Ita/259/2013 Of Yash Pal Gupta v. Comm. Of Income Tax, Ludhiana & Anr

IN THE HIGH COURT OF PUNJAB AND HARYANAATCHANDIGARH ITA No.259 of 2013 (O&M)Date of decision: 10.01.201 Shri Yash Pal Gupta C/o M/s Baldev Raj Ram Murti, Loha Mandi,Miller Ganj, Ludhiana (PAN No. ), ..-Appella Vs, Commissioner of Income Tax, Ludhiana and another ... Responde CORAM:HON BLE MR. JUSTICEK AJAY KUMAR MITTAHON’ BLE MS. JUSTICE ANITA CHAUDHR 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 ordedated 31.7.2012, Annexure A.3 passed by the Income Tax AppellateTribunal, Chandigarh Bench — 'B', Chandigarh (in short, “the Tribunal’) inITA No.577/Chd/2012, for the assessment year 2008-09, claiming followingsubstantial questions of law:- 1) Whether the learned authorities below have justified toreduce the rate of interest on mere assumptions and not fixing afare market rate by holding proper enquiry in view of section40A(2b) of the Act?reduce the rate of interest on mere assumptions and not fixing afare market rate by holding proper enquiry in view of section40A(2b) of the Act? 11) Whether the learned authorities below were justified by notfollowing the principle of consistency as the said rate ofinterest had been accepted from the assessment year 2000-01 to2007-08 without there being any change of circumstances?111) Whether the learned I'TAT was justified 1n dismissing thappeal of the assessee by not recording the arguments and notconsidering the judgments submitted by the assessee?iv) Whether in the facts and circumstances of the case, theaction of the authorities below, the impugned orders AnnexuresA.3 and A.5 are legally sustainable 1n the eyes of law?” ) -Briefly, the facts necessary for adjudication of the controversyinvolved, as available on the record are that the assessee 1s engaged intrading in C.R. Iron sheet and cycle parts. It filed its return of income for theassessment year 2008-09 on 16.8.2008 showing income of =a10,85,910/-which was processed under section 143(1) of the Act. Subsequently thecase was Selected for scrutiny. Notice under Section 143(2) dated 14.9.2009was issued and served on the assessee on 15.9.2009. Notice under Section142(1) of the Act dated 31.5.2010 was also issued and served on theappellant on 7.6.2010. The assessee filed its written statement. TheAssessing Officer vide order dated 10.12.2010, Annexure A.1, afterexamining the record held that the assessee had paid the interest onlunsecured loans at a higher rate to his family members as compared to theothers and reduced the rate of interest from 18% to 12% only. Feelingagerieved, the assessee filed appeal before the Commissioner of Income Tax ITA No.259 of 2013 (O&M) (A) partly allowed the appeal by increasing the rate of interest on unsecuredloans from 12% to 15%. Still not satisfied, the assessee filed appeal beforethe Iribunal. Vide order dated 31.7.2012, Annexure A.3, the Tribunaldismissed the appeal. Thereafter, the assessee filed a miscellaneousapplication 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 beenconsidered nor appreciated by the Tribunal. It was further submitted that forinvoking Section 40A(2), it was mandatory for the Assessing Officer toestablish the market rate which was neither done by the Assessing Officernor by the CIT(A). The said application was dismissed by the Tribunal videorder dated 3.4.2013, Annexure A.5. Hence the present appeal by theaSSCSSCC. (A) partly allowed the appeal by increasing the rate of interest on unsecuredloans from 12% to 15%. Still not satisfied, the assessee filed appeal beforethe Iribunal. Vide order dated 31.7.2012, Annexure A.3, the Tribunaldismissed the appeal. Thereafter, the assessee filed a miscellaneousapplication 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 beenconsidered nor appreciated by the Tribunal. It was further submitted that forinvoking Section 40A(2), it was mandatory for the Assessing Officer toestablish the market rate which was neither done by the Assessing Officernor by the CIT(A). The said application was dismissed by the Tribunal videorder dated 3.4.2013, Annexure A.5. Hence the present appeal by theaSSCSSCC. 3Learned counsel for the assessee-appellant submitted that noenquiry was held before the interest paid to the relatives was disallowedunder Section 40A (2) (b) of the Act. The Assessing Officer had adopted18% to be reasonable rate of interest for other years and there was nooccasion for him to have adopted different approach in this year. It wasurged that the Tribunal had also accepted 24% to be reasonable interest invarious cases and therefore disallowance of interest in the present casebeyond 15% was unjustified. 4After hearing learned counsel for the appellant, we do not findany merit in the appeal. 4]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 wellas unsecured loans on which he has paid interest of L19,71,701/- and“a17,61,600/-. The assessee has during theyear paid interest on unsecured loans at the rate varyingfrom 9% to 18%. The assessee has paid interest @ 18% toall his family members covered under section 40A(2) (b) ofthe I.T.Act and lesser rate of interest to others. The detail ofunsecured loans 1s as follows:- Break up of unsecured loans The assessee vide order sheet entry dated 12.11.2010 wasasked to explain as to why not the rate of interest paid tofamily members on unsecured loans be restricted to 12% only in view of the facts that to other persons you have paidinterest at the rate varying from 9% to 18%. Also in view ofthe tact that bank rate 1s 12% only. The assessee was furtherasked to explain as to why no additions be made undersection 40A(2). The assessee in his reply dated 1.12.2010stated as follows:- ‘the interest paid to family members 1s at par with whatis being paid in the market. Except for one case where theinterest has been paid at 12% p.a. which was furtherincreased to 15% p.a most of the unsecured creditors ratebeing paid @ 18% p.a. which 1s the market rate. Tribunalin the case of Anil Kumar, Jalandhar ITA No.61 Asr 1980has held 24 per cent as a reasonable rate of interest. TheBench of Tribunal has consistently held that market valueof the services and not the individual action of theindividual has to be looked into. The copy of the judgmenthas already been filed with you vide our letter dated Ol[St]November, 2010. Therefore, no disallowance under section40A(2)(b) can be made.’ Further in his reply dated |.11.2010 the assessee has stated asfollows:- ‘The detail of interest paid to unsecured creditors 1senclosed. Perusal of chart shows that the interest paid variesfrom 9.00% per annum to 18.00% per annum. It is furthersubmitted that the rate of interest depends on various factorssuch as availability of funds in the market, security availableto the creditor, borrowers nature of business and reputation inthe market and the willingness of the creditors to take the riskto give the loan. The rate of Interest payable to the bank 1s not comparableto the rate of interest payable to an unsecured creditor in theopen market as 1n the bank's case the bank has secured itselfafter pledging the borrowers property and then advanced themoney whereas in the latter case there 1s no underlying Further in his reply dated |.11.2010 the assessee has stated asfollows:- ‘The detail of interest paid to unsecured creditors 1senclosed. Perusal of chart shows that the interest paid variesfrom 9.00% per annum to 18.00% per annum. It is furthersubmitted that the rate of interest depends on various factorssuch as availability of funds in the market, security availableto the creditor, borrowers nature of business and reputation inthe market and the willingness of the creditors to take the riskto give the loan. The rate of Interest payable to the bank 1s not comparableto the rate of interest payable to an unsecured creditor in theopen market as 1n the bank's case the bank has secured itselfafter pledging the borrowers property and then advanced themoney whereas in the latter case there 1s no underlying security and element of risk is always there. It 1s mainlybecause of this risk factor the rate of interest of unsecuredloans are at a higher rate. The reply of the asssessee 1s carefully considered and is foundto be untenable. The assessee has put his reliance on variouscase laws which are no help to him as they are distinguishableon facts. Section 40A(2) talk about disallowance of any expenditurewhich is excessive and unreasonable having regard to the fairmarket value of goods, services or facilities, The section 1s reproduced here for ready reference:- '(2) (a) Where the assessee incurs any expenditure 1n respectof which payment has been or is to be made to any personreferred to in clause (b) of this sub section, and the AssessingOfficer 1s of opinion that such expenditure 1s excessive andunreasonable having regard to the fair market value of thegoods, services or facilities for which the payment 1s madeor the legitimate needs of thebusiness or profession of theassessee or the benefit derived by or accruing to him|therefrom, so much of the expenditure as 1s so considered byhim to be excessive or unreasonable shall not be allowed as adeduction.’ The persons to whom payment 1s made has beenmentioned in clause (b) of sub section 2 of section 40A. Thecase of the assessee falls under (b) (v1). The same 1s reproducedhere:- ‘(b) The persons referred to 1n clause (a) are the following,namely - (1) where the assessee is an _—_ any relative of the assesseeIndividual. The assessee has paid interest on unsecured loans at ahigher rate to his family members as compared to others and tobanks. In view of these facts I am of the opinion that section 40A(2)(b) 1s applicable on the assessee and the excessive rate ofinterest of 18% should be restricted to 12% only. On restrictingthe rate of interest to 12%, the allowable interest comes at=6,88,800/- 1n place of=10,33,200/- as claimed by the assessee,Therefore, the difference of43,44,400/- 1s added to the incomeof the assessee. Penalty under Section 271(1) (c) 1s initiatedseparately.’ 6] 6]On appeal, the CIT(A) vide order dated 14.3.2012, AnnexureA. held as under:- “4.3. 1 have carefully considered appellant's submission. Thefact on record is that the appellant had paid=17,61,600/- asinterest on unsecured loans. The admitted fact 1s also that theinterest was paid at the rate varying from 9% to 18%. Fromthe details brought out by the AO in the assessment order, itis also apparent that the rate of interest paid to personscovered under section 40A(2)(b) is at the rate of 18% whilethe rate of interest paid to others 1s varying from 9% to 18%.The AO was therefore justified in invoking the provisions ofSection 40A(2)(a) of the Income Tax Act. Section 40A(2) (a)of the IT Act reads as under: 6] 6]On appeal, the CIT(A) vide order dated 14.3.2012, AnnexureA. held as under:- “4.3. 1 have carefully considered appellant's submission. Thefact on record is that the appellant had paid=17,61,600/- asinterest on unsecured loans. The admitted fact 1s also that theinterest was paid at the rate varying from 9% to 18%. Fromthe details brought out by the AO in the assessment order, itis also apparent that the rate of interest paid to personscovered under section 40A(2)(b) is at the rate of 18% whilethe rate of interest paid to others 1s varying from 9% to 18%.The AO was therefore justified in invoking the provisions ofSection 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 1n respect ofwhich payment has or is to be made to any person referredto in clause (b) of this sub section and the officer is ofopinion that such expenditure 1s excessive or unreasonablehaving regard to the fair market value of the goods,services or facilities for which the payment 1s made or thelegitimate needs of the business or profession of theassessee or the benefit derived by or accruing to himtherefrom, so much of the expenditure as 1s so consideredby him to be excessive or unreasonable shall not beallowed as a deduction.' What has to be seen 1s whether the expenditure isexcessive or unreasonable having regard to the fair market value of the facilities for these payments made. Fair marketvalue of facilities would depend upon facts of each case. In theinstant case there 1s no dispute in the issue that the persons towhom interest has been paid are covered under Section 40A(2)(b). The fact also remains that the appellant had paid interest torelatives at the rate of 18% while interest to others had beenpaid at the rate varying from 9% to 18%. These facts have beenbrought out by the AO in the assessment order. Market rate inthese circumstances would depend upon the rate of interestpaid by the appellant to others. The rate of interest payable tobank is not comparable to the rate of interest payable tounsecured creditors in the open market. It 1s an undeniable factthat banks provide secured loans on the basis of mortgage ofproperty/other assets at rates of interest varying from 12% to14%. There is no risk factor involved in such loans. Aproposunsecured loans risk factor 1s always there and that 1s whatmakes the rate of interest with regard to unsecured loanshigher. Moreover, bank loans also involve payment ofprocessing fee and legal fee along with extensivedocumentation. Therefore market rate would depend upon rateof interest paid to others. In this regard, 1n view of the fact thatthe appellant was paying interest to Shri Rajesh Bah,Smt.Shashi Singla, Shri Ram Krishan and Garg Steels @ 15%,it may be reasonable to hold that the market rate during theperiod for unsecured loans was 15%. In these circumstances itwould be fair and reasonable to take the market rate of intereston unsecured loans @ 15%. The appellant may have paidinterest to one of the creditors @ 12% and another creditor at9% but that by itself does not establish that unsecured loans areavailable in the market at that rate. The major part of theinterest paid to outsiders being @ 15%, therefore, | hold thatthe rate of interest to persons covered under Section 40A(2) (b)@ 18% 1s excessive and same should be restricted to 15%. Thisground of appeal of the appellant, 1s therefore, partly allowed.” ITA No.259 of 2013 (O&M) ToOn further appeal by the assessee, the Tribunal vide order dated 31.7.2012, Annexure A.3 noticed as under:- ITA No.259 of 2013 (O&M) ToOn 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 therecord. The assessee is 1n appeal against the disallowance ofinterest by invoking the provisions of Section 40A(2)(a) ofthe Act. The assessee during the year under considerationhad paid interest @ 18% per annum to the persons coveredunder Section 40A(2)(b ) of the Act as against rate of interestvarying between 9% to 18% paid to other persons. The breakup of the unsecured loans raised from the family membersand from others is available at page 4 of the assessmentorder. The perusal of the said tabulated details reflect that theassessee had paid uniform rate of interest on the loans raisedfrom its family members who are covered persons undersection 40A(2) (b) of the Act. In respect of loans from otherpersons the assessee had paid the rate of interest @ 9% toone party and 12% was paid to other party. To others, the rateof interest of 15% was paid. The Assessing Officer alsocontronted the assessee vis a vis bank loan which was 12%per annum. As against the above said details, the assesseehad furnished on record comparative chart of the rate ofinterest paid year wise under which consistently it waspaying rate of interest of 18% to its family members fromassessment year 2002-03 onwards. However, to the otherpersons, the rate of interest varied from 8.5% to 18%. In thepreceding year the assessee was paying interest @ 8.5% tofour parties, 9% to one party, 12% to three parties, 15% totwo parties and 18% to three parties. In the year under appealthe assessee 1S paying interest @ 9% to one, 12% to anotherand 15% to four parties and 18% per annum to the balanceparties. In the facts and circumstances and in view of theassessee having paid interest at varying rates of interest, wedo not find merit in the claim of the assessee in view of the provisions of section 40A(2) (a) of the Act which clearlyprovides that where the payment 1s being made to any personspecified under section 40A(2)(b) of the Act, such serviceshould be provided at market rate. Where the assesseehimself has paid interest at a rate lesser than 18%, we find nomerit in the claim of the assessee vis a vis the rate of interest@ 18% per annum paid to its family members who areadmittedly specified persons covered under section 40A(2)(b) of the Act. We find that the Assessing Officer hadallowed rate of interest of 12% per annum, which wasenhanced to 15% by the ClT(Appeals) in view of theassessee having paid similar rate of interest to other personsand also the rate of interest being paid to the bank. In thechanging scenario of market rate of interest being payable,we find no merit in the claim of the assessee of the constantrate of interest paid from assessment year 2002-03 toassessment year 2008-09 @ 18% per annum. We are inconformity with the order of the CIT (Appeals) in applyingthe rate of interest of 15% in restricting the disallowance o 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) aswell as the Tribunal after appreciating the factual matrix have accepted rateof 15% interest paid to relatives as reasonable whereas interest beyond thathas been disallowed under Section 40A(2)(b) of the Act. The rate of interestis primarily a question of fact to be determined on various factors by theauthorities on appreciation of material on record. Allowance of interesteither by the Assessing Officer or by the Tribunal at different rates cannotbe taken as a precedent or law for allowing the same rate for all cases unlessthe facts are comparable and identical therein. ITA No.259 of 2013 (O&M) Q.Accordingly, finding no error in the approach of the Tribunal,the appeal is dismissed. Since the appeal has been dismissed on merits, noorder 1s required to be passed on the application under Section 5 of thelumitation Act, 1963. (Ajay Kumar Mittal)Judge| ITA No.259 of 2013 (O&M) Q.Accordingly, finding no error in the approach of the Tribunal,the appeal is dismissed. Since the appeal has been dismissed on merits, noorder 1s required to be passed on the application under Section 5 of thelumitation Act, 1963. (Ajay Kumar Mittal)Judge| January 10, 2014?>&? (Anita Chaudhry)Judge|