Asstt.Commissioner of Income Tax, Bhavnagar V. M/s. Priya Blue Industries Pvt.Ltd., Bhavnagar

ITA 756/AHD/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8448 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 06-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R P MAURYA
• Keywords: Fair market value

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD .., , BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ./ I.T.A. NO.756/AHD/2015 ( / ASSESSMENT YEAR : 2011-12) THE ACIT CIRCLE-1 BHAVNAGAR / VS. M/S.PRIYA BLUE INDUSTRIES PVT.LTD. PLOT NO.1563, ASHIRWAD NR.RUPANI, BHAVNAGAR-364 001 $ ./ ./ PAN/GIR NO. : AABCP 2808 B ( $' / APPELLANT ) .. ( ($' / RESPONDENT ) $') / APPELLANT BY : SHRI R.P. MAURYA, SR.DR ($'*) / RESPONDENT BY : SHRI TUSHAR HEMANI, AR +,*- / DATE OF HEARING 23/03/2018 ./0*- / DATE OF PRONOUNCEMENT 13/ 04 /2018 / O R D E R PER PRADIP KUMAR KEDIA - AM: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTAN CE OF THE REVENUE AGAINST THE APPELLATE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-6, AHMEDABAD [CIT(A) IN SHORT] DATED 05/01/2015 ARISING IN THE ASSESSMENT ORDER PASSED UNDER S.143(3) OF T HE INCOME TAX ITA NO.756/AHD/ 2015 ACIT VS. PRIYA BLUE INDUSTRIES P.LTD. ASST.YEAR 2011-12 - 2 - ACT, 1961 (HEREINAFTER REFERRED TO AS 'THE ACT') D ATED 14/03/2014 RELEVANT TO ASSESSMENT YEAR (AY) 2011-12. 2. THE REVENUE IS AGGRIEVED BY THE ACTION OF THE CI T(A) IN DELETING THE ADDITION OF RS.46,51,963/- MADE UNDER S.40A(2)( B) OF THE ACT. 3. BRIEFLY STATED, THE ASSESSEE IS ENGAGED IN SHIP BREAKING ACTIVITIES. THE RETURN OF INCOME OF RS.2,55,34,607/- FILED BY T HE ASSESSEE (RELEVANT TO AY 2011-12) WAS SUBJECTED TO SCRUTINY ASSESSMENT . THE AO NOTICED THAT THE ASSESSEE INTER ALIA PAID INTEREST TO DIRECTORS OF THE COMPANY AT HIGHER RATE OF 18% P.A. WHEREAS THE ASSESSEE HAS AL SO PAID INTEREST ON BORROWED FUNDS AT LOWER RATE OF 11% - 13% TO OTHER PARTIES. THE AO ACCORDINGLY HELD THAT NEARLY 5% HAS BEEN PAID TO TH E DIRECTORS IN EXCESS OF FAIR MARKET VALUE OF LENDING RATE AND CONSEQUENT LY QUANTIFIED THE DISALLOWANCE OF EXCESS INTEREST AMOUNTING TO RS.46, 51,963/- WITH THE AID OF SECTION 40A(2)(B) OF THE ACT. 4. THE CIT(A), HOWEVER, REVISITED THE ENTIRE ISSUE AND FOUND MERIT IN THE CASE OF THE ASSESSEE FOR NON-APPLICABILITY OF S ECTION 40A(2)(B) OF THE ACT. THE RELEVANT PARA OF THE ORDER OF THE CIT(A) IS REPRODUCED HEREUNDER:- 5.2 AT PARA-16 OF THE ASSESSMENT ORDER; AO OBSER VED THAT THE APPELLANT HAD PAID INTEREST @ 18% TO TWO DIRECTORS OF THE COMPANY AS ITA NO.756/AHD/ 2015 ACIT VS. PRIYA BLUE INDUSTRIES P.LTD. ASST.YEAR 2011-12 - 3 - AGAINST THE INTEREST PAID @ 11% TO 13% TO OTHER PAR TIES AND THEREFORE INTEREST OF 5% WAS CONSIDERED AS EXCESSIVE AND WAS BEING DISALLOWED. THE CONTENTIONS OF THE LD. A.R. ARE THAT THE APPELL ANT HAD PAID INTEREST @ 18% TO TWO UNRELATED PARTIES NAMELY MARINELINE SH IP BREAKERS PVT. LTD. & M/S R.K. GUPTA & SONS ; THEREFORE AO'S OBSER VATION THAT THE INTEREST PAID TO OTHER PARTIES WAS @ 11% TO 13% ONL Y WAS FACTUALLY INCORRECT; BANK PROVIDES LOAN @ 11% TO 14% WITH FUL L SECURITY AND GUARANTEE ; INTEREST OF 18% TO 24% ON UNSECURED LOA NS IS REASONABLE ; IT WAS SO HELD BY THE AHMEDABAD TRIBUNAL IN THE CAS E CITED AT 92 TTJ 223; THE DIRECTORS DID NOT CHARGE ANY AMOUNTS FROM THE APPELLANT FOR THE GUARANTEE PROVIDED BY THEM IN CONNECTION WITH T HE LOAN TAKEN FROM INDIAN OVERSEAS BANK; IF THE COST FOR GUARANTEE IS TAKEN INTO CONSIDERATION, THE RATE OF INTEREST WORKS OUT TO 23 .81% AS AGAINST WHICH THE INTEREST PAID WAS @ 18% AND THEREFORE THE DISAL LOWANCE U/S 40A(2)(B) WAS UNWARRANTED. 5.3 HAVING CONSIDERED THE FACTS OF THE MATTER, I AM INCLINED TO ACCEPT THE CONTENTIONS OF THE LD. A.R. AS HELD BY VARIOUS TRIBUNALS INTEREST UPTO 24% ON UNSECURED LOANS WAS HELD TO BE REASONABLE [AND NOT EXCESSIVE WITHIN THE MEANING OF SECTION 40A(2)(B)]. IT IS ALSO SEEN THAT INTEREST @ 18% WAS PAID TO TWO OTHER UNRE LATED PARTIES. I AM OF THE VIEW THAT INTEREST PAID @ 18% TO THE DIRECTO RS CANNOT BE HELD TO BE EXCESSIVE OR UNREASONABLE. IMPUGNED DISALLOWANCE IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. 5. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE THE T RIBUNAL. 6. WE HAVE HEARD BOTH THE PARTIES. THE LIMITED ISSUE FOR ADJUDICATION IN THE INSTANT CASE IS APPLICABILITY OF SECTION 40A (2)(B) OF THE ACT TO THE INTEREST PAID TO DIRECTORS IN EXCESS OF INTEREST PA ID TO OTHER PARTIES. ON BEHALF OF THE ASSESSEE, IT WAS FIRSTLY CONTENDED T HAT IT IS NOT THE DIRECTORS OF THE ASSESSEE ALONE WHO HAVE BEEN PAID INTEREST @ 18% P.A. ON THE ITA NO.756/AHD/ 2015 ACIT VS. PRIYA BLUE INDUSTRIES P.LTD. ASST.YEAR 2011-12 - 4 - LOANS/ADVANCES AVAILED BUT THERE ARE OTHER PARTIES TOO TO WHOM INTEREST @ 18% P.A. WAS PAID ON THE LOANS/ADVANCES AVAILED. T HE PARTIES MARINE LINE SHIP BREAKERS PVT.LTD. AND R.K.GUPTA & SONS WA S REFERRED TO AUGMENT THE AFORESAID CONTENTION. IT IS THUS CON TENDED ON BEHALF OF THE ASSESSEE THAT THE PROVISIONS OF SECTION 40A(2)(B) C ANNOT BE APPLIED TO INTEREST COSTS TOWARDS BORROWALS FROM DIRECTORS WHE RE THE INTEREST COST INCURRED QUA NON-RELATED PARTIES ARE SIMILAR AND COMPARABLE. S ECONDLY, IT IS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE VA LUE OF SERVICES I.E. MARKET RATE OF INTEREST HAS NOT BEEN INDEPENDENTLY DETERMINED BY AO AT ALL AND THEREFORE THERE WAS NO WARRANT FOR THE AO T O HOLD INTEREST PAID TO THE DIRECTORS AS EXCESSIVE TO THE EXTENT OF 5% ON T HE LOANS AVAILED. FOR THIS PROPOSITION, THE DECISION OF THE HONBLE GUJAR AT HIGH COURT IN THE CASE OF CIT VS. SARJAN REALITIES LTD. (2014) 50 TAX MANN.COM 52(GUJ.) WAS RELIED UPON. IN SHORT, IT WAS CONTENDED ON BEH ALF OF THE ASSESSEE THAT THE INTEREST PAID TO THE DIRECTORS @ 18% PER ANNUM ON THE LOANS AVAILED CANNOT BE SAID TO BE EXCESSIVE AND UNREASONABLE HAV ING REGARD TO THE COMPARABLE CASES AS POINTED OUT AND ALSO IN THE ABS ENCE OF ANY INDEPENDENT FINDING TOWARDS PREVALENT MARKET RATE O F INTEREST TO BE LOWER THAN THE RATE AT WHICH INTEREST COSTS HAVE BEEN INC URRED. 7. WE FIND SUBSTANCE AT THE FIRST INSTANCE ON THE P LEA PADDLED ON BEHALF OF THE ASSESSEE THAT INTEREST RATE @ 18% CAN NOT BE SEEN AS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FACT THAT THE ASSESSEE HAS ITA NO.756/AHD/ 2015 ACIT VS. PRIYA BLUE INDUSTRIES P.LTD. ASST.YEAR 2011-12 - 5 - INCURRED INTEREST COSTS AT THE SIMILAR RATE ON BORR OWED FUNDS FROM UNCONTROLLED PARTIES. THIS FACT ITSELF PROVES THE CASE OF THE ASSESSEE IN AFFIRMATIVE. THE REVENUE HAS NOT BEEN ABLE TO COUNT ER THIS ASPECT OF JUSTIFICATION FOR MAKING PAYMENT OF INTEREST ALLEGE D AT HIGHER RATE QUA OTHER LENDERS. THEREFORE, WE DO NOT CONSIDER IT NE CESSARY TO LOOK INTO THE OTHER PLEA OF THE ASSESSEE ON REQUIREMENT OF DETERM INATION OF MARKET RATE OF INTEREST INDEPENDENTLY. IN VIEW OF THE AFORESAI D DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) IN DR AWING CONCLUSION IN FAVOUR OF THE ASSESSEE. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. THIS ORDER PRONOUNCED IN OPEN COURT ON 13/ 04/2018 SD/- SD/- (..) ( ) ( S.S. GODARA ) ( PRADIP KUMAR KEDIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 13/ 04/2018 4..+,.+../ T.C. NAIR, SR. PS ITA NO.756/AHD/ 2015 ACIT VS. PRIYA BLUE INDUSTRIES P.LTD. ASST.YEAR 2011-12 - 6 - !'#$%$' / COPY OF THE ORDER FORWARDED TO : 1. $' / THE APPELLANT 2. ($' / THE RESPONDENT. 3. 567- 8- / CONCERNED CIT 4. 8- ( ) / THE CIT(A)-6, AHMEDABAD 5. 9:-+67 , 670 , 5 / DR, ITAT, AHMEDABAD 6. <, / GUARD FILE. / BY ORDER, (9-- //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 13.4.18 (DICTATION-PAD 7+7 PAGES ATTACHED AT THE END OF THIS APPEAL-FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 23.4.18 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.13.4.18 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 13.4.18 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER