SURENDRA K SHETH (HUF), Mumbai V. ITO 17(3)(4), Mumbai

ITA 4861/MUM/2019

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 3728 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 22-07-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SMITA VERMA
• Assessee Lawyers: SAMYAK LOHADE
• Keywords: Fair market value
• Section: 201; 48; 73; 22

Judgement Text

1 I.T.A. NO.4861/MUM/2019 IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) I.T.A. NO. 48 61 /MUM/201 9 (ASSESSMENT YEAR 20 1 4 - 1 5 ) SHRI SURENDRA K SHETH (HUF) KULKARNI PATIL BHAVAN 14 MURZABAN ROAD OPP NEW EMPIRE THEATRE MUMBAI 400 001 PAN : AA HFS9761R VS ITO - 17(3)(4), MUMBAI APPELLANT RESPONDENT APPELLANT BY SHRI SAMYAK LOHADE , ( AR ) RESPONDENT BY MS. SMITA VERMA, ( DR ) DATE OF HEARING 01 - 02 - 2021 DATE OF PRONOUNCEMENT 25 - 02 - 2021 O R D E R THIS IS AN APPEAL BY THE ASSESSEE AGAINST ORDER DATED 22 - 0 5 - 201 9 OF LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) - 2 8 , MUMBAI FOR THE ASSESSMENT YEAR 20 1 4 - 1 5 . 2 . THE DISPUTE IN THE PRESENT APPEAL IS CONFINED TO PART DISALLOWANCE OF INTEREST EXPENDITURE BY APPLYING PROVISIONS OF SECTION 40A(2 )(B) OF THE ACT. 3 . BRIEFLY THE FACTS ARE, THE ASSESSEE IS A HINDU UNDIVIDED FAMILY (HUF). FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED ITS RETURN OF INCOME ON 26 - 12 - 2014 DECLARING TOTAL INCOME OF RS.7,38,880/ - .IN COURSE OF ASSESSMENT 2 I.T.A. NO.4861/MUM/2019 PROCEED INGS, THE A SSESSING O FFICER ON VERIFYING THE MATERIALS ON RECORD FOUND THAT THE ASSESSEE HAD AVAILED UNSECURED LOAN S BOTH FROM RELATED AND UNRELATED PARTIES. FURTHER, HE FOUND THAT WHILE THE ASSESSE IS PAYING INTEREST @ 11% TO 12% P ER A NUM (P.A.) TO UNRELATED PARTIES, IT IS PAYING INTEREST @15% P.A. TO RELATED PARTIES. NOTICING THIS, THE A SSESSING O FFICER CALLED UPON THE ASSESSEE TO EXPLAIN THE REASON FOR PAYING HIGHER RATE OF INTEREST TO RELATED PARTIES AND ALSO TO EXPLAIN WHY EXCESS INTEREST PAI D SHOULD NOT BE DISALLOWED. THOUGH , THE ASSESSEE JUSTIFIED THE PAYMENT OF INTEREST AT HIGHER RATE TO THE RELATED PARTIES; HOWEVER, THE A SSESSING O FFICER HELD THAT INTEREST PAID @15% P.A. TO FAMILY MEMBERS AND RELATED PARTIES IS UNREASONABLE AND EXCESSIVE I N COMPARISON TO INTEREST PAID TO NON RELATED PARTIES AT 11% TO 12% P.A. THEREFORE, HE PROCEEDED TO DISALLOW THE EXCESS 3% INTEREST PAID BY THE ASSESSE E WHICH WORKED OUT TO RS.7,05,410/ - . THE ASSESSEE CONTESTED THE A FORE SAID DISALLOWANCE BEFORE THE FIRST AP PELLATE AUTHORITY. TAKING NOTE OF THE FACT THAT MARKET RATE OF INTEREST VARIES BETWEEN 12.05% TO 15.41% AS PR THE RESERVE BANK OF INDI A (RBI) REPORT, LEARNED COMMISSIONER (APPEALS) HELD THAT INTEREST PAID OVER AND ABOVE THE AVERAGE RATE OF INTEREST OF 13.7 3% IS UNREASONABLE AND EXCESSIVE IN TERMS OF SECTION 40A(2)(B) OF THE ACT. ACCORDINGLY, HE DIRECTED THE ASSESSING OFFICER TO DISALLOW THE EXCESS INTEREST PAID OF 1.27%. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED , THE ASSESSEE HAS PAID 15% INTEREST O N THE UNSECURED LOAN AVAILED FROM RELATED PARTIES BECAUSE THEY ARE LONG TERM LOAN S COMPARED TO SHORT TERM LOANS AVAILED FROM UNRELATED PARTIES. DRAWING ATTENTION TO RBI REPORT AS WELL AS SCHEDULE LENDING RATE OF COMMERCIAL BANKS, THE LEARNED A UTHORISED R EP RESENTATIVE SUBMITTED, VARIOUS BANKS CHARGED INTEREST OF MORE THAN 15% ON TERM LOANS. THUS, HE SUBMITTED, COMPARED TO COMMERCIAL RATE PER ANNUM, THE INTEREST PAID BY THE ASSESSEE TO THE RELATED PARTIES AT 15% CANNOT 3 I.T.A. NO.4861/MUM/2019 B E CONSTRUED TO BE HIGH AND UNREASONABLE . FURTHER, HE SUBMITTED, IN CASE ASSESSEE WOULD HAVE AVAILED LOAN FROM BANKS AND FINANCIAL INSTITUTION S , APART FROM PAYING HIGHER RATE OF INTEREST, THE ASSESSEE, NOT ONLY WOULD HAVE PAID ADDITIONAL COST BY WAY OF PROCESSING CHARGES, BUT WOULD HAVE BEEN REQ UIRED TO SECURE THE LOAN BY MORTGAGING ITS ASSETS. THUS, HE SUBMITTED , THE INTEREST PAID @15% BEING REASONABLE, SHOULD BE ALLOWED. IN SUPPORT OF HIS CONTENTION, LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS: - 1. MOTILAL LAXMICHAND S ANGHAVI VS ACIT (2019) 178 ITD 710 (MUM) 2. PCIT VS CAMA HOTELS LTD (2016) 240 TAXMAN 770 (GUJ) 3. CIT VS SARJAN REALITIES LTD (2014) 227 TAXMAN 225 (GUJ) 4. CIT VS SHIV KUMAR (2013) 217 TAXMAN 73 (DEL) 5. R.N. GUPTA & CO. LTD VS ACIT (2016) 69 TAXMANN .COM 291(CHD) 6. DCIT VS SHIV KUMAR (ITA NO.3247/DEL/2010) 5. STRONGLY RELYING UPON THE OBSERVATIONS OF THE A SSESSING O FFICER AND LEARNED COMMISSIONER (APPEALS), THE LEARNED D EPARTMENTAL R EPRESENTATIVE SUBMITTED, WHEN THE ASSESSEE HAS PAID INTEREST AT A RATE MORE THAN WHAT IS PAID TO UNRELATED PARTIES, PROVISIONS OF SECTION 40A(2)(B) ARE CLEARLY ATTRACTED. THUS, S HE SUBMITTED, THE DISALLOWANCE SUSTAINED BY LEARNED COMMISSIONER (APPEALS) HA S TO BE UPHELD. 6. I HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIALS ON RECORD. UNDISPUTEDLY, THE ASSESSEE HAS AVAILED UNSECURED LOAN BOTH FROM RELATED AND UNRELATED PARTIES . WHILE THE ASSESSEE HAS PAID INTEREST TO UNRELATED PARTIES AT 11% TO 12% P.A , ON THE LOAN AVAILED FROM RELATED PARTIES IT HAS PAID INTEREST @15% P.A. TO EXPLAIN THE DIFFERENCE BETWEEN THE RATE OF INTEREST, THE ASSESSEE HAS SUBMITTED THAT WHILE THE LOANS AVAILED FROM UNRELATED PARTIES ARE SHORT TERM LOAN S, THE LOANS AVAILED FROM RELATED PARTIES ARE LONG TERM LOANS. FURTHER, THE 4 I.T.A. NO.4861/MUM/2019 ASSESSEE HAS FURNISHED MATERIAL ON RECORD TO DEMONSTRATE THAT THE RATE OF INTEREST CHARGED BY SCHEDULED BANK S AS PER RBI REPORT IS MORE THAN 15% IN SOME CASES. THE AFORESAID FACT HAS ALSO BEEN NOTED BY LEA RNED COMMISSIONER (APPEALS) WHILE WORKING OUT THE AVERAGE RATE OF INTEREST AT 13.73%. 7. HOWEVER, THE ISSUE BEFORE ME IS WHETHER THE INTEREST PAID BY THE ASSESSEE TO THE RELATED PARTIES CAN BE CONSIDERED TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO TH E FAIR MARKET VALUE OF INTEREST IN TERMS OF SECTION 40A(2)(B) OF THE ACT. FROM THE RBI REPORT REPRODUCED IN LEARNED COMMISSIONER (APPEALS) ORDER AND A COPY OF WHICH HAS ALSO BEEN FURNISHED IN THE PAPER BOOK, IT IS VERY MUCH CLEAR THAT THE RATE OF INTEREST NORMALLY CHARGED BY COMMERCIAL BANKS ON LOAN VARIES BETWEEN 12% TO 20%. FURTHER, IT CANNOT BE DENIED THAT IF THE ASSESSEE WOULD HAVE AVAILED LOAN FROM BANKS AND FINANCIAL INSTITUTION S, APART FROM PAYING HIGHER RATE OF INTEREST IT WOULD HAVE PAID ADDITIONAL COST BY WAY OF PROCESSING CHARGES AND WOULD ALSO HAVE BEEN REQUIRED TO FURNISH COLLATERAL S TO SECURE THE LOAN . W HEREAS , WHILE AVAILING LOAN FROM THE RELATED PARTIES , WHICH ARE STATED TO BE LONG TERM LOAN S , THE ASSESSEE NEITHER HAS TO PAY ANY ADDITIONAL CO ST NOR HAS TO FURNISH ANY COLLATERAL S . THUS, THE ASSESSEE IS RATHER IN AN ADVANTAGEOUS POSITION AS THE RELATED PARTIES ALWAYS RUN THE RISK OF NOT BEING ABLE TO RECOVER THE LOAN IN CASE OF DEFAULT. CONSIDERING THE AFORESAID FACTOR S , INTEREST PAID BY THE ASS ESSEE @15% TO THE RELATED PARTIES CANNOT BE SAID TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITY FOR WHICH THE PAYMENT IS MADE, IN TERMS OF SECTION 40A(2)(B). IN ANY CASE OF THE MATTER, THE DIFFERENCE BETWEEN THE INTEREST PAID BY ASSESSEE AT 15% AND THE REASONABLE RATE OF INTEREST ULTIMATELY ALLOWED BY LEARNED COMMISSIONER (APPEALS) AT 13.73% WORKS OUT TO A NEGLIGIBLE AMOUNT OF 1.27%. THAT BEING THE CASE , IN MY CONSIDERED OPINION, THE 5 I.T.A. NO.4861/MUM/2019 PROVISIONS OF SECTION 40A(2)(B) WOULD NOT BE APPLICABLE IN THE PRESENT CASE. THEREFORE, I AM INCLINED TO DELETE THE DISALLOWANCE SUSTAINED BY LEARNED COMMISSIONER (APPEALS). GROUNDS ARE ALLOWED. 8 . IN THE RESULT, APPEAL IS ALLOWED. ORDER PRONOUNCED ON 25 / 02/2021. SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DT : 25 /02/2021 PAVANAN COPY TO : 1. APPELLANT 2. RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) 5. THE DR, ITAT, MUMBAI 6. GUARD FILE /TRUE COPY/ BY ORDER ASSTT . REGISTRAR, ITAT, MUMBAI