Case Law Details
Shantiniketan Properties Pvt. Ltd. Vs ACIT (ITAT Delhi)
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Delhi in the case of Shantiniketan Properties Pvt. Ltd. vs. ACIT held that higher tax rate of interest payments made under commercial expediency does not attract disallowance under Section 40A(2) of the Income Tax Act. The ruling emphasizes the significance of commercial considerations and the absence of loss to tax revenue in such scenarios.
The case came to the tribunal due to an appeal against the disallowance of interest paid on loans obtained from corporate entities. The assessing officer deemed these not for business purposes and claimed that the interest was excessive in nature. However, the assessee argued that the higher interest rate was paid under commercial expediency and that the alleged excessive payment was based on assumptions and speculations.
The tribunal noted the Bombay High Court’s judgments in similar cases where it was held that if the sister concern is also paying tax at a higher rate, the disallowance of alleged excess payment of interest to the sister concern is not justified. In essence, the tribunal found no plausible reason to disallow interest payments to associate concerns, provided they are also assessed to tax and paying tax at higher rates.
Conclusion: This ruling sets a precedent that payment of a higher rate of interest under commercial expedience does not amount to evasion of tax, and thus does not attract any disallowance. This decision provides clarity on the applicability of section 40A(2) of the Income Tax Act and serves as a significant relief to taxpayers who engage in transactions under similar circumstances. The order sheds light on the importance of considering commercial expediency and the tax status of associated entities in such matters.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal has been filed against the order of CIT(A) XXV, New Delhi dated 07.02.2019 for AY 2015-16.
2. The grounds of assessee are as follows:-
1. On the facts and circumstances of the case, the Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer in disallowing interest paid on loans obtained from corporate entities holding that the same are not for business purposes and was excessive in nature without appreciating the commercia l expediency of the same.
1.1 That the Commissioner of Income-tax (Appeals) ought to have appreciated that the finding of the assessing officer that the interest paid was excessive was based on assumptions and speculations and were therefore not sustainable.
1.2 That the Commissioner of Income-tax (Appeals) ought to have appreciated that the interest has been paid to other resident entities that are also subject to tax in India and therefore under no circumstances was there any loss of tax revenue to the income tax department. On the contrary, the action of the assessing officer has resulted in double taxation of the same income.
2. On the facts and circumstances of the case, the assessing officer has erred in not giving credit for the taxes deducted at source on the payments made to the appellant amounting to IN 1,94,59,857/-
3. On the facts and circumstances of the case, the assessing officer has erred in not giving credit for the advance tax paid by the appellant amounting to INR 3,00,000/-
4. On the facts and circumstances of the case, the assessing officer has erred in providing interest under section 244A of the Act only for 28 months instead of 34 months.
2. The ld. counsel of assessee submitted that the Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer in disallowing interest paid on loans obtained from corporate entities holding that the same are not for business purposes and was excessive in nature without appreciating the commercial expediency of the same. He further submitted that the Commissioner of Income-tax (Appeals) ought to have appreciated that the finding of the assessing officer that the interest paid was excessive was based on assumptions and speculations and were therefore not sustainable. It has also been contended that the Commissioner of Income-tax (Appeals) ought to have appreciated that the interest has been paid to other resident entities that are also subject to tax in India and therefore under no circumstances was there any loss of tax revenue to the income tax department. On the contrary, the action of the assessing officer has resulted in double taxation of the same income.
3. The ld. counsel submitted that in view of various judgments and orders of coordinate benches of Tribunal and Hon’ble High Court including judgments of Hon’ble High Court of Bombay in the case of CIT vs. Indo Saudi Services (Travel) Pvt. Ltd. (2008) 219 CTR 562 (Bom.) and in the case of CIT vs V S Dempo & Co. P. Ltd. (2011) 196 TAXMAN 193 (Bom.) it has been held that where the revenue was not in a position to point out how the assessee evaded payment of tax by alleged payment of higher commission or interest to its sister concern, since the sister concern was also paying tax at higher rate, disallowance of alleged excess payment of interest paid to the sister concern was not justified. The ld. counsel also drew our attention towards pages 50 to 140 of assessee paper book and submitted that the assessee has submitted copies of the assessment order passed for AY 2014-15 a& 2015-16 of all recipient subsidiary companies which clearly show that all the companies are filing return of income and paying tax on the higher tax rate then the addition would amount to double addition therefore the same may kindly be deleted.
5. Replying to the above, the ld. Senior DR strongly supported the orders of the authorities below and submitted that the Assessing Officer was right in making addition/disallowance due to the large difference within the rate of interest paid by the assessee ranging from 16% to 9% per annum therefore addition may kindly be upheld dismissing the grounds of assessee.
6. On careful consideration of above, first of all, from the statements of facts noted by the ld. CIT(A) in para 3 it is clear that the assessee is engaged in the business of developing and leasing of property in IT/TES sector and filed return of income showing loss of Rs. 16,26,34,840/- and the Assessing Officer made addition on account of excessive interest paid on unsecured loan and not found to be admissible u/s. 37(1) of the Act and the Assessing Officer denied credit of TDS amounting to Rs. 1,95,45,548 and only allowed credit of Rs. 85,691/- resulting into short credit of Rs. 1,94,59,857/-. The ld. CIT(A) found that the assessee has paid higher interest to the associate concerns whereas the prevailing interest rate were less. The ld. CIT(A) dismiss contention of the assessee by holding that it is not clear as to why the appellant chaos to confer undue benefit on the associate concerns whereas funds at economical rates were available to the assessee. On the other hand, the ld. counsel for the assessee submitted that the interest of bank are less but the lead hypothecation of goods, collateral securities, mortgage and guarantor and other various paper formalities which takes time and when the funds are needed in urgency in the property business then it is always feasible to have unsecured loan from associate concerns by paying higher rate of interest under commercial expediency otherwise property deals cannot be materialized in absence of funds.
7. On careful consideration of rival submission and relevant facts and findings recorded by the authorities below first of all, we find that neither the Assessing Officer nor ld. CIT(A) has disputed the quantum of interest expenditure and purpose of business. However, the Assessing Officer proceeded make addition on account of payment of interest on higher rate to the associate concerns. From the assessment order, we note that the Assessing Officer has disallowed entire amount of interest paid to the four associate concerns without granting or allowing any part thereof on the lesser percentage of interest which is not a plausible action of tax authority. Hon’ble Bombay High Court in the case of CIT vs. Indo Saudi Services (Travel) Pvt. Ltd. (supra) held that the higher payment to sister concern which is also paying tax at higher rate does not attract any disallowance and action of the Assessing Officer is not justified. In the case of CIT vs V S Dempo & Co. P. Ltd. (supra) Hon’ble High Court of Bombay also held that when the assessee and its subsidiary were in the same tax bracket then there was no question of diversion of fund by paying higher rate of interest and provision of section 40A(2) of the Act are not applicable.
8. In the present case also from the copies of the assessment order for AY 2014-15 & 2015-16 it is clear that the all four associate concerns are assessed to tax and paying tax on the higher tax rate therefore payment of higher rate of interest under commercial expediency and convenience cannot be alleged as unreasonable attracting the disallowance u/s. 40A(2) or any other provisions of the Act. Accordingly, ground no. 1 to 1.2 of assessee are allowed and entire addition/disallowance is deleted.
9. Apropos ground no. 2 the ld. counsel submitted that the assessing officer has erred in not giving credit for the taxes deducted at source on the payments made to the appellant amounting to IN 1,94,59,857/-. On the other hand, the ld Senior DR submitted that from the assessment order it is not clear that the Assessing Officer has not allowed credit to TDS to the assessee. Placing rejoinder to the above, the ld. counsel drew our attention towards calculation of tax chart prepared by the Assessing Officer and submitted that the Assessing Officer has only given credit of Rs. 85,691/-therefore the total credit has not been allowed to the assessee for which assessee was eligible.
10. On careful consideration of above submissions we are of the considered view that the assessment order is silent about the cause of denial of credit of TDS to the assessee. The ld. CIT(A) has noted the contention of the assessee but has not given any finding on the issue of denial of TDS credit of Rs. 1,94,59,857/-. Thus, the issue requires examination and verification at the level of Assessing Officer and therefore the issue is restored to the file of Assessing Officer for consideration and adjudication of grievance of assessee after allowing due opportunity of hearing to the assessee by passing speaking order in this regard. Accordingly ground no. 2 is allowed for statistical purposes.
11. Apropos ground no. 3 & 4 the ld. representative of both the side submitted identical submissions as has been submitted for ground no. 2 of assessee. Therefore this ground is also restored to the file of Assessing Officer for consideration and adjudication of grievance of assessee after allowing due opportunity of hearing to the assessee and by passing speaking order. Accordingly, ground no. 3 & 4 of assessee are also allowed for statistical purposes.
12. In the result, the appeal of the assessee is partly allowed on ground no. 1 and partly allowed on ground no. 2, 3 & 4 for statistical purposes.
Order pronounced in the open court on 13.06.2023.
