.75% AND THE R ATE OF INTEREST AT 18% WAS THUS, ALLOWABLE. THE ASSESSING OFFICER ON THE OTHER HAND, OBSERVED THAT THE RATE OF BANK ON FDR WAS BETWEEN 8% - 9.5% AND EVEN THE INCOME TAX WAS CHARGING INTEREST UNDER SECTION 234A , 234B AND 234C OF THE ACT @ 12% AND GIVING IN TEREST @ 9% ON INCOME TAX ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 3 REFUNDS. AS PER PROVISIONS OF THE ACT, THE RATE OF INTEREST ON PARTNERS FUND WAS 12%, HENCE, THE ASSESSING OFFICER HELD THE INTEREST @ 12% WAS REASONABLE WHICH WAS ALLOWED AS DEDUCTION AND THE BALANCE INTEREST @ 6% WAS HELD TO BE NOT ALLOWABLE UNDER SECTION 40A(2)(B) OF THE ACT, RESULTING IN ADDITION OF RS.22,20,958/ - . 5. THE SECOND DISALLOWANCE MADE IN THE HANDS OF ASSESSEE WAS ON ACCOUNT OF DIRECTORS REMUNERATION, WHEREIN THE EXPLANATION OF ASSESSEE WAS THAT THE SAID REMUNERAT ION WAS BEING PAID TO THE FOUNDER DIRECTOR, CHAIRMAN AND OTHER DIRECTORS SINCE PAST SEVERAL YEARS, WAS NOT ACCEPTED SINCE THERE WAS DECREASE IN THE TURNOVER OF ASSESSEE COMPANY AND ALSO NET PROFIT BEFORE TAX ON PERCENTAGE BASIS HAD GONE DOWN. THE ASSESSIN G OFFICER WAS OF THE VIEW THAT THE REMUNERATION OF DIRECTORS SHOULD BE RESTRICTED TO RS.15 LAKHS AND THE BALANCE OF RS.15 LAKHS WAS DISALLOWED AND ADDED TO THE INCOME OF ASSESSEE. BALANCE OF RS.15 LAKHS WAS DISALLOWED AND ADDED TO THE INCOME OF ASSESSEE. 6. THE CIT(A) DELETED THE ADDITION MADE ON ACCOUNT OF INTEREST PAID TO RELA TED PARTIES HOLDING THE INTEREST RATE OF 18% TO BE REASONABLE AND NOT EXCESSIVE, IN VIEW OF INTEREST RATE IN RESPECT OF LOANS FROM PRIVATE PARTIES PREVAILING IN THE MARKET. THE CIT(A) ALSO DELETED THE ADDITION MADE ON ACCOUNT OF DIRECTORS REMUNERATION HOL DING THAT SIMILAR REMUNERATION WAS BEING PAID FROM YEAR TO YEAR AND BECAUSE OF STRIKE IN THE FACTORY, THE SALES HAD MARGINALLY GONE DOWN, BUT THE SAME DOES NOT JUSTIFY THE DISALLOWANCE OF DIRECTORS REMUNERATION. 7. THE REVENUE IS IN APPEAL AGAINST THE O RDER OF CIT(A). ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 4 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE EXCESS INTEREST RATE WAS PAID TO RELATED PARTIES WHICH WAS DISALLOWED BY THE ASSESSING OFFICER BUT HAS BEEN ALLOWED BY THE CIT(A). THE LEARNED DEPARTMENTAL REP RESENTATIVE FOR THE REVENUE POINTED OUT THAT ONUS WAS UPON THE ASSESSEE TO ESTABLISH THAT THE EXPENDITURE CLAIMED WAS REASONABLE. IN THIS REGARD, RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. SHATRUNJAY DIAMONDS (2 003) 261 ITR 258 (BOM) . IN RESPECT OF SECOND DISALLOWANCE OF DIRECTORS REMUNERATION BEING EXCESSIVE, THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE STRESSED THAT THE BUSINESS HAD CLOSED FOR THREE MONTHS AND EVEN THE TURNOVER AND PROFITS WERE LESS ER, HENCE, THE DISALLOWANCE WAS JUSTIFIED. HE FURTHER PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN NUND & SAMONT CO. (P.) LTD. VS. CIT (1970) 78 ITR 268 (SC), WHEREIN IT WAS HELD THAT THE ASSESSING OFFICER IS NOT REQUIRED INDEPEN DENTLY TO COLLECT EVIDENCE TO DECIDE WHETHER THE ALLOWANCE WAS CLAIMED INDEPEN DENTLY TO COLLECT EVIDENCE TO DECIDE WHETHER THE ALLOWANCE WAS CLAIMED EXCESSIVE AND UNREASONABLE. 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE OTHER HAND, REFERRED TO THE BANK STATEMENTS, UNDER WHICH THE BANKS WERE CHARGING INTEREST @ 14.5% TO 14.75%. HE FURTHER POINTED OUT THAT THE ASSESSING OFFICER HAD ALLOWED INTEREST @ 12%, WHEREAS THE ASSESSEE WAS PAYING INTEREST @ 18%, WHICH WAS AS PER MARKET RATES. IN RESPECT OF SECOND DISALLOWANCE, THE LEARNED AUTHORIZED REPRESENTATIVE FOR T HE ASSESSEE POINTED OUT THAT SIMILAR REMUNERATION IS BEING PAID FOR THE DIRECTORS FOR THE PAST SEVERAL YEARS, WHO IN TURN, WERE PAYING TAXES AT THE MARKET RATES. DURING THE YEAR UNDER CONSIDERATION, STRIKE FOR THREE MONTHS WHICH AFFECTED THE SALES AND PRO FITS OF THE ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 5 BUSINESS. HOWEVER, THE SAID DIRECTORS WERE ENGAGED IN CARRYING ON OF THE ACTIVITIES AND SINCE THE REMUNERATION WAS AS PER MARKET RATE, THE SAME WAS TO BE ALLOWED. 10. ON PERUSAL OF RECORD AND AFTER HEARING BOTH THE LEARNED AUTHORIZED REPRESEN TATIVES, THE ISSUE WHICH ARISES FOR ADJUDICATION IN THE PRESENT APPEAL IS THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 40A(2)(B) OF THE ACT. THE SAID SECTION PROVIDES THAT WHERE THE PAYMENT IS BEING MADE TO RELATED PARTIES, THEN THE SAID P AYMENT TO THE RELATED PARTIES SHOULD BE REASONABLE AND AS PER THE PREVAILING MARKET RATES. THE LIST OF RELATED PARTIES IS PROVIDED UNDER SECTION 40A(2)(B) OF THE ACT . ADMITTEDLY, IN THE PRESENT CASE THE ASSESSEE HAD MADE PAYMENTS TO THE RELATED PARTIES O N ACCOUNT OF INTEREST AND ON ACCOUNT OF DIRECTORS REMUNERATION. THE INTEREST WAS PAID ON THE LOANS RECEIVED FROM THE DIRECTORS AND RELATED PARTIES, WHEREIN THE ASSESSEE WAS RECEIVED FROM THE DIRECTORS AND RELATED PARTIES, WHEREIN THE ASSESSEE WAS PAYING INTEREST @ 18% . HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT INTERE ST @ 12% WAS REASONABLE SINCE THE BANKS ON FDRS WAS GIVING INTEREST @ 8% - 9%, INCOME TAX REFUND @ 9% AND WAS CHARGING INTEREST @ 12% UNDER SECTION 234A, 234B AND 234C OF THE ACT. HOWEVER, THE PLEA OF ASSESSEE WAS THAT ON THE BANK LOANS IT HAD OBTAINED FR OM THE BANKS WHICH WAS CUMBERSOME PROCEDURE AND IT WAS PAYING INTEREST @ 14.5% - 14.75%. THE ASSESSEE HAS PLACED ON RECORD THE COPIES OF BANK STATEMENTS. THE PERUSAL OF THE SAME REFLECTS THAT THE RATE OF INTEREST @ 14.75% IS FOR THE PERIOD 01.09.2008 TO 30.09.2008. THE RATE OF CHARGING INTEREST AT 14.50% PER ANNUM IS FOR THE PERIOD 01.01.2011 TO 28.02.2011 . THE COPIES OF SAID BANK STATEMENTS ARE PLACED AT PAGES 90 AND 91 OF THE PAPER BOOK. T HE ASSESSEE HAS ALSO FILED ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 6 BANK STATEMENTS FOR THE RELEVANT FI NANCIAL YEAR I.E. 2009 - 10 , WHERE BANK IS CHARGING INTEREST @ 13.25% P.A. ADMITTEDLY, THE ASSESSEE HAD RECEIVED INTEREST @ 8% - 9% ON ITS FDRS BUT AGAINST THE SAME, IT HAD PAID INTEREST @ 18% TO THE RELATED PARTIES. THE SAID INTEREST RATE PAID BY THE ASSE SSEE IS MORE THAN THE MARKET RATE AND IS NOT REASONABLE AND HENCE, THIS DEDUCTION IS HIT BY PROVISIONS OF SECTION 40A(2)( A ) OF THE ACT. IN THE INTEREST OF JUSTICE, I RESTRICT THE ALLOWANCE OF INTEREST @ 15% PER ANNUM. THE ASSESSING OFFICER IS DIRECTED TO WORK OUT THE DISALLOWANCE IN THE HANDS OF ASSESSEE ACCORDINGLY. THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS PARTLY ALLOWED. 11. THE SECOND ISSUE ARISING IN THE PRESENT APPEAL IS IN RELATION TO ALLOWANCE OF DIRECTORS REMUNERATION. THE ASSESSEE HA S PAID SUM OF RS.30 LAKHS TO DIFFERENT DIRECTORS DURING THE YEAR UNDER CONSIDERATION; ONE OF THEM WAS THE FOUNDER CHAIRMAN AND THE SECOND PERSON IS MANAGING DIRECTOR AND OTHER S ARE FOUNDER CHAIRMAN AND THE SECOND PERSON IS MANAGING DIRECTOR AND OTHER S ARE DIRECTORS OF THE ASSESSEE COMPANY, WHO HAVE BEEN WORKING WITH THE COMPANY F OR THE PAST SEVERAL YEARS AND HAVE KNOWLEDGE OF BUSINESS OF THE ASSESSEE COMPANY. THE REASON FOR DISALLOWANCE OF PARTIAL DIRECTORS REMUNERATION IN THE HANDS OF ASSESSEE BY THE ASSESSING OFFICER, WA S THE DECLINE IN PROFIT AND SALES DURING THE YEAR UNDER CO NSIDERATION. THE ASSESSEE HA D EXPLAINED THE REASONS FOR DECLINE I.E. STRIKE IN THE FACTORY PREMISES WHICH HA D BEEN RESOLVED AND THE ASSESSEE HA D CONTINUED TO CARRY OUT ITS BUSINESS. THE PROVISIONS OF SECTION 40A(2)( A ) OF THE ACT ARE TO BE APPLIED IN CASE THE REMUNERATION PAID BY THE ASSESSEE IS HIGHER THAN THE MARKET RATE. HOWEVER, THE ASSESSING OFFICER HAS FAILED TO ESTABLISH ITS CASE AND IN THE ABSENCE OF THE SAME, THERE IS NO MERIT IN ANY DISALLOWANCE ON ACCOUNT OF DIRECTORS REMUNERATION BY APPLYING T HE ITA NO. 1919 /PN/20 1 6 M/S. KHAMBETE KOTHARI CAN AND ALLIED PRODUCTS PVT. LTD. 7 PROVISIONS OF SECTION 40A(2)(A) AND 40A(2)(B) OF THE ACT . UPHOLDING THE ORDER OF CIT(A), THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS DISMISSED. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE THUS, PARTLY ALLOWED. 1 2 . IN THE RESULT, THE APPEAL OF REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 9 TH DAY OF DECE MBER , 201 6 . SD/ - (SUSHMA CHOWLA) / JUDICIAL MEMBER / PUNE ; DATED : 9 TH DECEM BER , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT(A) - 2 , NASHIK ; 4. / THE PR. CIT - 2 , NASHIK ; 5. 6. , , , - / DR SMC , ITAT, PUNE; / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE