BHAIRAV PROPERTIES & AGROFARMS PVT. LTD., MUMBAI V. ITO -9(3)(1), MUMBAI

ITA 2640/MUM/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2482 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 11-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K BEPARI
• Assessee Lawyers: RAVIKANT N PATHAK
• Keywords: Non-deduction of tax

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'SMC' BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 2640/MUM/2016 (ASSESSMENT YEAR: 2012-13) SHRI BHAIRAV PROPERTIES & AGROFARMS PVT. LTD. 412, FLOOR-4, 17G, VARDHAMAN CHAMBER, CAWASJI PATEL ROAD HORNIMAN CIRCLE FORT, MUMBAI 400001 VS. INCOME TAX OFFICER - 9(3)(1) AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN AAMCS9620B APPELLANT RESPONDENT APPELLANT BY: SHRI RAVIKANT N. PATHAK RESPONDENT BY: SHRI S.K. BEPARI DATE OF HEARING: 26.09.2018 DATE OF PRONOUNCEMENT: 14.11.2018 O R D E R PER SAKTIJIT DEY, JM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-21, MUMBAI DAT ED 28.12.2015AND IT RELATES TO ASSESSMENT YEAR2012-13. 2. THE ISSUE IN DISPUTE IN THE PRESENT APPEAL RELATES TO DISALLOWANCE OF DEDUCTION CLAIMED ON ACCOUNT OF INTEREST PAID ON LO AN AVAILED FROM M/S. SURYODAY BUILDWELL AND FARMS PVT. LTD. 3. BRIEF FACTS OF THE CASE ARE, THE ASSESSEE, A COMPAN Y, IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT. FOR THE AS SESSMENT YEAR UNDER DISPUTE THE ASSESSEE FILED ITS RETURN OF INCOME ON 29.09.2012 DECLARING LOSS OF ` 23,141/. DURING THE ASSESSMENT PROCEEDINGS THE ASSE SSING OFFICER (AO) WHILE VERIFYING THE MATERIAL ON RECORD FOUND T HAT THE ASSESSEE HAS CAPITALISED INTEREST LIABILITY OF ` 40,32,408/- AND ADDED IT TO THE OPENING STOCK. ON FURTHER VERIFICATION THE AO FOUND THAT TH E AFORESAID INTEREST IS ON ACCOUNT OF OUTSTANDING LOAN LIABILITY OF ` 1,91,01,743/- FROM M/S. SURYODAY ITA NO. 2640/MUM/2016 SHRI BHAIRAV PROPERTIES & AGROFARMS PVT. LTD. 2 BUILDWELL AND FARMS PVT. LTD. AND THE RATE OF INTER EST CHARGED WAS 27%. NOTICING THESEFACTS, THE AO WAS OF THE VIEW THAT TH E RATE OF INTEREST CHARGED ON THE LOAN AVAILED IS HIGH AND EXCESSIVE. HENCE, H E CALLED UPON THE ASSESSEE TO EXPLAIN WHY THE RATE OF INTEREST PAYABL E SHOULD NOT BE RESTRICTED TO 12%, WHICH ACCORDING TO THE AO, IS TH E FAIR MARKET RATE FOR INTEREST. FURTHER, HE ALSO CALLED UPON THE ASSESSEE TO SHOW CAUSE AS TO WHY THE INTEREST PAYMENT SHOULD NOT BE DISALLOWED UNDER SECTION 40(A)(IA)OF THE INCOME TAX ACT, 1961 (HEREINAFTER 'THE ACT') ON ACC OUNT OF NON-DEDUCTION OF TAX AT SOURCE. IN RESPONSE, THE ASSESSEE SUBMITT ED ITS REPLY VIDE LETTER DATED 25.09.2014 JUSTIFYING THE ALLOWABILITY OF INT EREST PAID @27%. AS REGARDS THE NON-DEDUCTION OF TAX AT SOURCE, IT WAS SUBMITTED THAT ON THE PROMISE OF THE LENDER THAT THEY HAVE APPLIED FOR A CERTIFICATE UNDER SECTION 1`97 FOR NIL DEDUCTION THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE. FURTHER, IT WAS SUBMITTED, THE PAYEE HAS FURNISHED DECLARATI ON STATING THAT THEY HAVE OFFERED INTEREST RECEIVED AS THEIR INCOME AND PAID TAX. THUS, IT WAS SUBMITTED, NO DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT CAN BE MADE. THE AO, HOWEVER, DID NOT FIND MERIT IN THE SUBMISSI ONS OF THE ASSESSEE. AS REGARDS THE ISSUE RELATING TO NON-DEDUCTION OF TAX AT SOURCE AND CONSEQUENT DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT, THE AO OBSERVED, SINCE THE ASSESSEE NEITHER DEDUCTED NOR P AID THE TDS AMOUNT BEFORE THE DUE DATE OF FILING OF RETURN OF INCOME, DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT HAS TO BE MADE. FURTHE R HE OBSERVED THAT SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT HAVI NG BEEN INSERTED TO THE STATUTE W.E.F. 01.07.2012 IS EFFECTIVE FOR A.Y. 201 4-15. HENCE, THE ASSESSEE CANNOT TAKE BENEFIT OF SUCH PROVISION IN THE IMPUGN ED ASSESSMENT YEAR. THUS, ULTIMATELY, THE AO HELD THAT THE ENTIRE INTER EST PAYMENT HAS TO BE DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT. WI THOUT PREJUDICE TO THE ABOVE, THE AO ALSO HELD THAT RATE OF INTEREST PAID AT 27% IS HIGH AND EXCESSIVE IN COMPARISON TO THE MARKET RATE OF INTER EST. HE OBSERVED, THE MARKET RATE OF INTEREST ON UNSECURED LOAN IN THE RE LEVANT PREVIOUS YEAR VARIED BETWEEN 12% AND 15%. HE ALSO OBSERVED THAT T HE PRIME LENDING RATE AT WHICH THE STATE BANK OF INDIA CHARGED INTEREST A S ON 31.03.2012 IS 14.5%. THUS, TAKING THE BPLR OF STATE BANK OF INDIA AT 14.5% AS THE ITA NO. 2640/MUM/2016 SHRI BHAIRAV PROPERTIES & AGROFARMS PVT. LTD. 3 BENCHMARK, THE AO RESTRICTED THE INTEREST PAYMENT O N THE LOAN AVAILED BY THE ASSESSEE TO 14.5%. RESULTANTLY HE ALLOWED THE E XPENDITURE ON ACCOUNT OF INTEREST PAYMENT AT ` 21,65,552/-,THEREBY, DISALLOWING AN AMOUNT OF ` 18,66,856/-. BEING AGGRIEVED WITH THE AFORESAID DIS ALLOWANCE MADE BY THE AO ON ACCOUNT OF INTEREST PAYMENT, THOUGH, THE ASSE SSEE PREFERRED APPEAL BEFORE THE LEARNED CIT(A), HOWEVER, HE UPHELD THE D ISALLOWANCE MADE BY THE AO. 4. THE LEARNED AUTHORISED REPRESENTATIVE (A.R.) SUBMIT TED, WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE FOR A.Y. 2012-13 THE TRIBUNAL IN ITA NO. 2639/MUM/ 2016 DATED 07.06.2018 HAS RESTORED THE ISSUE RELATING TO DISALLOWANCE UNDER SECTION 40(A)( IA) OF THE ACT WITH A DIRECTION TO THE AO TO EXAMINE THE APPLICABILITY OF SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT. AS REGARDS THE ISSUE RELATING TO RESTRICTION OF RATE OF INTEREST TO 14.5%, THE TRIBUNAL, AFTER CONS IDERING THE SUBMISSIONS OF THE PARTIES, ENHANCED THE RATE OF INTEREST TO 18 % PER ANNUM. THUS, THE LEARNED A.R. SUBMITTED, SINCE IT HAS ALREADY BEEN H ELD BY DIFFERENT HIGH COURTS AS WELL AS THE TRIBUNAL THAT SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT IS RETROSPECTIVE IN NATURE, NO DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT CAN BE MADE IF THE PAYEE HAS OFFERED THE AMOUNT RECEIVED AS INCOME. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, RELIED UPON THE OBSERVATIONS OF THE LEARNED CIT(A) AND AO. 6. I HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AS REGARDS THE FIRST ISSUE RELATING TO DISA LLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOURCE ON INTEREST PAYMENT, IT IS THE SPECIFIC CLAIM OF THE ASSESSEE B EFORE THE DEPARTMENTAL AUTHORITIES THAT THE RECIPIENT/PAYEE HAS NOT ONLY O FFERED THE INTEREST RECEIVED AS INCOME BUT ALSO PAID THE TAX. THUS, THE ASSESSEE HAS CLAIMED BENEFIT UNDER THE SECOND PROVISO TO SECTION 40(A)(I A) OF THE ACT. IT IS EVIDENT, THE AO HAS NOT DISPUTED THE CLAIM OF THE A SSESSEE THAT PAYEE/RECIPIENT OF INTEREST HAS OFFERED IT AS INCOM E AND PAID TAX. THE ONLY ITA NO. 2640/MUM/2016 SHRI BHAIRAV PROPERTIES & AGROFARMS PVT. LTD. 4 REASON ON WHICH ASSESSEES CLAIM HAS BEEN DISALLOWE D IS, THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT WILL NOT OP ERATE RETROSPECTIVELY. IT IS NOW WELL SETTLED BY VIRTUE OF RATIO LAID DOWN IN A NUMBER OF JUDICIAL PRECEDENTS INCLUDING THE DECISION OF DIFFERENT HIGH COURTS THAT SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT WILL OPERAT E RETROSPECTIVELY SINCE IT IS CLARIFICATORY IN NATURE. THEREFORE, THE REASONING O F THE DEPARTMENTAL AUTHORITIES THAT SECOND PROVISO TO SECTION 40(A)(IA ) OF THE ACT WILL APPLY FROM A.Y. 2014-15 IS NOT ACCEPTABLE. THUS, IF ASSES SEES CLAIM THAT THE RECIPIENT/PAYEE HAS OFFERED THE INTEREST INCOME TO TAX IS FOUND TO BE CORRECT, NO DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT CAN BE MADE. IN THIS CONTEXT, IT IS RELEVANT TO OBSERVE, BEFORE THE AO AS WELL AS THE FIRST APPELLATE AUTHORITY THE ASSESSEE HAS FURNISHED THE DECLARATION ISSUED BY THE RECIPIENT/PAYEE OF INTEREST THAT IT HAS OFFERED THE SAID INTEREST INCOME IN THE RETURN FILED AND HAS ALSO PAID THE TAX. THER EFORE, IN MY CONSIDERED OPINION, ON THE BASIS OF THE AFORESAID FACTS AND MA TERIAL ON RECORD NO DISALLOWANCE UNDER SECTION 40(A)(IA) OF THE ACT CAN BE MADE. AS REGARDS THE ISSUE RELATING TO RATE AT WHICH INTEREST SHOULD HAV E BEEN PAID BY THE ASSESSEE ON THE LOAN TAKEN, I FIND, WHILE DECIDING IDENTICAL ISSUE IN ASSESSEES OWN CASE IN A.Y. 2012-13 THE TRIBUNAL, I N THE ORDER REFERRED TO ABOVE, HAS FIXED THE REASONABLE RATE OF INTEREST AT 18% PER ANNUM. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E TRIBUNAL IN ASSESSEES OWN CASE, I DIRECT THE AO TO COMPUTE THE INTEREST P AYABLE BY THE ASSESSEE ON THE LOAN TAKEN @18% AND RESTRICT THE DISALLOWANC E TO THE INTEREST PAID OVER AND ABOVE 18% PER ANNUM. GROUND RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH NOVEMBER, 2018. SD/ - (SAKTIJIT DEY) JUDICIALMEMBER MUMBAI, DATED: 14 TH NOVEMBER, 2018 ITA NO. 2640/MUM/2016 SHRI BHAIRAV PROPERTIES & AGROFARMS PVT. LTD. 5 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -21, MUMBAI 4. THE PR.CIT- 13, MUMBAI 5. THE DR, SMC BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.