M/s. Ravi Ceramics, Kheda V. The Dy.CIT, Central Circle-1, Baroda

ITSSA 29/AHD/2014

• Counselvise Citation: [2016] 122 COUNSELVISE.COM (IT) 2768 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 26-12-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 26-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R I PATEL
• Keywords: Proportionate interest
• Section: 143(3); 153A

Judgement Text

IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND MAHAVIR PRASAD JM] IT(SS)A NOS. 24 TO 29/AHD/2014 ASSESSMENT YEAR: 2005-06 TO 2010-11 M/S. RAVI CERAMICS ...............APPELLAN T 32, NARAYANDEEP, JIVANDEEP COLONY, ANAND, DIST. KHEDA [PAN AADFM 4513 D] VS. THE DY. COMMISSIONER OF INCOME-TAX .............. ..............RESPONDENT CENTRAL CIRCLE-1, BARODA APPEARANCES BY: NONE FOR THE APPELLANT RI PATEL FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : DECEMBER 26, 20 16 DATE OF PRONOUNCING THE ORDER : DECEMBER 26, 2016 O R D E R PER BENCH : THESE SIX APPEALS PERTAIN TO THE SAME ASSESSEE, INV OLVE COMMON ISSUE AND WERE HEARD TOGETHER. AS A MATTER OF CONVENIENCE, THEREF ORE, THESE SIX APPEALS ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. 2. THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST A CONSOLIDATED ORDER DATED 11.11.2013 PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-IV, AHMEDABAD IN THE MATTER OF ASSESSMENT U/S 143(3) R.W.S. 153A OF THE INCOME-TAX ACT FOR THE ASSESSMENT YEARS 2005-06 TO 2010-11 AND ORDER U/S 143(3) OF THE ACT FOR ASSESSMENT YEAR 2011-12. 3. THE GRIEVANCE OF THE ASSESSEE COMMON IN ALL THES E APPEALS IS THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN HOLDING THAT THE INTEREST PA ID @ 18% IN RELATION TO THE BORROWING IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 2 OF 7 MADE FROM THE PERSONS SPECIFIED U/S 40A(2)(B) IS UN REASONABLE AND EXCESSIVE AND IN DISALLOWING THE INTEREST PAID IN EXCESS OF 12%. 4. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS PAID INTEREST @ 18% ON BORROWINGS FROM SPECIFIED PERSONS U/S 40A(2) (B), BUT, THE ASSESSING OFFICER WAS OF THE VIEW THAT SUCH PAYMENTS SHOULD BE RESTRICTED TO 12% PER ANNUM AS IS THE MARKET RATE OF BORROWINGS FROM BANKS. IT WAS IN THIS BACKDROP THA T THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO SHOW-CAUSE AS TO WHY THE AMOUNT OF INTE REST PAID IN EXCESS OF 12% PER ANNUM NOT BE DISALLOWED U/S 40A(2)(B) OF THE ACT. IT WAS EXPLAINED BY THE ASSESSEE THAT THE INTEREST PAID IS AT THE PREVAILING MARKET RATE, BAS ED ON NEGOTIATION, AND IT CANNOT BE EQUATED WITH LOANS FROM BANKS AND FINANCIAL INSTITUTIONS, B ECAUSE THE ASSESSEE HAS IN SUCH A CASE TO GIVE EQUATABLE MARKET AND COLLATERAL SECURITIES ETC . IN ADDITION TO COMPLYING WITH VARIOUS DOCUMENTATION REQUIREMENTS. IT WAS ALSO EXPLAINED BY THE ASSESSEE THAT THE RECIPIENTS OF THE INTEREST ARE ANY WAY PAYING THE TAX AT THE MAXI MUM MARGINAL RATES AND AS SUCH THERE IS NO TAX AVOIDANCE MOTIVE IN MAKING EXCESSIVE PAYMENT S ON ACCOUNT OF INTEREST. THE EXPLANATIONS SO GIVEN BY THE ASSESSEE WERE REJECTED . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CONTENTION OF THE ASSESSEE THAT THE LOAN WAS NOT AV AILABLE FROM THE BANKS CANNOT BE ACCEPTED AND THAT IT IS THE FACT THAT NO PRUDENT BUSINESSMAN WILL ALLO W INTEREST AT A VERY HIGHER RATE AS IT WAS NOT IMPOSSIBLE TO GET SUCH LOAN AT LOWER RATE . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE WAS NOT ABLE TO GIVE ANY JUSTIFICATION FOR PAYMENT OF EXCESSIVE 18% WHEN THE BANK RATE IS 12%. IT WAS IN THIS BACK DROP THAT THE IMPUGNED DISALLOWANCES OF INTEREST WERE MADE. 5. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE LD. CIT(A), BUT WITHOUT ANY SUCCESS. LD. CIT(A) REJECTED THE CLAI M OF THE ASSESSEE THAT 18% PER ANNUM IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 3 OF 7 INTEREST PAID BY THE ASSESSEE IS REASONABLE. WHEN THE ASSESSEE INVITED ATTENTION OF THE LD. CIT(A) TO THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF CIT VS. M/S. NAVJIVAN ROLLER FLOUR & PULSE MILLS P. LTD IN ITA NO.2695/AHD/2009, LD. CIT(A) STATED THAT WITH DUE RESPECT TO THE JUDGMENT OF HONBLE ITAT, THER E ARE CONTRARY DECISIONS OF VARIOUS HIGH COURTS IN THIS REGARD . HE THEN REFERRED TO THE JUDGMENTS OF HONBLE KE RALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO. [2002] 123 TAXMAN 8 94 (KER.) AND HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H.R. SUGAR FACTORY (P. ) LTD. [1990] 53 TAXMAN 63 (ALL.). LD. CIT(A) WAS OF THE VIEW THAT THE ASSESSING OFFICER W AS JUSTIFIED IN DISALLOWING THE PROPORTIONATE INTEREST EXPENSES BY APPLYING THE PRO VISIONS OF SECTION 40A(2)(B) OF THE ACT. THE ASSESSEE IS NOT SATISFIED AND IN FURTHER APPEAL BEFORE US. 6. AT THE TIME OF HEARING, NONE APPEARED ON BEHALF OF ASSESSEE, BUT WE HAVE HEARD THE LD. DR, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDE RED THE FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. WE FIND THAT THE Q UESTION AS TO WHETHER 18% PER ANNUM INTEREST RATE CAN BE SAID TO BE REASONABLE CAME UP BEFORE THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. M/S. NAVJIVAN ROLL ER FLOUR & PULSE MILLS P. LTD (SUPRA) AND THE CO-ORDINATE BENCH INTER ALIA HELD AS FOLLOWS:- 4. AT THE OUTSET, FROM THE SIDE OF THE RESPONDENT-ASS ESSEE AN ORDER OF ITAT 'A' BENCH AHMEDABAD IN THE CASE OF SHRI RAMESH KANTILAL SHETH VS. I TO BEARING ITA NO.109/AHD/2006 FOR ASSESSMENT YEAR 2002-03 DATED 05 /12/2008 HAS BEEN FILED, WHEREIN ALMOST ON IDENTICAL FACTS IT WAS HELD AS UNDE R:- '4. WE HAVE HEARD BOTH THE PARTIES. AT THE TIME OF HEARIN G IT WAS SUBMITTED THAT THIS TRIBUNAL, IN IDENTICAL CIRCUMSTANCES, HAS ALLOWE D THE CLAIM OF THE ASSESSEE IN ITS ORDER DATED 25-4-2008 (A.Y. 2000-01). THE TRIBUN AL HAS MADE THE FOLLOWING OBSERVATIONS IN THE AFORESAID CASE: 5. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND THE F ACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT SO FAR AS PAYMENT OF INTEREST IS CONCERNED, IT IS TO BE PAID AS PER MUTUAL CONSENT OF THE PARTIES A ND THE BUSINESS EXIGENCY OR EXPEDIENCY AND, THEREFORE, IT IS PREROGATIVE OF THE B USINESS MAN TO SEE AS TO WHAT RATE THE INTEREST SHOULD BE PAID SO THAT ITS BUSINESS GETS MAXIMUM BENEFIT AND IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 4 OF 7 THE REVENUE HAS NO PART TO PLAY IN THIS RESPECT. MANY A TIMES, SPECIALLY, WHEN A BUSINESS MAN HAS TO SEEK LOAN FROM PRIVATE PARTIES, HE FAILED TO GET BECAUSE OF SO MANY REASONS AND IN THAT SITUATION, HE HAS NO OPTION BUT TO APPROACH THE CLOSE RELATIVE AND FRIENDS AND IF IN THAT SITUATION, HE IS COMPELLED TO PAY INTEREST AT A MARGINALLY HIGHER RATE, THERE IS NO ILLEGALITY IN ACCE PTING THE LOANS AND PAY A LITTLE BIT HIGHER INTEREST. THE OVER ALL POSITION TO B E SEEN IS AS TO WHETHER THE ASSESSEE HAS EARNED THE PROFIT OR NOT; I.E. WHETHER THE ASSESSEE IS PAYING INTEREST MORE THAN THE PROFIT OR NOT. THE FACT THAT SUCH LOANS ARE FROM CLOSE RELATIVES AND FRIENDS, IN OUR OPINION, IS OF NO USE TO COME TO THE CONCLUSION THAT HE SHOULD NOT HAVE PAID INTEREST ON SUCH A HIGHER RATE. 6. IN THE PRESENT CASE, THERE IS DOUBT THAT THE ASSESSE E WAS PAYING INTEREST TO OUTSIDERS @ 12%, BUT IF IT HAD TO PAY INTEREST @ 18% TO THE DIRECTORS, IT CANNOT BE SAID THAT THE ASSESSEE WAS PAYING HIGHER INTEREST T O THE DIRECTORS INTENTIONALLY. THE REVENUE, IN THE PRESENT CASE, HAS NOT DISPUTED THE ASSESSEE'S CLAIM THAT THE INTEREST TO DIRECTORS AS WELL AS THE O UTSIDERS WAS BEING PAID AS PER MUTUAL CONSENT AND IF THAT WAS THE CASE, THEN IN OUR OPINION, THE ASSESSEE HAD NOT COMMITTED ANY DEFAULT WHICH COULD CLOTHE THE ASSESS ING OFFICER TO INVOKE THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. CONSEQUE NTLY, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT(APPEALS), W HICH IS CONFIRMED.' 5. THE MATERIAL FACTS IN THE PRESENT CASE ARE SIMILAR TO THESE INVOLVED IN THE AFORESAID CASE DECIDED BY THIS TRIBUNAL. IN THIS VIEW OF THE MAT TER, GROUND NO.1 TAKEN BY THE ASSESSEE IS ALLOWED AND THEREFORE, GROUND NO.2 TAKEN BY THE ASSESSEE DOES NOT REQUIRE ANY ADJUDICATION BY US.' 7. CLEARLY, THEREFORE, THERE IS A CO-ORDINATE BENCH DECISION HOLDING THAT THE PAYMENT OF INTEREST @ 18% CANNOT BE SAID TO BE EXCESSIVE OR UN REASONABLE FOR THE PURPOSES OF SECTION 40A(2)(B) OF THE ACT. IN ANY EVENT, THE RATE AT WH ICH BANKS ARE LENDING ADVANCES TO IT BORROWERS CANNOT BE TREATED AS A BENCHMARK FOR LOAN S TAKEN BY THE ASSESSEE FROM INDIVIDUALS WHO ARE NOT CARRYING ON THE BUSINESS OF BANKING. ESSENTIALLY, A LOAN TAKEN FROM THE BANK NOT ONLY INVOLVES FURNISHING OF SECURITIES AND DOCUMENTATION BUT ALSO IS ADVANCED AFTER SAFEGUARDING THE INTEREST OF THE LENDERS IN A ROBUST MANNER. QUITE UNLIKE SUCH TRANSACTIONS/BORROWINGS FROM INDIVIDUALS ARE MUCH L ESS ORGANIZED AND WITHOUT THE CUMBERSOME REQUIREMENTS OF DOCUMENTATION AND COLLAT ERAL SECURITIES ETC. IN OUR CONSIDERED VIEW, THE VERY ACTION OF THE ASSESSING O FFICER IN HOLDING THAT THE BORROWINGS FROM THE SPECIFIED PERSONS AT A RATE HIGHER THAN TH E RATE AT WHICH BANK WOULD LEND ITS LOANS IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 5 OF 7 TO THE BORROWERS, WOULD BE EXCESSIVE AND UNREASONAB LE AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS, THEREFORE, DEVOID OF LEGALLY SUSTAINABLE BASIS. 8. WE HAVE NOTICED THAT THERE ARE CO-ORDINATE BENCH DECISIONS HOLDING THAT 18% PER ANNUM INTEREST IS REASONABLE AND IT CANNOT HIT THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, YET THE CIT(A) DECLINED TO FOLLOW THESE DECISIONS O N THE BASIS OF JUDGMENTS OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO (S UPRA) AND ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. H.R. SUGAR FACTORY (P.) LTD (SUPRA). NO NE OF THESE HIGH COURTS DECISIONS, HOWEVER, HELD ANYTHING TO THE CONTRARY OF WHAT HAS BEEN DECI DED BY THE CO-ORDINATE BENCH. THE QUESTION AS TO WHETHER 18% INTEREST PER ANNUM IS RE ASONABLE OR NOT IS AN ESSENTIAL QUESTION OF FACT. LD. CIT(A) HAS BEEN SUPERFICIAL IN HIS AP PROACH IN DISREGARDING THE DECISIONS OF CO- ORDINATE BENCH. 9. IN ANY EVENT, IT IS NOT IN DISPUTE THAT INTEREST IS TAXED IN THE HANDS OF THE RECIPIENTS AT THE SAME RATE. ON THIS FACT, AND IN THE LIGHT OF H ONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF PWS ENGINEERS LIMITED VS. DCIT (TAX APPEAL NO.209 OF 2015; JUDGMENT DATED 06.06.2016), THE DISALLOWANCE UNDER SECTION 40A(2) CANNOT BE MADE. IN THE SAID CASE, THEIR LORDSHIPS HAD, INTER ALIA, OBSERVED AS FOLLOWS:- 6. WE HAVE HEARD LEARNED COUNSEL FOR THE PARTIES. THE QUESTION OF APPLICABILITY OF SECTION40A(2) OF THE ACT TO THE RESTRICTED DISALLOWA NCE OF RS. 47,90,178/- IS ALREADY CONCLUDED BY THIS COURT BY THE SAID ORDER DATED 31.3. 2015. WE MAY THEREFORE, PROCEED ON THAT BASIS. DESPITE THIS, THE QUESTION THAT STILL SU RVIVES IS WHETHER THE REVENUE CAN TAX THE SAME INCOME IN THE HANDS OF THE COMPANY ON WHICH THE DIRECTORS HAD ALREADY PAID THE TAX AT THE SAME RATE AT WHICH THE COMPANY WOULD HAVE BEEN LIABLE TO BE ASSESSED. IN THIS CONTEXT, WE MAY RECALL THAT CONSIST ENTLY BEFORE ASSESSING OFFICER, CIT(APPEALS) AND TRIBUNAL, THE ASSESSEE HAD CANVASSED THAT ALL THE FOUR DIRECTORS WHO HAD RECEIVED SUCH REMUNERATION, WERE TAXED IN THE HIGHES T BRACKET OF 30%; AT THE SAME RATE AT WHICH THE ASSESSEE COMPANY AT THE RELEVANT TIM E WAS ASSESSED. IN FACT, THE ASSESSEE HAD DEMONSTRATED BEFORE CIT(APPEALS) THAT THE TAX LIABILITY OF THE COMPANY ON SUCH DISPUTED REMUNERATION AMOUNT WAS EXACTLY THE SAM E AS THE TAX THE FOUR DIRECTORS HAD PAID TO THE REVENUE. TO THESE FACTUAL ASPECTS, EVEN THE REVENUE HAS, AT NO STAGE IT(SS)A NOS. 24 TO 29/AHD/2014 M/S. RAVI CERAMICS VS. DCIT ASSESSMENT YEAR: 2005-06 TO 2010-11 PAGE 6 OF 7 RAISED ANY DISPUTE. WE MAY THEREFORE, PROCEED ON THE BASIS THAT THE ELEMENT OF EXCESSIVE REMUNERATION REPRESENTS THAT INCOME OF THE COMPANY WHI CH WAS EVENTUALLY TAXED IN THE HANDS OF THE DIRECTORS AT THE SAME RATE AT WHICH; HAD IT NOT BEEN SO DISTRIBUTED; WOULD HAVE BEEN TAXED IN THE HANDS OF THE COMPANY. IN THAT VI EW OF THE MATTER, THE QUESTION OF REVENUE NEUTRALITY WOULD IMMEDIATELY ARISE. A CERTA IN INCOME HAS ALREADY BEEN TAXED IN THE HANDS OF THE DIRECTORS. PERMITTING THE REVENUE TO T AX THE SAME INCOME AGAIN AT THE SAME RATE IN THE HANDS OF THE PRINCIPAL PAYER WOULD AM OUNT TO DOUBLE TAXATION. ONLY ON THIS COUNT, WE ANSWER QUESTION IN FAVOUR OF THE APPEL LANT-ASSESSEE AND AGAINST REVENUE, ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE TRIBUN AL. THE TAX APPEAL IS DISPOSED OF ACCORDINGLY. 10. ONCE THERE WAS CATEGORICAL FINDINGS BY THE TRIB UNAL THAT 18% PER ANNUM INTEREST WAS REASONABLE AND THERE WAS NOTHING CONTRARY THERE TO SUCH FINDINGS IN THE DECISION OF THE HONBLE COURTS ABOVE, THE CIT(A) OUGHT TO HAVE FOLL OWED THE SAME. IN VIEW OF THE ABOVE DISCUSSION AND BEARING IN MIND ENTIRETY OF THE CASE , WE ARE OF THE CONSIDERED VIEW THAT THE IMPUGNED DISALLOWANCE U/S 40A(2)(B) IN RESPECT OF I NTEREST PAID IN EXCESS TO 12% PER ANNUM DESERVES TO BE DELETED. WE, THEREFORE, DIREC T THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE. 11. IN THE RESULT, ALL THE SIX APPEALS ARE ALLOWED IN THE TERMS INDICATED ABOVE. PR ONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF DECEMBER, 2016. SD/- SD/- MAHAVIR PRASAD PRAMOD KU MAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, THE 26 TH DAY OF DECEMBER, 2016 BT* COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD