DCIT Vs Shri Shekhar G. Patel (ITAT Ahmedabad)
Conclusion:
Non-charging of interest on the loan amount given by lending company to its director could not be a perquisite as no remuneration or salary in the capacity of the director had been drawn from the lending company nor any interest expenditure was shown in its profit and loss account.
Held:
Assessee-director had taken interest free loan from the company in which he was director. AO opined that if an interest at the rate of 15 per cent been charged, assessee would be required to pay amount of Rs. 47 lakhs, therefore, the company had extended undue benefits by not charging interest from assessee which had to be construed as perquisite in the hands of assessee under section 2(24)(iv). It was held assessee being director neither an employee of the lending company nor he was having substantial interest in the lending company. AO had also not brought anything on record to say that the aforesaid companies have paid any sum of money which was by way of obligation payable by assessee. There was no fresh loan taken during the year under consideration but it was the loans taken in the preceding years. No interest was charged in earlier year nor any perquisite value was assessed. Moreover, lending company did not have any interest expenditure in its profit and loss account therefore, there was no obligation of assessee in respect of any interest was paid by the lending company on behalf of assessee. Thus, non-charging of interest on the loan amount did not constitute a perquisite.
FULL TEXT OF THE ITAT JUDGEMENT
Revenue is in appeal before the Tribunal against order of the ld.CIT(A)-2, Ahmedabad dated 22.6.2016 passed for the Asstt.Year 2008-09. On receipt of notice on Revenue’s appeal, the assessee has also filed cross objection bearing no.164/Ahd/2016.
2. In the first ground of appeal, Revenue has pleaded that the ld.CIT(A) has erred in quashing re-assessment order passed under section 143(3) r.w.s. 147 of the Income Tax Act, 1961.
3. Brief facts of the case are that the assessee has filed his return of income on 27.3.2010 declaring total income at Rs.49,53,850/-. An assessment order was passed under section 143(3) on 23.12.2010. The ld.AO did not make any addition to the income declared by the assessee and accepted declared income. The assessee was a director in a company named Ganesh Housing corporation Ltd.(“GHCL” for short). Records of GHCL were subject to audit survey and examined by the Revenue department. The Revenue authorities found that GHCL has disallowed a sum of Rs.80,38,101/-. In the computation of total income, it made reference to the audit report and observed this amount relates to personal expenditure, hence, it was construed that expenditure incurred on personal needs of the Director ought to have been shown by the Director as perquisite in the return. According to the AO, the assessee failed to recognize that expenditure as his income which has escaped assessment. Therefore, he recorded reasons and reopened the assessment. The reasons recorded by the AO has been reproduced by the ld.CIT(A), which reads as under:
“Reasons for invoking provisions of section 147 of the I. T. Act
1. The assessee is one of the directors in Ganesh Housing Corporation Limited. The return of income was filed on 27/03/2010 declaring total income of Rs.49,53,850/-. The assessment of the assessee was completed u/s. 143(23) on 23/12/201£determining total income at Rs.49,53,850/-.
During the course of verification of records of the Ganesh Housing Corporation Limited, it has been noticed that Ganesh Housing Corporation Limited has disallowed a sum of Rs.80,38,101/- in the computation of total income. In the Annexure – 6 of the Tax Audit Report the details of expenditure of personal nature have been given which includes expenditure on telephone, electricity, motor car usage, foreign travelling and other expenses on behalf of the Directors etc. The auditor of the Ganesh Housing Corporation Limited has disallowed such expenses since it was treated expenditure of personal nature. It was aiso certified that such expenditures were for the benefit of directors.
As per the section 2(24) (iv) the value of any benefit of prerequisite whether convertible into money or not obtained from a company either by a director or by a person who has a substantial interest in the company or by a relative of the director or such person and any sum paid by any such company in respect of any obligation which, but for such payment would have been payable by the director or other person aforesaid.
In view of the above provision, the sum paid by the company on behalf of the Director should have been reflected as income in the hands of the Director. In the case of Shri Shekhar G. Patel, an amount of Rs.26,79,366/-being l/3rd of amount of Rs.80,38,101/- have to be included in the income of the assessee which has been escaped from the assessment in the hands of the Director Shri Shekhar G. Patel.
2. Further Shri Shekhar G. Patel has taken interest free loans from Umnesh Complex Pvt, Ltd. and Mihika Buiidcon Pvt. Ltd. in which he is one of the directors. The non levy of interest by Unmesh Complex Pvt. Ltd. and Mihika Buiidcon Pvt. Ltd. on the sums advanced to Mr. Shekhar G. Patel is a benefit enjoyed by Shri Shekhar G, Patel by virtue of being a director. Hence, as per provisions of section 2(24)(iv), the value of such benefits is to be added in the income of the Shri Shekhar G. Patel. As per the records, average of the benefit enjoyed by Shri Shekhar G. Patel as loan comes to Rs.31849700/- on which interest @ 15% comes to Rs.4777455/-. Thus an income of Rs.4777455/- has escaped assessment in the hands of Shri Shekhar G. Patel.
3. On going through the sale deeds submitted by Shri Shekhar G. Patel, is seen that provisions of section 50C has not been complied with. Mr. Shekhar G. Patel has sold non – agriculture land (50% share) situated at Shilaj Village for Rs. 15,00,000/-. The stamp duty paid thereon is Rs.89,500/-. By applying jantry rate @ 4.9% on stamp duty paid, the cost of the property works out to be Rs. 18,26,530/-. Therefore, there is under valuation of property to the extent of Rs.3,26,530/-. Since, Shri Shekhar G. Patel had 1/2 share in the property, under assessment comes to Rs. 1,63,265/- in the hands of Shri Shekhar G. Patel.
4. Similarly a property situated at Shilaj Village, BlockNo. 737 was sold at Rs. 15,00,0007-. Shri Shekhar G. Patel had 173rd share in the said property. The stmp duty paid thereon is Rs.87,200/-. By applying jantri rate @ 4.9% on stamp duty, the cost of property should have been Rs.17,79,590/-, so there is undervaluation of property of Rs.2,79,590/- u7s. 50C of the Act, Since Shri Shekhar G. Patel has 173rd share in the property under assessment comes toRs.93,195/-.
In view of above, I have reason to believe that income of Rs.77,13,281 /-(Rs.26,79,366/- + Rs.47,77,455/- + Rs.1,63,265/- + Rs.93,195/-) has escaped assessment for A. Y. 2008-09 and therefore, I am of the opinion that this a fit case for assessment by invoking the provisions of section 147 of the Income Tax Act, 1961.”
4. Dissatisfied with this reopening, the assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) has made a detailed analysis of the reasons recorded by the AO vis-à-vis information available to him. According to the ld.CIT(A) the assessment has been reopened after expiry of four years from the end of the relevant assessment year, and therefore, proviso appended to section 147 would come in the way of AO for reopening of the assessment, unless it is established that income has escaped assessment on account of failure of the assessee to disclose all material facts fully and truly. In the opinion of the ld.CIT(A), the AO failed to refer to any material which can be alleged that the assessee failed to disclose fully and truly, and accordingly, the ld.CIT(A) has quashed the re-assessment order.
5. Before us, while impugning the order of the ld.CIT(A), the ld.DR contended that GHCL in its audit report has itself made disallowance of Rs.80,38,101/-. If this expenditure were of personal in nature, then perquisite value of this expenditure ought to have been disclosed by the assessee. He failed to disclose this, therefore, this proviso will not come in the way of the AO, because the assessee failed to disclose material facts fully and truly. He further observed that the assessee has also obtained interest free loans from Umnesh Complex PLtd., and Mihika Buildcon P.Ltd. If interest at the rate of 15% is being calculated on those loans, then benefit in terms of notional interest would come to Rs.47,77,455/- which has a perquisite value in the hands of the assessee, and it should have been shown as his income.
6. On the other hand, the ld.counsel for the assessee relied upon the order of the ld.CIT(A). She pointed out that AO nowhere applied his mind and made analysis of the nature of the expenditure, and whether any personal element would involve in this expenditure. There can be different reasons for the company to make a disallowance, out of its claim on expenditure. In the opinion of the management, certain expenditure were not for the purpose of business and the company wants to pay taxes on this count, that would not become automatic as perquisite in the hands of the assessee.
7. We have duly considered rival contentions and gone through the record carefully. There is no dispute that original assessment was made under section 143(3) of the Act. There is also no dispute that four years has lapsed from the end of the assessment year. The question is, whether proviso appended to section147 puts an embargo in the power of the AO for reopening of an assessment order, where a scrutiny assessment has been made, and four years has expired, which would come to the rescue of the assessee or not ? On the other hand, view of the Revenue is that there was no disclosure of material facts fully and truly, therefore, proviso will not come in way of the AO. On the other hand, the stand of the assessee is that AO failed to analysis the nature of expenditure, and therefore, there is no live-link between formation of opinion showing escapement of income vis-à-vis information available with the Ld.AO. Let us take into consideration bifurcation of those expenditure. These have been reproduced by the ld.CIT(A). They read as under:
