In absence of any material change revenue cannot take a view different from earlier view

M/s. Bajrang Wire Products (India) Pvt. Ltd. Vs. The Addl. CIT (ITAT Jaipur) In the present case the matter before the ld. CIT (A) was payment of interest for the A.Y. 2006-07 and also for A.Y. 2008-09. In both the matters, the interest was restricted by the AO to 12% whereas in the matter for A.Y. 2006-07, the CIT (A) has uphold the payment of interest @ 15%. In the assessment year under consideration before us, the ld. CIT (A) has restricted it to 13.5% despite the fact that in the earlier assessment year the payment of interest @ 15% has been upheld. We do not find any justification in the order passed by the ld. CIT (A). The reason given by the AO were also available with him when ld. CIT (A) has passed the assessment order for A.Y. 2006-07. Since there is no material change in the circumstances, therefore, the interest payable cannot be reduced to 13.5%. Therefore, we are of the view that the orders passed by AO and Id. CIT (A) are required to be set aside and we accordingly held that the 15% interest claimed by the assessee for the loan borrowed is allowed.

INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR

BEFORE: SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM

ITA Nos. 138/JP/2014 -Assessment Years : 2008-09.

M/s. Bajrang Wire Products (India) Pvt. Ltd. Vs. The Addl. CIT

Assessee by : Shri Ashok Holani (C.A.)

Revenue by : Shri Rajendra Singh, (JCIT)

Date of Hearing: 08. 10.2015. Date of Pronouncement: 21/10/2015.

ORDER

PER SHRI LALIET KUMAR, J.M.

This an appeal filed by the Assessee against the order of ld. CIT (A)-II, Jaipur dated 17.12.2013 for the A.Ys. 2008-09. The grounds raised in the appeals are as under :-

1. That the disallowance/additions made by the learned Assessing Officer are against the law and the facts on records therefore it is submitted that the additions/disallowances so made are unjustified and deserves to be set aside.

2. The appeal was preferred before the Commissioner of the Income Tax (Appeals)-II, Jaipur. The learned Appellate Authority vide their order dated 17.12.2013 restricted the disallowance to 1.50% of interest paid to related parties against the 3% disallowance by learned Assessing Officer. It is submitted that the learned Assessing Officer has erred at law disallowing interest of Rs. 1026771/- under section 40A(2)(b), stating that reasonable interest as defined in Income Tax Act 1961 is 12% while there is no such definition in the Act, defining reasonable interest as stated in the assessment order dated 03.12.2010. The learned assessing officer allowed 12% interest on the unsecured loans taken from the friends and relatives as against 15% paid by the company.

3. Thus appellate authority has not consider the full interest amount @ 15% paid by the company to the related parties and allowed the interest @ 13.50% on deposits of the related parties. Hence appeal is partially allowed.

4. Under the facts and circumstances of the case it is submitted that the interest paid by the company @ 15% is bonafide and not excessive or unreasonable having regards to the fair market value of the facilities for which payment is made, hence this appeal.

2. Brief facts of the case are that the assessee is a company and is having income from the business of drawing and galvanizing of steel wire. During the assessment proceedings, written submissions were filed, books of accounts were produced which were examined on test check basis. It was found that interest was paid by the assessee to 9 (nine) persons for a total amount of Rs.51,33,856/- @ 15% break up of which is as under:

The AO was of the view that the prevailing market rate was 12% whereas the assessee has paid the interest @ 15%. The AO had issued show cause notice for the excess interest paid by the assessee to the said persons under section 40A(2)(a). In response to the show cause notice the assessee filed the reply as under :-

“Your goodself has asked to submit the details of payments of interest to relatives as defined u/s 40A(2)(b). It is submitted that the details are available at page no. 63 of the paper book submitted earlier. Your goodself has asked the justification of payment of interest @ 15% while PLR is 12%. In this regard it is submitted that :-

a. All the loan and deposit accounts, whether relatives or not are old one, subjected to scrutiny assessment u/s 143(3) in earlier years too and there is no change in interest rate this year as is evident from the documents available on record as well as enclosed herewith in paper book at page -63.

b. All the parties, whether relatives or not, are income-tax payers and the payment of interest is after deduction of TDS and is actual.

c. Your goodself is well aware of the fact the PLR not at all affect the rate of interest on old loans or deposits. It is not a case where the loans were available from bank but the same has been taken from relatives. The assessee has submitted the copy of bank loan sanction letter dated 10.10.2007 (copy enclosed for ready reference and appreciation of facts at page 176-185) wherein it is clear condition on OVERALL TERMS AND CONDITIONS: 11 & 19 that ‘Friends/relatives from whom the unsecured loans has been raised shall provide an undertaking that they shall not withdraw these loans during currency of bank loan and borrower to undertake that same shall not be allowed to withdraw without prior permission of bank (condition 11 at page 184 of paper book).

d. That the PLR of Bank is not the yardstick to judge/measure the excessiveness or reasonableness of interest rate for private borowings which are old one.

e. That interest paid to others is also @ 15% and the assessingl authority has treated them as relatives too e.g. Mr. S.S. Katta as is evident from the details of interest on record as well as enclosed herewith in paper book at page no. 751.

f. That under the facts and circumstances of the case it is submitted that the interest in question is bonafide and not excessive or unreasonable having regards to the fair market value of the facilities for which payment is made.

In the light of these facts it is clear that the payment of interest is duly adjudged by the department in earlier assessment u/s 143(3) as the loan accounts are old and there was no change in interest rate this year. Further the assessee client was under a bar from the bank itself as stated above hence bound to pay the interest @ 15% only.

Therefore, it is submitted that the payment of interest to friends and relatives are quite reasonable and were as per business needs as there was condition itself in bank loan sanction letter itself as stated above.”

However, the AO was not satisfied with the reply given by the appellant assessee and the A.O. had restricted the interest at 12% instead of 15% as claimed by the assessee. Thus an amount of Rs. 10,26,771/- was disallowed by the AO.

3. Aggrieved the assessee has filed appeal before ld. CIT (A), and the ld. CIT (A) has allowed partial relief to the assessee whereby the interest has been restricted to 13.5% instead of 15%. The relevant portion of ld. CIT (A) is as under :-

“3.3. I have considered the facts of the case, assessment order and appellant’s written submission. Assessing Officer disallowed interest in excess of 12% paid to related persons under section 40A(2b) on the ground that interest paid to partners is allowable only in the extent of 12% under section 40(b). Assessing Officer also mentioned that interest payable to the bank is not 15% which is paid to the related parties hence it is excessive and unreasonable. Appellant submitted that it was paying bank interest @ 12.5% on the secured borrowings which involved processing fees and other charges to the extent of 1-2%. It was also submitted that in assessment year 2006-07, CIT (A) allowed the claim of interest paid to related parties © 15%. Appellant further submitted that assessing officer relied upon the wrong provision of section 40(b) which applies to partnership and not company. I agree with the appellant that provisions of section 40(b) applies to only partnership firm and this does not determine the market rate of interest and therefore disallowance of interest relying on this provision is not correct. However, if interest paid is excess considering the market rate, disallowance of excess interest is justified. Appellant submitted that it was paying bank 12.5% interest on secured loan of Rs. 20 crores. Processing charges and other costs associated with this loan will be maximum 1% annually. Considering this, market rate of interest in the case of appellant during the year comes to 13.5%. However, appellant paid interest to related parties at 15%. When appellant can borrow from bank with complete cost at 13.5%, paying interest at 15% to related parties is definitely excessive and unreasonable which is disallowable under section 40A(2b). The decision of CIT (A) in assessment year 2006-07 did not consider this aspect of borrowing from bank at lower rate than from related parties. Considering this, 1.5% interest paid to related parties is considered disallowable as against 3% interest disallowed by the AO. Accordingly, disallowance is restricted to 1.5% of interest paid to related parties.”

4. Aggrieved, the assessee is before us.

5. It is contended by the assessee before us that all the unsecured loans were taken by the assessee company in the earlier assessment years and no fresh amount was accepted by the assessee company. Besides this, it was also submitted that the assessee has taken unsecured loans from other parties not listed under section 40A(2a) of the Act. Lastly it was contended that all the unsecured loans carries 15% rate of interest and assessee is paying the same. The ld. A/R of the assessee has also taken us to the order passed by the ld. CIT (A) on 27.10.2009 for the A.Y. 2006-07 whereby the ld. CIT (A) has upheld the payment of 15%. The relevant para is as under :-

” I have considered facts of the case and arguments taken by Sh. Jain quite carefully. It is a fact that all these loans from related persons were not raised during the year but these were loan taken in preceding A.Y. @ 15% p.a. It is also not the case that during the year there is increase in the interest rate. When the loans has been taken on a particular interest rate in preceding A.Y. then till it is repaid it is the responsibility of the appellant to pay interest at the pre determined rate. Further, the banker has also provided conditions that during the currency of bank loan any loan/deposits taken from friends and relatives shall not be withdrawn without prior permission of the bank. Further, the appellant has paid interest @ 15% p.a. to the non related party also namely Sh. S.S. Katta. Further, no instance has been given by AO that how 12% interest rate can be considered as reasonable not excessive. With this discussion and under these circumstances, in my considered view the interest paid to the related persons @ 15% in this case was not unreasonable and excessive and with this discussion such disallowance of interest in the name of Excessive and Unreasonable to the extent of Rs. 5,92,197/- is hereby deleted.”

6. The ld. D/R for the revenue relied upon the order passed by ld. CIT (A).

7. We have heard rival contentions and perused the material on record. It is the consistent view of the Hon’ble Supreme Court that the rule of consistency should be followed in respect of assessment proceedings though the principle of res judicata is not applicable. During the course of hearing, it was enquired by the Bench whether the assessee and the person who had given the loan both are assessed to Income-tax at maximum marginal rate or not. To this, it was replied by the assessee that both are taxed at maximum marginal rate. Therefore, it cannot be said that higher rate of interest is paid by the assessee to the lenders to evade income-tax. In the similar facts and circumstances, the Hon’ble Gujarat High Court in the matter of CIT vs. Gujarat Gas Financial Services Ltd. in para 11, 12 & 13 has reiterated the principle of res judicata and consistency in the following words :-

“11. It would thus be clear from the above observations of the Hon’ble Supreme Court that the principle of res judicata does not apply to income tax proceedings and each assessment year is considered as a separate unit. Still, however, the Hon’ble Supreme Court has held that in absence of any material or substantial change justifying the revenue to take a different view than the view it had taken in the preceding assessment years, it should not have reopened the issue in the subsequent assessment year. In the case on hand also, there cannot be any avil that, strictly speaking, the principle of res judicata is applicable to income tax proceedings. Still, however, the revenue had allowed deduction of service charges from the income to assess the income tax of the respondent in the preceding year. In asbence of any material change, it could not have disallowed the claim of service charges under Section-40(A) of the Act. In the backdrop of these facts, the arguments canvassed by learned Senior Counsel Mr. M.R. Bhatt cannot be countenanced.

12 The Gujarat Gas Financial Services Limited (a Government Company), is engaged in distributing gas through pipelines to its customers, wherein the respondent company is 100% subsidiary company of the Gujarat Gas Company Ltd. It is accepted fact that the parent as well as assessee company had entered into an agreement on 25.4.2003 for various works, which are to be undertaken by the assessee company. For such works, the assessee company would be entitled for service charges and the charges agreed between the parties is Rs. 3,205/- per connection. Accordingly, for the assessment year 2004-2005, the assessee company had paid Rs. 5,00,84,000/- towards service charges. which was deducted by the Assessment Officer under the provisions of Section 37 of the Act. Similar is the case for assessment year 2005-06 to the tune of Rs.7,07,00,028/-. The Assessment Officer, who found such amount as excessive for the assessment Year 2006-07, initiated proceedings by exercising powers under Section 40A(2) of the Act. It was the case of the assessee company that it is the company which is providing various kinds of services to the parents company and both the companies are paying the highest tax and, therefore, there was no evasion of tax by the assessee. The Assessment Officer could not accept the submissions made by the company that in past two years the claim made towards the expenditure was accepted by the Officer on the ground that there is no question of res judicata, however, has held that without any material, the maximum expenditure of the assessee company towards service charges is Rs.10 crores as, if, the assessee company was only received the premiums belong to the foreign company, which is contrary to law laid down by the various courts and tribunals. As far as this aspect is concerned, the Hon’ble Apex Court in the case of Commissioner of Income Tax vs Excel Industries Ltd, as reported at 295 ITR has held in paragraphs 28, 29, 30 and 31 which reads as under:

“28 Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the revenue.

29 In Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) this court did not think it appropriate to allow the reconsideration of an issue for a subsequent assessment year if the same ” fundamental aspect” permeates in different assessment years. In arriving at this conclusion, this court referred to an interesting passage from Hoystead v. Commissioner of Taxation (1926) AC 155 (PC) wherein it was said (page 328 of 193 ITR):

“Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle – namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision,taken or assumed by the plaintiff and traversable by the defendant, has not been tranversed. In that case also a defendant is bound by the judgment, although it maybe true enough that subsequent light or ingenuity might suggest some traverse which had not been taken.”

30 Reference was also made to Parashuram Pottery Works Co. Ltd vs ITO(1977) 106 ITR 1 (SC) and then it was held (page 329 of 193 ITR):

“We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter – and if there was no change, it was in support of the assessee – we do not think t the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings,a different and contradictory stand should have been taken.

31 It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it.”

13. As has been found by us in the preceding para of this judgment that the respondent company as well as the parent company, both are assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge is paid to the respondent company at a unreasonable rate to evade income tax. Even the learned Counsel Mr. Bhatt for the revenue does not dispute this fact.”

In the present case the matter before the ld. CIT (A) was payment of interest for the A.Y. 2006-07 and also for A.Y. 2008-09. In both the matters, the interest was restricted by the AO to 12% whereas in the matter for A.Y. 2006-07, the CIT (A) has uphold the payment of interest @ 15%. In the assessment year under consideration before us, the ld. CIT (A) has restricted it to 13.5% despite the fact that in the earlier assessment year the payment of interest @ 15% has been upheld. We do not find any justification in the order passed by the ld. CIT (A). The reason given by the AO were also available with him when ld. CIT (A) has passed the assessment order for A.Y. 2006-07. Since there is no material change in the circumstances, therefore, the interest payable cannot be reduced to 13.5%. Therefore, we are of the view that the orders passed by AO and Id. CIT (A) are required to be set aside and we accordingly held that the 15% interest claimed by the assessee for the loan borrowed is allowed.

8. In the result, assessee’s appeal is allowed.

Order pronounced in the open court on 21/10/2015.