Case Law Details
Sukh Sagar Co. Vs ITO (ITAT Ahmedabad)
On the issue of disallowance/ addition of interest under section 40A(2)(b) of the Act ;
- of Rs.9,195/- the same pertained to advance given by the assessee to one Shri Shailesh M. Patel from whom the ld.AO noted that the assessee had recovered interest at rates less than 12%;
- and Rs.21,295/- pertained to fund advanced by one Brijesh P. Chauhan to the assessee to whom the AO found assessee had paid interest at rate more than 12%.
Both were related entities to the assessee as per section 40A(2)(b) of the Act. Assessment order reveals that the assessee had furnished explanation for the same pointing out that the advance to Shailesh Patel was in the course of selling and purchase of goods, and it was not a commercial advance, whereas in the case of Brijesh Chauhan, the assessee has explained that the unsecured loans had been taken without any security, and hence interest at the rate of 18% was charged on the same.
The AO, we find, has simply rejected both these contentions and explanation of the assessee by stating that they were not acceptable, and incase of Brijesh Chauhan, by merely mentioning that he falls in the category of person specified under section 40A(2)(b) of the Act and in other cases the assessee had paid interest at the rate of 12%. There is no further reasoning by the AO for rejecting the explanation of the assessee. The order of the ld. CIT(A) is nothing but cryptic who merely mentioned that the AO had given full justification for the disallowance and his order is logical and specific.
Similarly, on the disallowance of interest of Rs.51,662/-, the same was made by the AO on the withdrawals made by one of the partners of the firm, Brijesh Chauhan (HUF), noting that asper the partnership deed, 12% interest was to be charged on the withdrawals, but the assessee had not charged the same. In his order the AO simply notes that the assessee furnished reply, but it was not satisfactory. What exactly was the reply, finds no mention in his assessment order. The AO straight-away arrives at a finding and conclusion that the reply was not satisfactory, without even giving any reasons and basis for rejecting the same. The ld. CIT(A) has nothing to say in the matter except that the assessment order is justified, and proper show cause notice has been given to the assessee.
Similarly, in the case of disallowance of interest of Rs.7,84,957/-, the same pertained to advances given to Ashok Sales Corporation without charging any interest on the same. The assessee had explained that the advances related to business transactions with Ashok Sales Corporation, which were rejected by the AO out rightly by stating that no prudent businessman would give advance without interest. The AO has not even cared to consider the assessee’s statement of facts that the advance was in relation to business transactions carried out by the assessee and was purely commercial advance. On the contrary, the AO has gone to hold that no business transaction has been shown by the assessee, and it was only financial transaction. The ld. CIT(A) has again upheld order of the AO finding it to be totally justified.
It is clear therefore that both AO & CIT)(A) below having passed orders in a very casual manner, totally ignoring the pleadings of the assessee and in complete disregard to the principles of natural justice. The orders are highly unjustified and are not sustainable in law.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The present appeal has been filed by the assessee against order passed by the Commissioner of Income Tax(Appeals)-10, Ahmedabad [in short referred to as ld. CIT(A)] under section 250(6) of the Income Tax Act, 1961 (“the Act” for short), dated 13.03.2019 pertaining to Asst.Year2014-15.
2. Effective grounds of appeal raised by the assessee are ground no.2 to 4, which read as under:
i) The ld. CIT(A) has erred in passing the appeal order confirming the action of the ld. ITO whereby confirming the disallowance of interest of Rs.9195/-, interest of Rs.21,295/- under section 40A(2)(b) of the Act.
ii) The ld. CIT(A) has erred in confirming the disallowance of interest of Rs.51,662/- (interest to partner)
iii) The ld. CIT(A) has grievously erred in confirming the disallowance of Rs.7,84,957/- for the fund advanced to Ashok Sales Corporation.”
Rests of the grounds are either general in nature or were not pressed before me.
3. As is evident from the above, solitary grievance of the assessee before me is against disallowance of interest of various amounts as mentioned in grounds of appeal.
4. I have heard both the parties; I have also gone through the orders of both the AO and the ld. CIT(A).
5. I may begin by stating that after hearing both the parties, and going through orders of the authorities below, I find that this is a classic case of orders passed by the Revenue officers i.e. both the AO and the CIT(A) in gross disregard to the principles of natural justice, totally ignoring the pleadings of the assessee before them, giving no reason for the same, and passing cryptic orders without any reasoning. The order of the ld. CIT(A) needs to be set aside for this reason alone and the assesses claims be allowed. Having said so, we shall now bring out the reasoning for the same from the orders of the authorities below.
6. As is evident from the grounds raised before me, the assessee has primarily challenged the disallowances of three types of interests viz.
(i) 9,195/- and Rs.21,295/- disallowed under section 40A(2)(b) of the Act,
(ii) 51,662/- being interest paid to partners disallowed, and
(iii) 7,84,957/- being the interest paid on fund advanced to one M/s. Ashok Sales Corporation.
The assessment order deals with all three issues at para 6 & 7 for the first issue as under:
6. The assessee has charged interest @ less than 12%, on the advances given to Kaileshbhai M. Patel, on the other hand, the assessee has paid interest @ 12% or more on . unsecured loan. Accordingly, the assessee vide notice dated 06.10.2016, has been asked that “In the case of Shaileshbhai Maganbhai Patel, you have charged interest Rs.30,750/- less than 12%,on the other hand you have paid interest @ 12% & more on unsecured loans, you are therefore, requested to show cause as to why Rs.9,195/- (Rs.39,945/- @ 12% – Rs.30,750/-), difference amount, should not disallowed out of your interest exp. claimed.” In response to the above the assessee submitted that “Advances to Shailesh Naganbhai Patel is in the-course of selling and purchase of goods. So it is not comparable to unsecured loans. The assessee has charged it as per normal trade practiced” The reply of the assessee has been considered, however, not acceptable. The assessee has paid and claimed Interest on unsecured loans @ 12% and even 18%, whereas charges interest less than 12% on advances, accordingly proportionate interest expenses of Rs.9,195/- is disallowed and added to the total income of the assessee.
7. The assessee has paid interest to Brijesh P Chauhan HUF, i.e. its partners HUF @ 18% on the unsecured loan from the above HUF. Accordingly the assessee vide this office notice dated 06.10.2016, has been asked that “You have paid interest @ 18% to Brijesh P Chandan-HUF of Rs.63,884/-, on the other hand you have given either interest free advances or charged interest @ 12%, you are therefore requested to show cause as to why the interest exp. should not be restricted to @12% and Rs.21,295/- should not be disallowed and added to your total income.” In response to the above the assessee vide its reply dated 08.11.2016 submitted that “The assessee firm has raised funds in the form of unsecured loans without giving any security. So, rate ‘of interest in this case is higher than secured loans. So, it is reasonable to charge interest @ 18% on unsecured loans.” The justification given by the assessee has been considered carefully, however found not acceptable. The assessee has paid interest @ 18% to the above person, who falls under the category of section 40A(2)(b) of the Act. In other cases the assessee has paid interest only @ 12%. Accordingly, excess interest paid to its partner’s HUF @ 6%, which comes to Rs.21,295/-, is disallowed and added to the total income of the assessee.”
Para-8 for the second issue as under:
8. Partner of the assessee Firm Shri Brijesh P Chandan has made withdrawals from the Firm and as per partnership deed it is required to charge interest @ 12%, however the assessee has not charged the same. On the other hand the assessee has claimed huge interest expenses including interest on partner’s capital. Accordingly, the assessee vide this office notice dated 06.10.2016′, has been asked that “Partner-of the Firm Shri Brijesh P Chandan has made withdrawals from the Firm, however, no interest has been charged, you are therefore requested to show cause as to why interest @ 12%, which comes to Rs.51,662/- should not be treated as income of the assessee Firm.” In response to the above the assessee could not offered any satisfactory reply, Accordingly, Rs.51,662/- is disallowed out of interest expenses claimed by the assessee and added to the total income of the assessee.
Para-9 for the third issue as under:
9. The assessee has given advances to Ashok Sales Corporation a numbers of times and received back time to time and shown, closing balance of Rs.35,51,065/-, however, not charged any interest. Accordingly, the assessee vide this office notice dated 06.10.2016, has been asked that “You have made financial transactions with Ashok Sales Corporation, however, you have not charged any interest, you are therefore, requested to show cause as to why proportionate interest exp. @12%, which comes to Rs.7,84,957/- should not be disallowed and added to your total income.” In response to the above the assessee, vide its reply dated 08.11.2016, submitted that “Transactions with Ashok Sales Corporation for the purposes of business. So, we have not charged any interest on it. “The justification given by the assessee is not acceptable. A prudent business man cannot give any interest free advances to any one out of its interest bearing funds. There is no business transaction has been shown by the assessee. The assessee has done only financial transactions with the above party and not charging interest on the advances from them cannot be acceptable, whereas the assessee is paying/incurring huge amount of interest expenses to raise funds for its business. Accordingly, proportionate interest expenses, as calculated above of Rs.7,84,957/- is disallowed and added to the total income of the assessee.
7. The ld. CIT(A) dealt with the same at para 4.2 to 4.3 for the first issue as under:
“4.2 The ground no. 2.1 (b) is relating to addition of Rs. 9,195/-. The differential interest between borrowing and lending rate @ of 3 percent has been added in respect of Shri Shailesh Patel. The AO has given full justification for a disallowance which is logical. Proper show cause notice has been served by the AO on appellant before making addition. I am convinced that the disallowance is called for. Ground no. 2.1(b) is dismissed.
4.3 Ground no. 2.1 (c) is regarding excessive interest paid @ 18%, disallowance is computed @ 6 % by the AO i.e. disallowance of Rs. 21,295/- u/s 40A(2)(b). The appellant tried to explain as if there were sufficient bank balance before such advances are made. The explanation of the appellant was also rejected on this issue by my predecessor in the appellate order for A.Y. 2012-13 dated 20-11-2015. The AO has given full justification for a disallowance in para 7 which is logical and specific provisions u/s 40A(2)(b) have been invoked. Proper show cause notice has been served by the AO on appellant before making addition. I am convinced that the disallowance is called for. Ground no. 2.1(c) is dismissed.
Para-4.4 for the second issue as under:
“4.4 Ground no. 2.1 (d) is regarding disallowance of Rs. 51,662/-. The issue is relating to charging of interest from the partner on capital account. The justification of the decision is contained in para 8 of assessment order. The partnership deed has been considered by the AO, hence the principle of expediency by the appellant is nothing but to defraud the revenue. Proper show cause notice has been served by the AO on appellant before making addition. The decision of the AO is found to be correct, therefore ground no. 2.1(d) is hereby dismissed.
Para-4.5 for the third issue, as under:
“4.5 Ground no. 2.1 (e) is regarding disallowance of Rs.7,84,957/-. The detail is in para 9 of assessment order. Huge funds have been advanced to Ashok Sales Corporation without charging any interest. Proper show cause notice has been served by the AO on appellant before making addition. The AO has taken consistent view to consider 12% interest as reasonable. The disallowance has been computed for the outstanding amount @ 12% per annum. The decision of the AO is found to be correct, therefore ground no. 2.1(e) is hereby dismissed.”
8. After going through the orders of the AO and the ld. CIT(A), all the issues are now being dealt with by me.
9. On the issue of disallowance/ addition of interest under section 40A(2)(b) of the Act ;
- of Rs.9,195/- the same pertained to advance given by the assessee to one Shri Shailesh M. Patel from whom the ld.AO noted that the assessee had recovered interest at rates less than 12%;
- and Rs.21,295/- pertained to fund advanced by one Brijesh P. Chauhan to the assessee to whom the AO found assessee had paid interest at rate more than 12%.
Both were related entities to the assessee as per section 40A(2)(b) of the Act. Assessment order reveals that the assessee had furnished explanation for the same pointing out that the advance to Shailesh Patel was in the course of selling and purchase of goods, and it was not a commercial advance, whereas in the case of Brijesh Chauhan, the assessee has explained that the unsecured loans had been taken without any security, and hence interest at the rate of 18% was charged on the same.
10. The AO, we find, has simply rejected both these contentions and explanation of the assessee by stating that they were not acceptable, and incase of Brijesh Chauhan, by merely mentioning that he falls in the category of person specified under section 40A(2)(b) of the Act and in other cases the assessee had paid interest at the rate of 12%. There is no further reasoning by the AO for rejecting the explanation of the assessee. The order of the ld. CIT(A) is nothing but cryptic who merely mentioned that the AO had given full justification for the disallowance and his order is logical and specific.
11. Similarly, on the disallowance of interest of Rs.51,662/-, the same was made by the AO on the withdrawals made by one of the partners of the firm, Brijesh Chauhan (HUF), noting that asper the partnership deed, 12% interest was to be charged on the withdrawals, but the assessee had not charged the same. In his order the AO simply notes that the assessee furnished reply, but it was not satisfactory. What exactly was the reply, finds no mention in his assessment order. The AO straight-away arrives at a finding and conclusion that the reply was not satisfactory, without even giving any reasons and basis for rejecting the same. The ld. CIT(A) has nothing to say in the matter except that the assessment order is justified, and proper show cause notice has been given to the assessee.
12. Similarly, in the case of disallowance of interest of Rs.7,84,957/-, the same pertained to advances given to Ashok Sales Corporation without charging any interest on the same. The assessee had explained that the advances related to business transactions with Ashok Sales Corporation, which were rejected by the AO out rightly by stating that no prudent businessman would give advance without interest. The AO has not even cared to consider the assessee’s statement of facts that the advance was in relation to business transactions carried out by the assessee and was purely commercial advance. On the contrary, the AO has gone to hold that no business transaction has been shown by the assessee, and it was only financial transaction. The ld. CIT(A) has again upheld order of the AO finding it to be totally justified. The assessee had given detailed explanation to the ld. CIT(A) in appellate proceedings, which are reproduced at page no.3 of his order at para 4, 5, 7 & 8 as under:
4.0 Disallowance of interest charged at lessor rate-Rs.9,195/-
4.1 The next ground of appeal relates to the disallowance at pro-rata basis in respect of interest expenses at Rs.9,195/-. It is discussed In para-6 of the order. The AO also found that the appellant had charged interest at a lesser rate in respect of advance given to Shri Shailesh M. Patel so that difference @ 6% of Rs.9,195/- was disallowed.
4.2 The appellant submits that the impugned disallowance is not justified because the AO has failed to establish nexus between the borrowings @15% and advance @12% to Sh. Shailesh M. Patel during the year under appeal. The appellant had explained that there was a commercial expediency charging interest at a lesser rate in as much as there were commercial relationship between the appellant and Sh. Shailesh M. Patel of trading goods. It is a normal practice in this market that the traders inter se to give advances whenever there is off season and the funds are not required immediately for his business purposes. The aim is to earn interest at whatever rate instead of keeping them ideal with them.
5.0 Disallowance of interest Exp. -Rs. 7,84,957/-
5.1 The next ground of appeal relates to the disallowance at pro-rata basis in respect of interest expenses at Rs.7,84,957/-. It is discussed in para-9 of the order. The AO has observed that there were financial transactions with this party and no justification for giving interest free advances while it was paying interest. Hence prorate interest of Rs.7,84,957/- was disallowed.
5.2 The appellant submits that the impugned disallowance is not justified because the AO has failed to appreciate that (i) there were both business as well as trading transactions with this party as per the bifurcation from single/consolidated account maintained by the accountant, (ii) so far as the financial transactions were concerned as made out in the bifurcated ledger a/c, the appellant had given funds to this party out of the surplus funds or the bank balance available out of the sale proceeds credited in the bank. i.e. Gujarat Mercantile Co-op. Bank CD a/c no. 1461. The appellant had filed herewith the relevant bank statement of the concerned period to prove this contention. Say for example, the advance of RS. 10.80 lacs given on 23-5-2013, the bank balance was Rs.29,56,654, similarly Rs. 15 lacs given on 18-6-2013 there was opening balance of RS. 15,80,436 and further credits of sale proceeds of RS. 103000+723600+66970, say the advance of RS. 10 lacs given on 24-6-2013, there was credit balance with bank of RS. 17,42,348 and even after this advance there was credit balance of RS. 9,40,363. All other transactions can be verified accordingly with bank statement and it clearly proves that the appellant had not diverted interest bearing funds to interest free advance to this party. Hence the impugned disallowance of RS. 784,957/-should be deleted.
6.0 Disallowance of interest Exp. -Rs. 4,86,471/-
6.1 The next ground of appeal relates to the disallowance at pro-rata basis in respect of interest expenses at Rs.4,86,471/-. It is discussed in para-10 of the order. The AO has observed that though there were interest payments exceeding the limit, the appellant had accepted Forms 15G u/s 197A(1B) from the parties and not made TDS so that disallowance u/s 40(a)(ia) was made. 6.2 The appellant submits that the impugned disallowance is not justified because the AO has failed to appreciate that
(a) the appellant had filed copy of ITRs of all those parties to prove that the interest income was offered to tax by them in their ITRs and as such in view of proviso to sec 201(1) r.w.s. 40(a)(ia), the disallowance was not justified. It may be noted that the second proviso to section 40(a)(ia) was inserted by Finance Act 2012 w.e.f. 1-42013 to the effect that TDS would be deemed to have been made when the assesse is not treated as defaulter under first proviso to Sec 201(1) i.e. the deductee has included the said income in his ITR and paid tax.
(b) Secondly, the AO has failed to appreciate that when the appellant has been given Form No. 15G by the concerned parties, the appellant has discharged from its duty to make TDS u/s 194A and he cannot be made liable for any discrepancies noticed in the said forms.
7.0 Disallowance of interest – Rs.21,295/-
7.1 The AO also noticed that the appellant had paid interest to the related parties such as Brijesh P. Chandan HUF @18%, though interest was paid @12% to the others. The appellant explain that it had raised unsecured loans without security so that rate @18% was reasonable. However, the AO rejecting the explanation made disallowance of Rs.21,295/- towards the excess interest of 6%.
7.2 The appellant submits that the AO had made identical disallowance in the assessment forA.Y. 2012-13 which was carried in appeal to CIT(A)-10, Abad who vide his para 7-page 10 of the order dated 20.11.2015 (supra), confirmed the impugned disallowance. However, it is submitted that interest at 18% paid to the creditor cannot be said to be excessive or unreasonable, since the market rate in respect of unsecured loans without security is 18%.
8.0 A/on charging of interest from Partner – Rs.51,662/-
8.1 The next ground of appeal relates to the addition of non-charging of interest from partner at Rs.51,662/-. It is discussed in para-8 of the order. The AO has observed that the appellant had not charged interest on the withdrawals made by the partners of the firm Shri Brijesh P Chandan. Hence, interest at 12% was treated as income.
8.2 The appellant submits that the impugned disallowance is not justified because, the partnership dated 1.4.2002 provides as per clause 8 for payment of interest to the partner in respect of funds contributed or arranged at the mutually agreed rate. Therefore, there is no clause for charging interest on the withdrawals made by said partners.
(ii) Secondly, it is submitted that the said partner required funds for the purpose of his business and it was a commercial expediency of not charging interest on his withdrawals. He has returned the money immediately as it would be noticed from the ledger account. Refer to S A Builders (288 ITR 1)(SC).
(iii) Lastly, it is settled law that the AO cannot compel the assessee to earn income so that the addition made by AO in respect of such income is wholly illegal.
It is clear therefore that both the authorities below having passed orders in a very casual manner, totally ignoring the pleadings of the assessee and in complete disregard to the principles of natural justice. The orders are highly unjustified and are not sustainable in law
13. In view of the above, I set aside the order passed by the ld.CIT(A) being a cryptic and non-speaking order. Accordingly, the grounds raised by the assessee are allowed.
14. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 24th March, 2023 at Ahmedabad.
