Shri Yash Pal Gupta V. Commissioner of Income Tax, Ludhiana and another

ITA/259/2013

AI Insights

The case revolves around an appeal by Shri Yash Pal Gupta against the orders of the Income Tax authorities concerning the interest rates applied to unsecured loans from family members. The Assessing Officer initially reduced the interest rate from 18% to 12%, which was later adjusted to 15% by the Commissioner of Income Tax (Appeals). The Tribunal upheld this decision, leading to Gupta's appeal to the High Court. The main legal contention was whether the interest rates applied were excessive and unreasonable under Section 40A(2)(b) of the Income Tax Act, 1961, which pertains to the fair market value of services and facilities.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 810432 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 10-01-2014
• Assessment Year: misc
• Other Referred Cases: Anil Kumar, Jalandhar ITA No.61 Asr 1980
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: ROHIT SUD
• Keywords: Assessment Year 2008-09; Family members; Income Tax; Interest Rate; Market rate; Unsecured loans
• Section: 142(1); 143(2); 143(1); 271(1)(c); 260A; 40A(2)

Judgement Text

"ITA No.259 of 2013 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.259 of 2013 (O&M) Date of decision:10.01.2014 Shri Yash Pal Gupta C/o M/s Baldev Raj Ram Murti, Loha Mandi, Miller Ganj, Ludhiana (PAN No.AARPG3936G). …Appellant Vs. Commissioner of Income Tax, Ludhiana and another …Respondents CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MS. JUSTICE ANITA CHAUDHRY Present: Mr. Rohit Sud, Advocate for the appellant. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 31.7.2012, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Bench – 'B', Chandigarh (in short, “the Tribunal”) in ITA No.577/Chd/2012, for the assessment year 2008-09, claiming following substantial questions of law:- Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 2 “i) Whether the learned authorities below have justified to reduce the rate of interest on mere assumptions and not fixing a fare market rate by holding proper enquiry in view of section 40A(2b) of the Act? ii) Whether the learned authorities below were justified by not following the principle of consistency as the said rate of interest had been accepted from the assessment year 2000-01 to 2007-08 without there being any change of circumstances? iii) Whether the learned ITAT was justified in dismissing the appeal of the assessee by not recording the arguments and not considering the judgments submitted by the assessee? iv) Whether in the facts and circumstances of the case, the action of the authorities below, the impugned orders Annexures A.3 and A.5 are legally sustainable in the eyes of law?” 2. Briefly, the facts necessary for adjudication of the controversy involved, as available on the record are that the assessee is engaged in trading in C.R. Iron sheet and cycle parts. It filed its return of income for the assessment year 2008-09 on 16.8.2008 showing income of ` 10,85,910/- which was processed under section 143(1) of the Act. Subsequently the case was selected for scrutiny. Notice under Section 143(2) dated 14.9.2009 was issued and served on the assessee on 15.9.2009. Notice under Section 142(1) of the Act dated 31.5.2010 was also issued and served on the appellant on 7.6.2010. The assessee filed its written statement. The Assessing Officer vide order dated 10.12.2010, Annexure A.1, after examining the record held that the assessee had paid the interest on unsecured loans at a higher rate to his family members as compared to the others and reduced the rate of interest from 18% to 12% only. Feeling aggrieved, the assessee filed appeal before the Commissioner of Income Tax (Appeals-II) [CIT(A)]. Vide order dated 14.3.2012, Annexure A.2. the CIT Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 3 (A) partly allowed the appeal by increasing the rate of interest on unsecured loans from 12% to 15%. Still not satisfied, the assessee filed appeal before the Tribunal. Vide order dated 31.7.2012, Annexure A.3, the Tribunal dismissed the appeal. Thereafter, the assessee filed a miscellaneous application dated 12.7.2012 for recalling the order dated 31.7.2012, Annexure A.3 to the effect that the arguments raised by it had neither been considered nor appreciated by the Tribunal. It was further submitted that for invoking Section 40A(2), it was mandatory for the Assessing Officer to establish the market rate which was neither done by the Assessing Officer nor by the CIT(A). The said application was dismissed by the Tribunal vide order dated 3.4.2013, Annexure A.5. Hence the present appeal by the assessee. 3. Learned counsel for the assessee-appellant submitted that no enquiry was held before the interest paid to the relatives was disallowed under Section 40A (2) (b) of the Act. The Assessing Officer had adopted 18% to be reasonable rate of interest for other years and there was no occasion for him to have adopted different approach in this year. It was urged that the Tribunal had also accepted 24% to be reasonable interest in various cases and therefore disallowance of interest in the present case beyond 15% was unjustified. 4. After hearing learned counsel for the appellant, we do not find any merit in the appeal. 5. While framing the assessment, the Assessing Officer vide order dated 10.12.2010, Annexure A.1 recorded as under:- “The assessee has during the year received secured as well as unsecured loans on which he has paid interest of Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 4 `19,71,701/- and ` 17,61,600/-. The assessee has during the year paid interest on unsecured loans at the rate varying from 9% to 18%. The assessee has paid interest @ 18% to all his family members covered under section 40A(2) (b) of the I.T.Act and lesser rate of interest to others. The detail of unsecured loans is as follows:- Break up of unsecured loans Name Rate of Interest Interest paid Family members Aayush Gupta 18% 18,960/- Mrs. Pooja Gupta 18% 100530/- Mrs. Ramesh Gupta 18% 71,220/- Y.P.Gupta Family Welfare Trust 18% 2,86,081/- Yash Paul Gupta HUF 18% 1,45,620/ Rohit Gupta 18% 1,31,420/- Rohit Gupta HUF 18% 2,68,560/- Dhriti Gupta 18% 10,800/- Others Pawan Kumar HUF 18% 21,240/- Rajesh Bali 15% 37,614/- Santosh Kumari 18% 25,004/- Shashi Singla 15% 1,17,041/- Kamlesh Gupta 9% 45,000/- Ram Krishan 12%,14.4% & 15% 2,07,300/- S.Rajesh Mechanical Works 12% 79,200/- Baldev Sahai 18% 36,000/- Garg Steels 15% 1,60,000/- The assessee vide order sheet entry dated 12.11.2010 was asked to explain as to why not the rate of interest paid to family members on unsecured loans be restricted to 12% Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 5 only in view of the facts that to other persons you have paid interest at the rate varying from 9% to 18%. Also in view of the fact that bank rate is 12% only. The assessee was further asked to explain as to why no additions be made under section 40A(2). The assessee in his reply dated 1.12.2010 stated as follows:- 'the interest paid to family members is at par with what is being paid in the market. Except for one case where the interest has been paid at 12% p.a. which was further increased to 15% p.a most of the unsecured creditors rate being paid @ 18% p.a. which is the market rate. Tribunal in the case of Anil Kumar, Jalandhar ITA No.61 Asr 1980 has held 24 per cent as a reasonable rate of interest. The Bench of Tribunal has consistently held that market value of the services and not the individual action of the individual has to be looked into. The copy of the judgment has already been filed with you vide our letter dated 01st November, 2010. Therefore, no disallowance under section 40A(2)(b) can be made.' Further in his reply dated 1.11.2010 the assessee has stated as follows:- 'The detail of interest paid to unsecured creditors is enclosed. Perusal of chart shows that the interest paid varies from 9.00% per annum to 18.00% per annum. It is further submitted that the rate of interest depends on various factors such as availability of funds in the market, security available to the creditor, borrowers nature of business and reputation in the market and the willingness of the creditors to take the risk to give the loan. The rate of Interest payable to the bank is not comparable to the rate of interest payable to an unsecured creditor in the open market as in the bank's case the bank has secured itself after pledging the borrowers property and then advanced the money whereas in the latter case there is no underlying Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 6 security and element of risk is always there. It is mainly because of this risk factor the rate of interest of unsecured loans are at a higher rate.' The reply of the asssessee is carefully considered and is found to be untenable. The assessee has put his reliance on various case laws which are no help to him as they are distinguishable on facts. Section 40A(2) talk about disallowance of any expenditure which is excessive and unreasonable having regard to the fair market value of goods, services or facilities. The section is reproduced here for ready reference:- '(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub section, and the Assessing Officer is of opinion that such expenditure is excessive and unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.' The persons to whom payment is made has been mentioned in clause (b) of sub section 2 of section 40A. The case of the assessee falls under (b) (vi). The same is reproduced here:- '(b) The persons referred to in clause (a) are the following, namely - (i) where the assessee is an any relative of the assessee. Individual. The assessee has paid interest on unsecured loans at a higher rate to his family members as compared to others and to banks. In view of these facts I am of the opinion that section Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 7 40A(2)(b) is applicable on the assessee and the excessive rate of interest of 18% should be restricted to 12% only. On restricting the rate of interest to 12%, the allowable interest comes at `6,88,800/- in place of `10,33,200/- as claimed by the assessee. Therefore, the difference of `3,44,400/- is added to the income of the assessee. Penalty under Section 271(1) (c) is initiated separately.' 6. On appeal, the CIT(A) vide order dated 14.3.2012, Annexure A.2 held as under:- “4.3. I have carefully considered appellant's submission. The fact on record is that the appellant had paid `17,61,600/- as interest on unsecured loans. The admitted fact is also that the interest was paid at the rate varying from 9% to 18%. From the details brought out by the AO in the assessment order, it is also apparent that the rate of interest paid to persons covered under section 40A(2)(b) is at the rate of 18% while the rate of interest paid to others is varying from 9% to 18%. The AO was therefore justified in invoking the provisions of Section 40A(2)(a) of the Income Tax Act. Section 40A(2) (a) of the IT Act reads as under: 'where the assessee incurs any expenditure in respect of which payment has or is to be made to any person referred to in clause (b) of this sub section and the officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.' What has to be seen is whether the expenditure is excessive or unreasonable having regard to the fair market Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 8 value of the facilities for these payments made. Fair market value of facilities would depend upon facts of each case. In the instant case there is no dispute in the issue that the persons to whom interest has been paid are covered under Section 40A(2) (b). The fact also remains that the appellant had paid interest to relatives at the rate of 18% while interest to others had been paid at the rate varying from 9% to 18%. These facts have been brought out by the AO in the assessment order. Market rate in these circumstances would depend upon the rate of interest paid by the appellant to others. The rate of interest payable to bank is not comparable to the rate of interest payable to unsecured creditors in the open market. It is an undeniable fact that banks provide secured loans on the basis of mortgage of property/other assets at rates of interest varying from 12% to 14%. There is no risk factor involved in such loans. Apropos unsecured loans risk factor is always there and that is what makes the rate of interest with regard to unsecured loans higher. Moreover, bank loans also involve payment of processing fee and legal fee along with extensive documentation. Therefore market rate would depend upon rate of interest paid to others. In this regard, in view of the fact that the appellant was paying interest to Shri Rajesh Bali, Smt.Shashi Singla, Shri Ram Krishan and Garg Steels @ 15%, it may be reasonable to hold that the market rate during the period for unsecured loans was 15%. In these circumstances it would be fair and reasonable to take the market rate of interest on unsecured loans @ 15%. The appellant may have paid interest to one of the creditors @ 12% and another creditor at 9% but that by itself does not establish that unsecured loans are available in the market at that rate. The major part of the interest paid to outsiders being @ 15%, therefore, I hold that the rate of interest to persons covered under Section 40A(2) (b) @ 18% is excessive and same should be restricted to 15%. This ground of appeal of the appellant, is therefore, partly allowed.” Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 9 7. On further appeal by the assessee, the Tribunal vide order dated 31.7.2012, Annexure A.3 noticed as under:- “10. We have heard the rival contentions and perused the record. The assessee is in appeal against the disallowance of interest by invoking the provisions of Section 40A(2)(a) of the Act. The assessee during the year under consideration had paid interest @ 18% per annum to the persons covered under Section 40A(2)(b ) of the Act as against rate of interest varying between 9% to 18% paid to other persons. The break up of the unsecured loans raised from the family members and from others is available at page 4 of the assessment order. The perusal of the said tabulated details reflect that the assessee had paid uniform rate of interest on the loans raised from its family members who are covered persons under section 40A(2) (b) of the Act. In respect of loans from other persons the assessee had paid the rate of interest @ 9% to one party and 12% was paid to other party. To others, the rate of interest of 15% was paid. The Assessing Officer also confronted the assessee vis a vis bank loan which was 12% per annum. As against the above said details, the assessee had furnished on record comparative chart of the rate of interest paid year wise under which consistently it was paying rate of interest of 18% to its family members from assessment year 2002-03 onwards. However, to the other persons, the rate of interest varied from 8.5% to 18%. In the preceding year the assessee was paying interest @ 8.5% to four parties, 9% to one party, 12% to three parties, 15% to two parties and 18% to three parties. In the year under appeal the assessee is paying interest @ 9% to one, 12% to another and 15% to four parties and 18% per annum to the balance parties. In the facts and circumstances and in view of the assessee having paid interest at varying rates of interest, we do not find merit in the claim of the assessee in view of the Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 10 provisions of section 40A(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 service should be provided at market rate. Where the assessee himself has paid interest at a rate lesser than 18%, we find no merit in the claim of the assessee vis a vis the rate of interest @ 18% per annum paid to its family members who are admittedly specified persons covered under section 40A(2) (b) of the Act. We find that the Assessing Officer had allowed rate of interest of 12% per annum, which was enhanced to 15% by the CIT(Appeals) in view of the assessee having paid similar rate of interest to other persons and also the rate of interest being paid to the bank. In the changing scenario of market rate of interest being payable, we find no merit in the claim of the assessee of the constant rate of interest paid from assessment year 2002-03 to assessment year 2008-09 @ 18% per annum. We are in conformity with the order of the CIT (Appeals) in applying the rate of interest of 15% in restricting the disallowance of interest made by the Assessing Officer. Upholding the same, we dismiss ground of appeal raised by the assessee.” 8. A perusal of the aforesaid findings shows that the CIT(A) as well as the Tribunal after appreciating the factual matrix have accepted rate of 15% interest paid to relatives as reasonable whereas interest beyond that has been disallowed under Section 40A(2)(b) of the Act. The rate of interest is primarily a question of fact to be determined on various factors by the authorities on appreciation of material on record. Allowance of interest either by the Assessing Officer or by the Tribunal at different rates cannot be taken as a precedent or law for allowing the same rate for all cases unless the facts are comparable and identical therein. Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh ITA No.259 of 2013 (O&M) 11 9. Accordingly, finding no error in the approach of the Tribunal, the appeal is dismissed. Since the appeal has been dismissed on merits, no order is required to be passed on the application under Section 5 of the limitation Act, 1963. (Ajay Kumar Mittal) Judge January 10, 2014 (Anita Chaudhry) 'gs' Judge Singh Gurbax 2014.03.18 17:08 I attest to the accuracy and integrity of this document High Court Chandigarh "