NAVBHARAT POTTERIES P. LTD, MUMBAI V. DCIT 7(1), MUMBAI

ITA 2701/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1769 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 18-02-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 07-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: YOGESH A THAR
• Keywords: Maximum Marginal Rate; Fair market value; Commercial expediency
• Section: 143(3); 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND , SHRI RAJENDRA, ACCOUNTANT MEMBER . / ITA NO. 2701/MUM/2011 / ASSESSMENT YEAR 2006-07 M/S. NAVBHARAT POTTERIES PRIVATE LIMITED, NAVBHARAT ESTATE, ZAKARIA BUNDER ROAD, SEWRI (WEST), MUMBAI. PAN: AAACN 1657 M VS. DY. COMMISSIONER OF INCOME TAX 7(1), MUMBAI. ( !' / APPELLANT ) ( #$!' / RESPONDENT ) !' % / APPELLANT BY : SHRI YOGESH A. THAR #$!' & % /RESPONDENT BY : SHRI MOHIT JAIN & '( / DATE OF HEARING : 18-02-2013 )* & '( / DATE OF PRONOUNCEMENT : 22-02-2013 + / O R D E R PER RAJENDRA, A.M. FOLLOWING ARE THE GROUNDS OF APPEAL FILED BY THE AP PELLANT AGAINST THE ORDER DT. 16-11-2010 OF CIT(A)-13, MUMBAI: GROUND I: DISALLOWANCE OF INTEREST U/S. 40A(2)(B) O F THE ACT 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 13 [THE CIT(A)] ERRED I N UPHOLDING THE ACTION OF DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1), MUMBAI [T HE AO] OF DISALLOWING INTEREST OF RS. 13,94,370/- U/S. 40A(2)(B) OF THE A CT ON THE GROUND THAT INTEREST PAID BY THE APPELLANT WAS EXCESSIVE OR UNREASONABLE. 2. THE APPELLANT PRAYS THAT THE AFORESAID DISALLOWANCE BE DELETED. ITA NO. 2701/MUM/2011 M/S. NAVBHARAT POTTERIES P. LTD., 2 GROUND II: GENERAL THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER AND /OR DELETE ANY/ALL OF THE ABOVE GROUND OF APPEAL. 2. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF WAREHO USING, LEASING OF PROPERTY, DEVELOPMENT OF REAL ESTATE/PROPERTY AND T RADING, FILED ITS RETURN OF INCOME ON 29-11-2006 DECLARING TOTAL INCOME RS. 49,19,238/-. ASSESSMENT WAS FINALISED BY THE ASSESSING OFFICER (AO) U/S. 143(3) OF THE INCOME-TA X ACT, 1961(ACT) DETERMINING THE TOTAL INCOME AS RS. 1,43,32,778/-. 3. DURING THE ASSESSMENT PROCEEDINGS, AO FOUND THAT TH E ASSESSEE HAD DEBITED INTEREST OF RS. 25,56,688/- (PY 44,01,226) WHICH WA S MAINLY PAID ON THE LOANS TAKEN FROM THE DIRECTORS AND RELATIVES, THAT THE PRINCIPA L AMOUNT OF LOAN AS PER THE BALANCE SHEET WAS RS. 1,58,85,124/- WHILE THE LOANS ADVANCE D AS ICD AND BANK FD TOTALED TO RS. 3,29,86,048/- ON WHICH THE INTEREST CREDITED WA S ONLY RS. 23,25,888/-. HE FOUND THAT THE ASSESSEE HAD NOT MENTIONED THE RATE OF INT EREST ON EITHER SIDE NOR IN THE AUDIT REPORT FILED ON SEC. 40A(2)(B) OF THE ACT. IN ABSE NCE OF THE SAME, AO ATTEMPTED AN APPROXIMATE WORKING FOR DIS-ALLOWANCE TO BE MADE U/ S. 40A(2)(B) OF THE ACT. FINALLY, HE MADE AN ADDITION OF RS. 13.94 LAKHS TO THE INCOM E OF THE ASSESSEE. 4. ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY (FAA). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE-C OMPANY, FAA HELD THAT THE AVERAGE INTEREST RATE ON THE LOAN TAKEN FROM THE DI RECTORS AND RELATIVES CAME TO 16% WHILE THE INTEREST RECEIVED ON LOANS AND FIXED DEPO SITS WAS 7%, THAT THE APPELLANT COULD HAVE VERY WELL RETURNED THE LOAN TAKEN AT A H IGHER RATE OF INTEREST FROM DIRECTORS AND RELATIVES, THAT IT HAD SURPLUS FUNDS BY WAY OF INVESTMENTS IN FIXED DEPOSITS ETC., AT LOWER RATE, THAT THE EXCESS INTEREST PAID TO THE DIRECTORS & RELATIVES OVER AND ABOVE THE RATE OF INTEREST FETCHED ON LOANS AND FIXED DEP OSITS AMOUNTING TO RS. 13,94,387/- COULD NOT BE SAID TO BE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS U/S. 37(1) AND SAME ALSO DID NOT FULFIL THE CRITERIA OF REASON ABLENESS U/S. 40A(2)(B). 5. BEFORE US, AUTHORISED REPRESENTATIVE (AR) SUBMITTED THAT IN EARLIER / SUBSEQUENT AYS, AO HAD NOT DIS-ALLOWED THE INTEREST PAID TO PARTNERS / DIRECTORS, THAT THE PARTNERS/DIRECTORS OF THE COMPANY WERE PAYING T AX AT THE MAXIMUM MARGINAL RATE, THAT IT HAD REVENUE NEUTRAL EFFECT, THAT ASSESSMENT ORDERS FOR THE EARLIER AND SUBSEQUENT YEARS WERE PASSED U/S. 143(3) OF THE ACT, THAT PROV ISIONS OF SEC. 40A(2)(B) WERE NOT APPLICABLE IN THE CASE UNDER CONSIDERATION. HE REF ERRED TO PAGE NOS. 100 TO 110 AND 29 TO 31 OF THE PAPER BOOK IN SUPPORT OF HIS SUBMIS SIONS. AR RELIED ON THE CASES OF M.M. TEXTILES [125 TTJ 14 (MUM)] AND SUBHASH CHANDE R & CO [31 SOT 11 (ASR)] IN ADDITION TO THE DECISION OF THE HONBLE SUPREME COURT IN THE MATTER OF GLAXO SMITHKLINE ASIA P. LTD., [195 TAXMAN 35 (SC)]. DEP ARTMENTAL REPRESENTATIVE (DR) SUBMITTED THAT THERE WAS HUGE DIFFERENCE BETWEEN TH E RATES OF INTEREST WITH REGARD TO THE LOANS ADVANCED/RECEIVED, THAT PROVISIONS OF SEC . 40A(2)(B) WERE APPLICABLE IN THE CASE UNDER CONSIDERATION. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PUT BEFORE US. THE UN-DISPUTED FACTS ARE THAT ASSESSEE HAD TAKEN L OANS FROM THE DIRECTORS AND RELATIVES AT A HIGHER RATE THAN THE RATE AT WHICH I T WAS GETTING INTEREST FROM FIXED ITA NO. 2701/MUM/2011 M/S. NAVBHARAT POTTERIES P. LTD., 3 DEPOSITS. IN OUR OPINION, FOR INVOKING PROVISIONS OF SEC. 40A(2)(B), AO HAD TO GIVE A FACTUAL FINDING ABOUT THE EXCESSIVE/UN-REASONABLENE SS OF AN EXPENDITURE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS/SERVICES/FACI LITIES FOR WHICH THE PAYMENT WAS MADE. WE FIND THAT NEITHER AO NOR THE FAA HAS GIVE N ANY FINDING IN THIS REGARD. SECONDLY, FAA HAS INVOKED PROVISIONS OF SEC. 37(1) WITHOUT GIVING ANY REASONS AS HOW THE EXPENDITURE INCURRED WAS NOT WHOLLY AND EXC LUSIVELY FOR THE BUSINESS OF THE APPELLANT-COMPANY. A FINDING GIVEN WITHOUT ANY REA SON IS OF NO USE IN THE EYES OF LAW. WE FIND THAT IN THE CASE OF M.M. TEXTILES (SU PRA), THE ISSUE OF DIS-ALLOWANCE U/S. 40A(2)(B) HAS BEEN DISCUSSED IN PARA NO. 14 OF THE ORDER. AFTER GIVING THE FACTS OF THE CASE TRIBUNAL HAS HELD AS UNDER: FROM THE FACTS NARRATED ABOVE, IT IS NOTED THAT TH E ASSESSING OFFICER DID NOT ALLOW DEDUCTION OF INTEREST TO PARTNERS BY RELYING ON SEC . 40A(2) AS IN HIS OPINION THE ASSESSEE HAD DIVERTED ITS CAPITAL AS WELL AS INTEREST FREE UNSEC URED LOANS FOR THE LOANS AND ADVANCES OF A MUCH HIGHER MAGNITUDE ON WHICH NO INTEREST WAS RECE IVED. SECTION 40A(2) STIPULATES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPEC T OF WHICH PAYMENT HAS BEEN MADE OR IS TO BE MADE TO ANY PERSON REFERRED TO CLAUSE (B) OF THI S SUB-SECTION AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR U NREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS THEN SO MUCH OF TH E EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED A S A DEDUCTION. FROM READING OF THIS SECTION, IT IS CLEAR THAT THE EXPENDITURE SHOULD HA VE BEEN INCURRED BY THE ASSESSEE WHICH IS OTHERWISE DEDUCTIBLE, BUT THE DEDUCTION IS RESTRICT ED TO A PART OF THE SUM BY CONSIDERING SUCH EXPENDITURE TO BE EXCESSIVE HAVING REGARD TO THE FA IR MARKET VALUE OF THE GOODS OR SERVICES ETC., THE DISALLOWANCE IS TO BE RESTRICTED TO SO MUCH PART OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE. IN ORDER TO BE COVERED WITHIN THE AMBIT OF THIS SECTION IT IS NECESSARY THAT THE EXPENDITUR E INCURRED BY THE ASSESSEE SHOULD BE PROVED BY THE ASSESSING OFFICER TO BE EXCESSIVE OR UNREASO NABLE. SUCH UNREASONABLENESS CAN BE PROVED BY CONSIDERING THE FAIR MARKET VALUE OF THE GOODS OR SERVICES FOR WHICH THE PAYMENT IS MADE. IT CANNOT BE SO AS PER THE MERE WHIMS AND FA NCIES OF THE OFFICER. COMING TO THE CONTEXT OF THE INTEREST PAID TO THE PARTNERS, THE S AME CAN BE DISALLOWED UNDER SECTION 40A(2) IF A CASE IS MADE OUT THAT THE RATE OF INTEREST ALL OWED ON THE CAPITAL CONTRIBUTED BY THE PARTNERS IS MORE THAN THE RATE OF INTEREST ON WHICH THE MONEY IS OTHERWISE AVAILABLE IN THE MARKET, BY KEEPING IN VIEW THE OTHER RELEVANT CONSI DERATIONS. IN OTHER WORDS IF THE INTEREST HAS BEEN PAID AT 12 PER CENT TO THE PARTNERS AND TH E MONEY IS AVAILABLE IN THE MARKET UNDER SIMILAR CIRCUMSTANCES AT 8 PER CENT, THEN THE DIFFE RENTIAL RATE OF 4 PER CENT CAN BE HELD AS EXCESSIVE UNDER SECTION 40A(2). THE CO-RELATION OF THE FUNDS CONTRIBUTED BY THE PARTNERS WITH THE RATE OF INTEREST ON WHICH THE MONEY IS ACTUALLY LENT BY THE ASSESSEE, FOR MAKING DISALLOWANCE UNDER SECTION 40A(2), IS MISCONCEIVED. WE, THEREFORE, HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN INVOKING THE PROVISION S OF SEC. 40A(2). 7. WE ALSO FIND THAT ITAT AMRITSAR BENCH HAS WHILE DEC IDING THE ISSUE OF DIS- ALLOWANCE AS PER THE PROVISIONS OF SEC. 40A(2)(B) H AS HELD THAT 15% INTEREST RATE P.A. WAS NEITHER EXCESSIVE NOR UN-REASONABLE HAVING REGA RD TO MARKET RATE. IN THE DECISION OF SUBHASH CHANDER & CO (SUPRA) IT HAS BEEN HELD: THERE WAS NO DISPUTE IN THAT THE PAYMENT OF INTERES T AT THE RATE OF 15 PER CENT P.A. TO RELATED PARTIES BY THE ASSESSEE WAS TO PERSONS SPEC IFIED IN SEC. 40A(2)(B). IN THE INSTANT CASE, THE ASSESSING OFFICER WAS OF THE OPINION THAT PAYME NT OF 15 PER CENT INTEREST PER ANNUM TO RELATED PARTIES WAS EXCESSIVE AS COMPARED TO PAYMEN T OF 12 PER CENT INTEREST PER ANNUM TO UNRELATED PARTIES. HOWEVER, THE REQUIREMENT OF SEC . 40A(2)(A) IS THAT THE OPINION OF THE ASSESSING OFFICER REGARDING THE EXPENDITURE BEING E XCESSIVE OR UNREASONABLE MUST BE HAVING ITA NO. 2701/MUM/2011 M/S. NAVBHARAT POTTERIES P. LTD., 4 REGARD TO THE FAIR MARKET VALUE OF THE GOODS/SERVIC ES/FACILITIES FOR WHICH PAYMENT IS MADE OR FOR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASS ESSEE OR FOR BENEFIT DERIVED OR ACCRUING THERE FROM. AS TO WHICH OF THOSE REQUIREMENTS THE CASE O F THE ASSESSEE FELL, HAD NOT BEEN STATED EITHER BY THE ASSESSING OFFICER, OR BY THE COMMISSI ONER (APPEALS). AS REGARDS THE FAIR MARKET VALUE, IT WAS UNDENIABLE THAT 15 PER CENT INTEREST RATE PER ANNUM WAS NEITHER EXCESSIVE NOR UNREASONABLE. THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN AND ASSUME THE ROLE TO DECIDE AS TO HOW MUCH EXPENDITURE IS REASONABLE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINE SSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT; THE IT AUTHORITIES MUST PUT THEMSELVES IN T HE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT; THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR VIEWPOINT, BUT FROM THAT OF A PRUDENT BUSINESSMAN I MPELLED BY COMMERCIAL EXPEDIENCY. IN VIEW OF THE ABOVE DISCUSSION, THE ORDER OF THE LOWE R AUTHORITIES WAS TO BE SET ASIDE. 8. IF THE FACTS OF THE CASE UNDER CONSIDERATION ARE C OMPARED WITH THE CASES OF M.M. TEXTILES AND SUBHASH CHANDER & CO (SUPRA), IT BECOMES CLEAR THAT THE THEY ARE MORE OR LESS IDENTICAL. IN THE PRESENT CASE, DIREC TORS/RELATIVES HAVE BEEN PAID INTEREST @ 15%, WHICH IN FEW CASES AFTER ADJUSTMENTS, HAVE F LUCTUATED TO 16%. IT IS A KNOWN FACT THAT INTEREST ON FDS IS 7 TO 9%. AO/FAA HAS N OT ESTABLISHED THAT INTEREST PAYMENT TO DIRECTORS WAS UN-REASONABLE OR EXCESSIVE . THEREFORE, RESPECTFULLY FOLLOWING THE ORDERS OF THE COORDINATING BENCHES, W E REVERSE THE ORDER OF THE FAA. WE DECIDE GROUNDS OF APPEAL IN FAVOUR OF THE ASSESS EE. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS AL LOWED. , - ,' . /0 & 1 23 & ' 45. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND FEBRUARY, 2013. + & )* 7 89 22 :( , 2013 * & 1 ; SD/- SD/- ( . . / I.P. BANSAL ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, 8 / DATE: 22 ND FEBRUARY, 2013 TNMM + + + + & && & #'< #'< #'< #'< =< ' =< ' =< ' =< ' / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. THE CONCERNED CIT (A) 4. THE CONCERNED CIT 5. DR B BENCH, ITA T, MUMBAI 6. GUARD FILE $<' #' //TRUE COPY// + + + + / BY ORDER, > >> > / 4 4 4 4 DY./ASST. REGISTRAR , / ITAT, MUMBAI