SUNIL BHABULAL DOSHI, MUMBAI V. ITO 21(2)(4), MUMBAI

ITA 2571/MUM/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0066 (ITAT-MUMBAI)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 10-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN KUMAR
• Assessee Lawyers: KL GUGALIA
• Keywords: Commercial expediency
• Section: 143(3)

Judgement Text

1 MAHAKOSHAL REFRACTORIES PVT LTD IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F, MUMBAI BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) ITA NO.6323/MUM /2014 - AY 2010-11 ITA NO.2571/MUM /2014 - AY 2011-12 MAHAKOSHAL REFRACTORIES PVT LTD, INDUSTRIAL AREA, KATAY GHAT ROAD, KATNI (M.P.) 483 501 VS DCIT-10(3), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI KL GUGALIA RESPONDENT BY SHRI SUMAN KUMAR DATE OF HEARING 19-06-2017 DATE OF PRONOUNCEMENT 21-06-2017 O R D E R PER G MANJUNATHA, AM : THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECT ED AGAINST SEPARATE BUT IDENTICAL ORDERS OF THE COMMISSIONER OF INCOME- TAX (APPEALS)-22, MUMBAI FOR ASSESSMENT YEARS 2010-11 AND 2011-12. S INCE THE FACTS ARE IDENTICAL AND ISSUES ARE COMMON, THE APPEALS WERE H EARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADIN G OF REFRACTORIES, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEARS 2010- 11 AND 2011-12 ON 11-10-2010 AND 17-09-2011 DECLARING TOTAL INCOME OF RS.5,29,67,150 AND RS.2,42,39,530 RESPECTIVELY. THE CASES HAVE BE EN SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICES U/S 143(2) AND 142 (1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REP RESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED T HE DETAILS AS CALLED FOR. THE ASSESSMENTS FOR THE ASSESSMENT YEARS 2010 -11 AND 2011-12 2 MAHAKOSHAL REFRACTORIES PVT LTD WERE COMPLETED U/S 143(3) ON 12-03-2013 AND 17-12-2 013 DETERMINING THE TOTAL INCOME OF RS.5,33,85,560 AND RS.2,45,44,4 50 RESPECTIVELY, INTERALIA MAKING ADDITION TOWARDS DISALLOWANCE OF I NTEREST PAID ON UNSECURED LOANS BORROWED FROM DIRECTORS AND THEIR R ELATIVES U/S 40A(2)(B) OF THE ACT BEING EXCESSIVE AND UNREASONABLE AS COMP ARED TO THE MARKET RATE. 3. AGGRIEVED BY THE ASSESSMENT ORDERS, THE ASSESSEE PR EFERRED APPEALS BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS SUBMITTED THAT BEING A PRUDENT BUSINESSMAN, THE ASSESSEE HAS RESOR TED TO LOANS FROM THE RELATIVES AS A LAST RESORT WHEN NO BORROWINGS W ERE POSSIBLE FROM THE BANKS. THE ASSESSEE FURTHER SUBMITTED THAT THE LOA NS BORROWED FROM RELATIVES WERE USED FOR BUSINESS PURPOSES ONLY. IT WAS FURTHER SUBMITTED THAT THE INTEREST RATE AT WHICH LOANS FROM RELATIVE S WERE RECEIVED SHOULD NOT BE COMPARED WITH THE BANK RATE FOR THE REASON T HAT THE BANK GRANTS LOANS ONLY WITH STRINGENT CONDITIONS AND FORMALITIE S ARE COMPLIED WITH WHEREAS THE LOANS FROM DIRECTORS AND THE RELATIVES ARE RAISED AS AND WHEN REQUIRED WITHOUT THERE BEING ANY CONDITIONS EXCEPT REPAYMENT OF LOAN ON DEMAND. THEREFORE, THE QUESTION OF COMPARING THE R ATE OF INTEREST THAT IS PAID ON THE UNSECURED LOANS WITH THE PREVAILING BAN K RATE IS INCORRECT. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE OBSERVED THAT THE ASSESSEE HAS FAILED TO PROVE THE FACT THAT IT HAS BORROWED LOANS FROM DIRECTORS AND THE RELATIVES ONLY WHEN IT WAS N OT POSSIBLE TO BORROW FURTHER LOANS FROM THE BANKS. THERE IS NO DENIAL B Y THE ASSESSEE THAT THE OFFICIAL BANK RATE OF INTEREST WAS APPROXIMATELY 12 %. THEREFORE, THE CIT(A) FOUND THAT THE AO WAS JUSTIFIED IN DISALLOWI NG INTEREST PAID OVER AND ABOVE 12% ON LOANS BORROWED FROM DIRECTORS AND THEIR RELATIVES U/S 40A(2)(B) AS EXCESSIVE AND UNREASONABLE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD.AR FOR THE ASSESSEE AT THE TIME OF HEARING S UBMITTED THAT THE ISSUE INVOLVED IN THESE TWO APPEALS IS COVERED BY T HE DECISION OF ITAT MUMBAI BENCH IN ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2009-10, WHEREIN THE TRIBUNAL HAS DELETED THE ADDITIONS MADE BY THE AO TOWARDS 3 MAHAKOSHAL REFRACTORIES PVT LTD DISALLOWANCE OF INTEREST PAID OVER AND ABOVE 18% ON UNSECURED LOANS BORROWED FROM DIRECTORS AND THEIR RELATIVES. ON TH E OTHER HAND, THE LD.DR STRONGLY SUPPORTED THE ORDER OF THE CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE M ATERIAL AVAILABLE ON RECORD. THE AO DISALLOWED INTEREST PAID ON UNSE CURED LOANS BORROWED FROM DIRECTORS AND THEIR RELATIVES BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) ON THE GROUND THAT THE INTEREST PAID ON U NSECURED LOANS IS EXCESSIVE AND UNREASONABLE. ACCORDING TO THE AO, T HE PREVAILING RATE OF INTEREST IN THE MARKET IS AROUND 12% WHEREAS THE AS SESSEE HAS PAID INTEREST @18%. WE FIND THAT A SIMILAR ISSUE HAS BE EN CONSIDERED BY THE CO-ORDINATE BENCH OF ITAT, MUMBAI IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 IN ITA NO.2913/UM/2012 DATE D 26-04-2016 WHEREIN IT WAS OBSERVED THAT THE TRANSACTIONS FROM THE RELATIVES AND OTHER ASSOCIATES / CONCERN CANNOT BE DISCARDED AND THE PR ICE PAID CANNOT BE DISCARDED UNLESS IT IS ESTABLISHED OTHERWISE BY THE DEPARTMENT THAT THE TRANSACTION WAS SHAM. THE REASONABLENESS OF THE IN TEREST IS TO BE DETERMINED AFTER TAKING INTO ACCOUNT THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE. WHEN COMPARING THE RATE OF INTERE ST, IT HAS TO BE COMPARED WITH THE PREVAILING RATE OF INTEREST AVAIL ABLE IN THE MARKET BUT NOT TO THE INTEREST CHARGED BY THE COMMERCIAL BANKS WHICH IS DEPENDING UPON DIFFERENT FACTS AND CIRCUMSTANCES. THE RELEVA NT PORTION OF THE ORDER IS EXTRACTED BELOW:- 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE F ACTS, IN BRIEF, ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF REFRACTORI ES. IT WAS NOTED BY THE LD. ASSESSING OFFICER THAT THE ASS ESSEE PAID INTEREST ON SECURED AND UNSECURED LOANS AMOUNTING T O RS.76,52,399/- AND RS.5,98,826/- RESPECTIVELY. THE UNSECURED LOANS WERE MAINLY OBTAINED FROM DIRECTORS AND OTHER RELATIVES ON WHICH THE INTEREST WAS PAID AT T HE RATE OF 18% PER ANNUM. THE ID. ASSESSING OFFICER WA S OF THE VIEW THAT THE PREVAILING MARKET RATE WAS 12% , THEREFORE, THE PAYMENT OF INTEREST AT 18% IS HIGHLY 4 MAHAKOSHAL REFRACTORIES PVT LTD EXCESSIVE, THUS, HE PAID RS. 1,53,6 10/- TO THE PAR TIES COVERED U/S 40A(2)(B) AND ADDITION WAS MADE TO THE RETURNED INCOME. 2.2 ON APPEAL, BEFORE THE COMMISSIONER OF INCOME TA X (APPEAL), THE FACTS WERE ANALYZED AND THE STAND TAK EN IN THE ASSESSMENT ORDER WAS AFFIRMED. THE ASSESSEE IS IN FURTHER APPEAL BEFORE THIS TRIBUNAL. 2.3. IF THE OBSERVATION MADE IN THE ASSESSMENT ORDER, LEADING TO ADDITION MADE TO THE TOTAL INCOME , CONCLUSION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF KEPT IN JUXTAPOSITION AND AN ALYZED, THERE IS NO DISPUTE TO THE FACT THAT UNSECURED LOAN S WERE OBTAINED FROM THE DIRECTORS AND OTHER RELATIVES AND INTEREST WAS PAID AT THE RATE OF 18% TO THEM. THE ADDITION WAS MADE BY THE LD. ASSESSING OFFICER AND CONFIRMED BY THE COMMISSI ONER OF INCOME TAX (APPEAL) IS THAT THE BANK INTEREST RATE WAS 12%. THIS IS ALSO AN ADMITTED POSITION THAT FOR SEC URING INTEREST FROM THE BANKS, LOT OF FORMALITIES LIKE PA PER WORK, PROCESSING FEE, ADMINISTRATIVE CHARGES, TIME IS REQUIRED, WHEREAS, FOR UNSECURED LOANS FROM RELATIV ES AND FRIENDS, SUCH FORMALITIES ARE NOT NEEDED. IT IS ALSO NOTED THAT THE ASSESSEE PAID INTEREST AT THE RATE O F 18% FROM OUTSIDE PARTIES NAMELY M/S ABHISHEK INVESTMENT , RATLAM, THEREFORE, THE BASIS OF ADDITION THAT EXCES SIVE INTEREST WAS PAID TO THE RELATED PARTIES, SOLELY CA NNOT BE THE BASIS FOR MAKING THE DISALLOWANCE. SO FAR AS , THE OBSERVATION CONTAINED IN 2.3 OF THE IMPUGNED ORDER THAT OPTION WAS AVAILABLE TO OBTAIN THE LOAN FROM THE BA NK IS CONCERNED, THE BUSINESS MAN IS WISE ENOUGH TO TAKE A DECISION UNDER THE CIRCUMSTANCES AND NO BUSINESS WILL PAY HI GHER RATE OF INTEREST UNLESS AND UNTIL THERE ARE PRESSING CIR CUMSTANCES. SINCE, THE ASSESSEE HAS PAID INTEREST AT THE RATE O F 18% TO THE OUTSIDE PARTIES ALSO, THEREFORE, THERE IS NO JUSTIF ICATION TO DISALLOW THE SAME. GENERALLY, THE TR ANSACTIO NS EVEN FROM THE RELATIVES AND O THER ASSOCIATES/ CONCERN PERSON CANNOT BE DISCARDED AND THE PRICE PA ID THEREFORE CANNOT BE DISCARDED UNLESS IT IS ESTABLIS HED OTHERWISE BY THE DEPARTMENT THAT THE TRANSACTION WA S SHAM. THE REASONABLENESS OF THE INTEREST IS TO BE DETERMINED AFTER TAKING INTO ACCOUNT, THE LEGITIMAT E NEEDS OF THE BUSINESS OF THE ASSESSEE. SO FAR AS, THE LEGITI MATE BUSINESS NEEDS ARE CONCERNED, THESE ARE TO BE JUST FROM THE COMMERCIAL EXPEDIENCY OR BUSINESS NEEDS OF THE BUSINESS MAN AND THE ASSESSING OFFICER IS NOT EXPECTED TO SIT ON THE CHAIR OF THE BUSINESS MA N. OUR 5 MAHAKOSHAL REFRACTORIES PVT LTD VIEW FIND SUPPORTS FROM THE DECISION FROM HON'BLE G UJARAT HIGH COURT IN VOITMAP TRANSFORMERS PVT. LTD. VS CIT (198 1) 129 ITR 105, 113(GUJ.). THE RATIO LAID DOWN IN ANAND G. SHA H VS CIT (1990) 181 ITR 171, WHEREIN THE ASSESSEE FIRM PAID INTEREST AT THE RATE OF 24%, PER ANNUM TO THE SON A ND WIFE OF ITS TWO PARTNERS. THE TRIBUNAL FOUND THAT INTEREST AT THE RATE OF 18% AS REASONABLE. THIS CASE SUPPORTS THE CASE OF T HE ASSESSEE. CONSIDERING THE TOTALITY OF FACTS AND THE JUDICIAL PRONOUNCEMENTS, THE APPEAL OF THE ASSESSEE IS ALLOW ED. 6. IN THIS VIEW OF THE MATTER AND ALSO CONSIDERING THE RATIO OF THE DECISION OF THE CO-ORDINATE BENCH OF ITAT, MUMBAI I N ASSESSEES OWN CASE FOR THE AY 2009-10, WE ARE OF THE VIEW THAT THE AO WAS ERRED IN DISALLOWING INTEREST PAID ON UNSECURED LOAN BORROWE D FROM DIRECTORS AND THEIR RELATIVES OVER AND ABOVE 18% WITHOUT ASSIGNIN G ANY REASONS AS TO HOW THE RATE OF INTEREST PAID BY THE ASSESSEE IS EX CESSIVE AND UNREASONABLE. THE CIT(A) WITHOUT APPRECIATING THE FACTS, SIMPLY UPHELD THE DISALLOWANCE MADE BY THE AO. THEREFORE, WE SET ASIDE THE ORDER PASSED BY THE CIT(A) AND DIRECT THE AO TO DELETE TH E ADDITION MADE TOWARDS DISALLOWANCE OF INTEREST U/S 40A(2)(B) OF T HE ACT FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12. 7. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE FO R AYS 2010-11 AND 2011-12 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JUNE, 2017. SD/- SD/- (D.T. GARASIA) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 21 ST JUNE, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) BY ORDER 4. CIT 5. DR /TRUE COPY/ ASSTT. REGISTRAR, ITAT, MUMBAI