Shri Girishbhai Vadilal Shah, Ahmedabad V. The DCIT, Circle-4(1)(2), Ahmedabad

ITA 330/AHD/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1149 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2022
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 02-08-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 15-06-2020
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Notional interest
• Section: 271(1)(c); 10; 2; 234B; 72

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SHRI PRAMOD M JAGTAP, VICE PRESIDENT& SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER I .T .A . N o . 3 3 0/ A h d /2 0 2 0 ( A s se ss m e nt Y e a r : 20 14- 1 5 ) Gir is hb ha iV a d il al S h ah 13 9 , V R S h a h S m r u ti Sh ik sh an Ma n d ir , N r . D h a r ni d ha r D er a s a r , Va s na , Ah me da b a d -3 8 00 07 V s . D C I T C ir cl e - 4 ( 1 ) ( 2 ) , A h me da ba d [ P AN N o. A B JP S3 1 0 2 P ] (Appellant) .. (Respondent) Appellant by : None Respondent by: Shri Shramdeep Sinha, Sr. DR D a t e of H ea r i ng 03.08.2022 D a t e of P r o no u n ce me nt 12.10.2022 O R D E R PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER: This appeal has been filed by the Assessee against the order passed by the Ld. CIT(Appeals)-8, Ahmedabad in Appeal No. CIT(A)- 8/11035/16-17 vide order dated 16.03.2020 passed for Assessment Year 2014-15. 2. The assessee has taken the following grounds of appeals:- “1. That the Ld. CIT(A) has erred both in law and on facts while sustaining the disallowance of interest expenses of Rs. 21,13,971/- u/s 57(iii) of the I.T. Act, 1961 which is requires to be deleted. ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 2 - 2. That the Ld. CIT(A) has without considering the facts and circumstances of the case disallowed interest expenses of Rs.21,13,971/- is against the principal of natural justice and therefore it requires to be deleted. 3. That the Ld. CIT(A) has sustain the disallowance of notional interest of Rs. 21,13,971/- on adhoc basis with certain assumptions and presumptions and also without doubting genuineness of the transactions is against the documents available on records and against the provision of law. Therefore the addition sustained of Rs. 21,13,971/- may please be deleted. 4. That the Ld. CIT(A) has disallowed the Interest expenses of Rs. 21,13,971/- without considering the facts that the Interest paid to the persons are paying tax on their respective income which amounts to double taxation, which is against the principal of law and natural justice. Therefore addition sustained by CIT(A) for Rs. 21,13,971/- may please be deleted. 5. Without prejudice to the grounds of appeals, The Ld. CIT(A) has allowed our plea in para 6.3.1 that notional interest on account of loan given to Shri Harmish G Shah is deleted. However while calculating disallowances by Ld. CIT(A) in para 6.6 deducted Rs. 21,31,971/- out of Rs. 77,15,185/- i.e. without deducting notional interest on Harmish G Shah as per finding of ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 3 - CIT(A) para 6.3.1. is required to be recalculated after deducting Rs. 47,37,840/- out of Rs. 77,15,185/-. 6. That the assessee has not concealed or suppressed any particulars of income as preexplanation-1 to section 271(1)(c) and as such the penalty and interest u/s 234A, 234B and 234C may please be deleted. 7. Your appellant craves leave to add, alter, amend or drop any of the grounds till the appeal is finally heard and disposed off.” 3. At the outset, we observe that the appeal is time-barred by 30 days. However, on going through the records, we observe that the order passed by Ld. CIT(A) was received by the assessee on 18-03-2020. However, in view of the nation-wide lockdown from 24 th March 2020, the Apex Court in Cognizance for Extension of Limitation, In re[2021] 127 taxmann.com 72 (SC), took suo motu cognizance of the situation arising out of the challenge faced by the country on account of COVID-19 Virus and resultant difficulties that could be faced by the litigants across the country. Consequently, it was directed vide order dated 23-3-2020 that the period of limitation in filing petitions/applications/suits/appeals/all other proceedings, irrespective of the period of limitation prescribed under the general or special laws, shall stand extended with effect from 15-3-2020 till further orders. The suo motu proceedings were, disposed of issuing the directions as to in computing the period of limitation for ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 4 - any suit, appeal, application or proceeding, the period from 15-3-2020 till 14-3-2021 shall stand excluded. Consequently, the balance period of limitation remaining as on 15-3-2020, if any, shall become available with effect from 15-3-2021. In view of the above, since the delay of 30 days in filing appeal is falling within the Covid pandemic period, the delay is hereby being condoned. 4. On merits, the brief facts of the case are that the return of income was filed on 31.07.2014 declaring total income at Rs. 67,60,019/-. During the course of assessment proceedings, on perusal of the statement of income filed by the assessee Ld. Assessing Officer observed the assessee has earned total interest of Rs. 2,03,85,303/- against which interest expenses of Rs. 1,71,57,630/- has been claimed. Thus, the assessee has offered net income of Rs. 32,27,673/- for taxation. The Ld. Assessing Officer observed that while giving interest the assessee has consistently paid the interest @12% per annum in majority of the cases, whereas while charging interest, the maximum rate of 9% per annum has been charged by the assessee. The Assessing Officer further observed that assessee has paid interest @12% per annum to his sons HUF but has charged no interest from his son in individual capacity against whom there was a closing balance of Rs. 3,94,82,000/-. Therefore, Ld. Assessing Officer held that the assessee has not been able to prove any nexus between the amount borrowed and the amount advanced. Accordingly, Ld. Assessing Officer held that the interest expenses claimed by the assessee under Section 57(iii) are not allowable to the ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 5 - extent they are attributable to the lower interest charged by the assessee i.e. lesser than 12% per annum on the advanced made. Therefore, Ld. Assessing Officer added/ disallowed an amount of Rs. 77,15,185/- out of the expenses claimed by the assessee under Section 57(iii) and added the same to the income of the assessee. 5. In appeal, Ld. CIT(A) gave part relief to the assessee by holding that the AO has not given any finding that the said loans on which higher rates of interest was paid were not utilized for earning interest income. The AO only found that the rate of interest paid was comparatively higher and therefore excessive and unreasonable. Therefore, disallowance under Section 57(iii) was incorrect. However, Ld. CIT(A) held that section 58(2) r.w.s 40A(2) talks about disallowance of any expenditure which is excessive and unreasonable having regard to the fair market value of goods, services or facilities. The AO has while making the said addition noticed and considered this fact that the higher rate of interest as compared to what has been paid to other parties are mentioned in Section 40A(2)(b). Ld. CIT(A) observed that Ld. Assessing Officer has adjudged that the interest paid is higher than it what should have been paid by the appellant. However, to arrive at the quantum of such excessive disallowance, the Ld. Assessing Officer has actually charged notional interest on loans advanced to the related parties. In the present, the assessee took unsecured loans amounting to Rs 22,67,99,016/- @ rates ranging from 6% to 12%. The assessee gave loans amounting to Rs 22,48,00,614/- @ 8-9%. Notably, the assessee took loan amounting to Rs 10,50,00,000/- from Ahmedabad Cements Company P. ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 6 - Ltd & Adeshwera Cements Company P. Ltd @ 8.5% only. Therefore, Ld. CIT(A) observed that there was no reason as to what was the exigency to take loans from persons specified u/s 40A(2)(b) of the Act @ 12% i.e. at such higher rates when the loan from everyone else was taken at maximum rate 8.5%. No commercial expediency has been proven. Accordingly, Ld. CIT(A) held that in view of the provisions of Section 40A(2) (a) of the Act which clearly provides that where the payment is being made to any person specified under Section 40A(2)(b) of the Act, such goods/services should be provided at market rate. Accordingly, Ld. CIT(A) held that since loans were advanced maximum @ 8.5%, therefore 3% or one fourth of such interest paid @ 12% as being excessive and unreasonable. Accordingly, 1/4 th of total interest paid to such related parties of Rs.84,55,885/- i.e. Rs. 21,13,971/-was disallowed and added back to the appellant’s income under Section 58(2) r.w. 40A(2) of the Act. The Ld. CIT(A) directed the Ld. Assessing Officer to allow/ delete the balance addition of Rs. 56,01,214/- (Rs. 77,15,185/- minus Rs. 21,13,971/-) Accordingly, Ld. CIT(A) partly allowed the assessee’s appeal. 6. The assessee is in appeal before us against the aforesaid order of Ld. CIT(A). Before us, none appeared on behalf of the assessee. In response, Ld. Departmental Representative argued that Ld. CIT(A) has taken a reasonable approach and has correctly disallowed a reasonable amount of interest while granting substantial relief to the assessee. ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 7 - 7. We have heard the contentions of Ld. Departmental Representative and perused the material on record. In our view, the Ld. CIT(A) has taken a reasonable approach by disallowing 1/4 th of interest expenses in the instant facts. The assessee has not brought on record any commercial expediency why the assessee took loans at such high interest rates from related parties to give loans. Notably, the assessee has consistently taken loans at the interest rate of 12% per annum in the majority of the cases, whereas while charging interest, maximum rate of 9% per annum has been charged. The assessee has paid interest at the rate of 12% per annum to a son’s HUF but has not charged any interest from the son in his individual capacity against whom there was a closing balance of 3, 94, 82,000/-. In the case of CIT v. H.R. Sugar Factory (P.) Ltd. [1990] 53 Taxman 63 (Allahabad), the assessee, a private limited company, manufacturing sugar, in which directors/shareholders were substantially interested, raised loans from banks on security of its assets.The assessee advanced huge amounts to its directors by charging interest at rate of 2.25 per cent per annum whereas it was paying interest at rate of 8 per cent per annum on borrowings from banks. The High Court held that difference between interest charged from its directors on aforesaid advances and interest paid by it to banks on borrowings was not an allowable deduction. In the case of CIT v. Accelerated Freeze Drying Co. Ltd. [2011] 10 taxmann.com 108 (Kerala), the assessee company was engaged in export of marine products. On verifying the accounts, the Assessing Officer found that the assessee had advanced an interest free loan to a sister concern. The Assessing Officer held that ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 8 - diversion of borrowed fund on which interest was paid by the assessee to the sister concern without collecting interest called for proportionate disallowance. The High Court held that unless the interest free loan given by assessee to sister concern goes to advance business interest of the assessee, there cannot be any commercial expediency. For example, if a company or a firm supplying raw material for manufacture of products of the assessee goes into financial crisis and if assistance, rendered by the assessee, would retain their business which in turn helps the assessee to carry on business more successfully, certainly commercial expediency can be canvassed. However, prima facie in this case, from the name of the company to which assessee advanced interest free loans, it appeared to be an investment company probably engaged in finance and it was not clear what was the commercial expediency that the petitioner could canvass for advancing interest free loans to that concern. Thus, the disallowance of proportionate interest in the instant case was justified. Now coming to the instant facts, the assessee took unsecured loans from several parties at rates ranging from 6%, 8%, 8.5% and 12% (totaling to rupees 22,67,99,016/-) and the assessee gave loans amounting to 22,48,00,614/ - at rates ranging from 8-9%. In the instant facts, the assessee has not been able to establish the commercial expediency for taking loans at higher rates and giving the same at lower rates. Accordingly, in the instant facts, we are of the considered view, that the Ld. CIT(A) has not erred in facts and in law in restricting the disallowance to 1/4 th of such interest paid at the rate of 12% as being excessive and unreasonable under section 58(2) rws 40 A (2) of the Act. ITA No. 330/Ahd/2020 GirishbhaiVadilal Shah vs. DCIT Asst.Year –2014-15 - 9 - 8. In the result, appeal of the assessee is dismissed. This Order pronounced in Open Court on 12/10/2022 Sd/- Sd/-/- PRAMOD M JAGTAP SIDDHARTHA NAUTIYAL (VICE PRESIDENT) (JUDICIAL MEMBER) Ahmedabad; Dated 12/10/2022 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad