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

ITA 332/AHD/2020

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1147 (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: 2016-2017
• Appeal Filed On: 15-06-2020
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Gift; Period of limitation; Commercial expediency
• Section: 271(1)(c); 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. CIT(A)-8/10386/18-19 vide order dated 16/03/2020 passed for the assessment year 2016-17. ITA No. 332/Ahd/2020 Assessment Year 2016-17 I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 2 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. 27,02,501/- 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. 27,02,501/- amounts to double taxation and therefore it requires to be deleted. 3. 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 234C may please be deleted. 4. 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 I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 3 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. 4. On merits, the brief facts of the case are during the course of assessment, the AO the assessee had borrowed funds ranging from 6% to 12% and had advanced loans at the interest rate of 9%. However, the assessee claimed deduction of interest expenses of 2,67,24,504/- on all borrowed funds of 37,64,76,272/-. 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 the closing balance of loans borrowed at 12% is 10,25,09,477/- and the assessee has not charged rate of interest of more than 9% in any of the loans advanced. Accordingly, the AO made disallowance of 67,79,927/- u/s 57 of the Act, with the following observations: I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 4 “4.6 In view of the above narrated facts and since the assessee has given interest free advance/gift of Rs. 4,11,62,700/- to Shri Harmishbhai G Shah and Aasit J Shah HUP, the claim of the interest in respect of these gifts is not allowable. Since the assessee has paid interest @ 12% on loans accepted, therefore, interest expenses in proportion to the funds given as gifts amounting to Rs. 49,39,524/- (12% of Rs. 4,1 1,62,700/-) is hereby disallowed u/s. 57 of the I.T Act and added to the total income of the assessee. 4.7 Further, assessee has borrowed funds at 12% is Rs. 10,25,09,477/- and the assessee has not charged rate of interest of more than 9% in any of the loans advanced. Since, assessee has higher rate of borrowing than the rate at which loans are advances thereby reducing the profit. Hence, to the extent of loans borrowed of Rs.6,13,46,777/-(Rs. 10,25.09,477 -Rs.4,11,62,700) interest expenses incurred at the excessive rate of 3% (i.e. Rs. 18,40,403/- is hereby disallowed u/s. 57 of the I.T Act and added to the income of the assessee. 4.8 In view of the above facts, the total interest expense amounting to Rs.67,79,927/- is hereby disallowed and added to the income of the assessee u/s. 57 of the Act. Penalty proceedings u/s. 271(1)(c) of the Act are hereby initiated for furnishing inaccurate particulars of income. [Disallowance of Rs.67,79,927/-]” I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 5 5. In appeal, Ld. CIT(Appeals) restricted the disallowance to 27,02,501/- under section 40A(2) rws 58(2) of the Act and deleted the balance addition of 40,77,426/- with the following observations: “6.3 The AO found that the appellant has advanced interest free loan to its son Shri Harmishbhai G Shah& son-in-law Shri Aasit J Shah HUF. It is seen that the appellant had its own capital of Rs. 9,00,00,310/- out of which it is claiming to have extended interest free loan to his son Shri Harmish Shah of Rs.4,11,62,700/-. In view of the ratio of the judgment in the case Commissioner of Income Tax vs. Reliance Utilities & Power Ltd. (2009) 77 CCH 0019 Mum (HC), also affirmed by the Apex Court if the appellant has sufficient non- interest bearing funds than addition on account of not extending loans on interest is explained and held as: "The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court." 6.3.1 So it can be presumed that such interest free loan to son Harmish G Shah & son-in-law Shri Aasit J Shah HUF has been extended from own capital and no adverse view can be taken in this case. It is found that the AO had not made any addition on this I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 6 account in AY 2015-16. Accordingly addition of notional interest on account of this loan to son is deleted. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 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 % and 12%. Loans amounting to Rs 43,26,73,187/- are taken at such rates. Loans amounting to Rs 36,45,03,209/- were given @ 8-9%. This is year it is stated that the appellant given loan of Rs 3,00,79,890/- to a group concern, viz. Ahmedabad Cement Company @ 8 % only. All the loans taken to earn interest during this year from specified members were @ 12%. 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% and loans extended to other persons including group concerns @ the max rate of 9%. No commercial expediency has been proven. 6.5 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 w 40A(2) (a) of the Act which I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 7 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% 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 Rs 1,08,10,007/- or Rs 27,02,501/- is disallowed and added back to the appellant's income u/s (2) r w 40A(2) of the Act. 6.6 It is pertinent to mention that the AO since had made separate addition of Rs 49,39,524/- in the case loans to son and son-in-law, he Jnadjeduce these loans from the total loans extended at 12%, i. e. 3 % of (Rs 10,25,09,477/- minus Rs. 4,11,62,700/-) OR 3 % of Rs 6,13,46,777/- = Rs 18,40,403/- was arrived at making total disallowance at Rs 67,79,927/-. Since those loans are now treated as from interest free capital, out of disallowance of Rs 67,79,927/- only Rs 27,02,501/- as discussed in para above is sustained, balance Rs 40,77,426/- is deleted. Ground of appeal 1 is partly allowed.” I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 8 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. On merits, we observe that 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 I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 9 that 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% (totalling to 43,26,73,187/-) and the assessee gave loans amounting to 36,45,03,209/- 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. In our considered view, the Ld. CIT(Appeals) has been reasonable in his approach while I.T.A No. 332/Ahd/2020 A.Y. 2016-17 Page No. Shri Girishbhai Vadilal Shah vs. DCIT 10 restricting disallowance and we find no reason to interfere with the order of Ld. CIT(Appeals). 8. Accordingly, all grounds raised by the assessee are 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