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

ITA 331/AHD/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1148 (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: 2015-2016
• Appeal Filed On: 15-06-2020
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Salary income; Period of limitation; Commercial expediency
• Section: 234B

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “A” BENCH Before: Shri P.M. Jagtap, Vice President And Shri Siddhartha Nautiyal, Judicial Member Girish bhai Vadilal Shah, 139, V. R. S hah Smruti Shikshan Mandir, Nr. Dh arnidhar Derasar, Vasna, Ah medabad PAN: AB JP S 3102P (Appellant) Vs The DCIT, Circle-4(1)(2 ), Ah med abad (Resp ondent) Asses see b y : None Revenue by : Shri S hramdeep Sinha , Sr. D. R. Date of hearing : 03-08 -2022 Date of pronouncement : 12-10 -2022 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-8, Ahmedabad in Appeal no. ITA No. 331/Ahd/2020 Assessment Year 2015-16 I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 2 CIT(A)-8/10348/17-18 vide order dated 16/03/2020 passed for the assessment year 2015-16. 2. The assessee has taken the following grounds of appeal:- “1. That the Ld. CIT(A) has erred both in law and on facts while sustaining the disallowance of interest expenses of Rs. 24,02,792/- u/s 58(2) r.w.s. 40A(2) of the I.T. Act. 1961 which requires to be deleted. 2. That the Ld. A.O as well as CIT(A) has not doubted the genuineness of Interest expenditure and the appellant has fulfilled all the conditions of section 57(iii) of the Income Tax Act, 1961, Further Interest paid to related parties u/s 40A(2)(b) all are paying tax on their Individual Income, However the disallowances made and sustained by CIT(A) for Rs. 24,02,792/- amounts to double taxation and therefore it requires to be deleted. 3. On peculiar facts and circumstances of the case of the appellant Ld. CIT(A) has erred both in law and on facts while sustaining disallowance of Interest expense of Rs. 11,26,619/- out of Income from house property and therefore it requires to be allowed u/s 24(b) of the Income Tax Act, 1961. 4. That the appellant has fulfil all the conditions of section 24(b) of the Income Tax Act, 1961 and therefore whole interest expenses of Rs. 25,97,100/- paid on construction of house property is allowable as deduction during the year under consideration. Therefore the deduction sustained by CIT(A) for Rs. 11,26,619/- which may please be allowed. 5. That the assessee has not concealed or suppressed any particulars of income as per explanation-1 to section 271(l)(c) and as such the penalty and interest u/s 234A, 234B and 23 4C may please be deleted. 6. Your appellant carves leave to add, alter, amend or drop any of the grounds till the appeal is finally heard and disposed off.” I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 3 3. The brief facts of the case are that the assessee is an individual having income from salary, house property and other sources. During the course of assessment, the AO found that the assessee had borrowed funds at the rate of 12% and had advanced loans at the interest rate of 9%. Accordingly, the AO issued a show cause notice as to why interest expenses only to the extent of rate of interest of 9% should be allowed section 57 of the Act. The AO observed that as per assessee’s own admission, part of the interest-bearing borrowings to the extent of 7,46,64,758/- has been utilised for the purpose of purchase of land and construction of building. Therefore, the Assessing Officer held that interest expenses corresponding to borrowings of Rs. 7,46,64,758/- amounting to 25,97,100/- are not allowable under section 57 of the Act. Further, the AO observed that the closing balance of loans borrowed at the rate of 12% rate of interest is 9,01,60,966/ - and as against this, the assessee has not charged rate of interest of more than 9% in any of the loans and advances. Therefore, to the extent of loans borrowed of 9,01,60,966/- the AO disallowed interest expenses incurred excessive rate of 3% i.e. 27,04,828/- and added the same to the total income of the assessee. 4. In appeal, with respect to the interest expenses of 27,04,828/- which was disallowed by the AO during the course of assessment proceedings, the Ld. CIT(Appeals) partly allowed the assessee’s appeal and restricted the disallowance to 24,02,792/- and thereby deleted addition of 3,02,036/-. While allowing the relief to the assessee, Ld. CIT(Appeals) made the following observations: I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 4 “6.4.2 The AO has while making the said addition noticed and considered this fact that the higher rate of interest than paid to other parties are mentioned in section 40A(2)(b). He has adjudged that the interest paid is higher than should have been paid by the appellant. However to arrive at the quantum of such excessive disallowance he has actually charged notional interest on loans advanced to the related parties. Here it is uncontroverted fact that unsecured loans were taken with several parties @ 'rates-ranging from 6%& 8 %, 8.5% and 12%. Loans amounting to Rs 31,47,55,258/- are taken at such rates. Loans amounting to Rs 25,72,98,427/- were given @ 8- 9%. This is year it is stated that the appellant paid back the entire loans taken from group companies, viz. Ahmedabad Cements Company P Ltd & Adeshwera Cements Company P Ltd from whom it had taken loan @ 8.5 % only. No reason whatsoever has been advanced that what was the exigency to take loans from specified persons @ 12% at such higher rates when the loan from everyone else capped at 8%. No commercial expediency has been proven. 6.6 In the facts and circumstances as discussed above and in view of the assessee having paid interest at varying rates of interest, in view of the provisions of section 58(2) r w40A(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. Where the assessee himself has paid interest at a rate lesser than 9%, I hold the appellant having taken loan at the rate of interest @ 12% per annum from its family members, who are admittedly specified persons covered under section 40A(2), being excessive and unreasonable especially in view of the fact that it had taken loan @ 8.5% from other related parties. No commercial expediency has been proven. Since loans were advanced maximum @ 9%, I hold that 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 Rs96,11,1667- or Rs 24,02,7927- is disallowed and added back to the appellant's income u7s 58(2) r w 40A(2) of the Act. I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 5 6.7 Balance Rs 3,02,036/- (Rs 27,04,828/- minus Rs 24,02,792/-) made by the AO is Greeted to be deleted. Ground of appeal 1 is partly allowed.” 5. With respect of disallowance of 25,97,100/- by the AO for the reason that this interest amount related to loan of 7,46,64,758/ - taken for the purchase of land and construction of building, Ld. CIT(Appeals) allowed the assessee to take up the alternative contention that this amount should be allowed under section 24 (b) of the Act for the period the assessee offered rental income to tax in respect of this property. Accordingly, the Ld. CIT(Appeals) gave part relief to the assessee with the following observations: “7. Ground No.2 relates to disallowance of Rs. 25,97,100/- by the A.O. for the reason that it was claimed as interest expense u/s 57(iii) of the Act but corresponding loan to the extent of Rs. 7,46,64,758/- was taken for the purpose of purchase of land and construction of building. The appellant claimed that it should be allowed u/s 24(b) of the Act at least for the period it showed rental income of the said house property. The appellant had furnished the calculation of interest expenses incurred on borrowing utilised for construction of house property with bifurcation for the interest expense incurred for the pre and post construction period vide submission dated 13.12.2017. The same is also part of assessment order. The appellant had requested additional claim and stated that the decision in Goetze (India)'s case (SC) has not prohibited such a claim before the appellate authorities. He has relied upon several decision in support of it's claim that the interest income has to be allowed u/s 24(b). The appellant has shown the income from House property for Rs. 32,46,009/- at the time of filing of return of income for AY 2015-16. Due to consistent practice to claim the interest expenses incurred for the borrowing made u/s 57(iii) of the Act, The appellant had not claimed the interest expenses u/s 24(b) of the Act. However, the Id. I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 6 A.O. has failed to consider the same and disallowed the entire interest expense of Rs. 25,97,100/-without considering the fact that the interest expense of Rs. 14,70,471/- was incurred during the period for which Rent income offered for income tax for AY 2015-16 and the same is allowable u/s 24(b) of the Act. 8.1 The appellant has shown Income from House Property from Rajoda House of Rs 45,00,000/- (gross - @ Rs 15,00,000/- per month). Hence, it can be construed that that the property was on rent from January 2015 onwards for period of 3 months . For AY 2016-17 the appellant had shown annual gross receipt on rent as Rs 1,84, 35,000/- and claimed entire interest of Rs 36,36,384 u/s 24(b). For this FY it has filed a chart claiming that out of the Total interest paid on such loan of Rs 25,9-7,100/-, Rs 11,26,619/- pertained to period April 2014 to Dec 2014 and Rs 14,70,481/- pertained to period Jan 2015 to Mar 2015. The AO is directed to verify this calculation. Interest for period April 2014 to Dec 2014 is not allowed and addition of that much amount is confirmed. Interest for period Jan 2015 to Mar 2015 is allowed u/s 24(b). Not to say the claim of appellant in this regard is admitted in view of the Supreme Court order in the case. The ground of appeal 2 is partly allowed.” 6. The assessee is in appeal before us against the aforesaid additions confirmed by Ld. CIT(Appeals). Before us, none appeared on behalf of the assessee. The Ld. DR relied upon the observations made in Ld. CIT(Appeals) order. We have heard the contentions of the Ld. DR and perused the material on record. 7. 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 I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 7 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 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. 8. On merits, we observe that with respect for deduction of claim under section 24(b) of the Act, Ld. CIT(Appeals) allowed the assessee to raise this additional ground during the course of appeal (though not claimed during the course of assessment proceedings) and directed the AO to grant deduction of proportionate interest of 14,70,481/- against the rental income for the period January 2015 to March 2015 i.e. the post construction period when the property was put up for rent by the assessee, after due verification of calculation to be carried out by the AO. While granting relief, Ld. CIT(Appeals) also observed that in the immediately succeeding year, the assessee has shown gross annual receipt of rent as 1,84,35,000/- and claimed the interest of 36,36,384/- under section 24(b) of the Act. I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 8 Accordingly, in our view, in the instant set of facts, Ld. CIT(Appeals) has taken reasonable approach while granting relief to the assessee on this count. Accordingly, with respect to this ground, we see no reason to interfere with the order passed by Ld. CIT(Appeals). 8.1 So far as part relief with respect to addition made under section 58(2) rws 40A(2) of the Act is concerned, we observe that the assessee in the instant set of facts has not been able to establish any commercial expediency for taking loans at high rates and giving the same at maximum interest rate of 9%. Accordingly, we find no infirmity in the order of the Ld. CIT(Appeals) who has disallowed 3% or 1/4 th of the interest paid at 12% as being excessive and unreasonable. 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 diversion of borrowed fund on which interest was paid by the assessee to the sister concern without I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 9 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 31,47,55,258/-) and the assessee gave loans amounting to 25,72,98,427/ - 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. I.T.A No. 331/Ahd/2020 A.Y. 2015-16 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 10 9. In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on 12-10-2022 Sd/- Sd/- (P.M. JAGTAP) (SIDDHARTHA NAUTIYAL) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 12/10/2022 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद