2023 (11) TMI 800 - AT - Income Tax

Disallowance of interest paid on loans taken u/s.40A(2)(b) - excessive or unreasonable expenditure - CIT allowing the interest @15% instead of the claimed amount @ 18% - HELD THAT - As rightly pointed out by assessee that there has been no basis given by the AO or by the CIT(A) for holding that the rate of interest paid by the assessee to directors on loan taken from it at the rate of 18% was excessive. In fact, we note that even the CIT(A) has noted neither the assessee has justified the rate of interest at the rate of 18% nor the AO has justified the rate of interest of 12% applied by him. Clearly, it shows that even CIT(A) found that there is no basis given by the AO for finding the rate of interest paid by the assessee has been excessive. CIT(A) has also, we find , not given any basis for finding the rate adopted by the assessee as excessive or the rate applied by him of 15% as reasonable. Without establishing with cogent basis as to what was the reasonable /fair market value of rate of interest on loan, the entire exercise of the Revenue authorities below, we hold, fails. Neither the AO nor the Ld.CIT(A) have demonstrated as to how the rate of interest applied by them was the fair rate , nor have they demonstrated as to how the rate applied by the assessee was unreasonable. As in the case of CIT vs NEPC India Ltd. 2006 (12) TMI 129 - MADRAS HIGH COURT has held that there should be some material available for the assessing officer for invoking section 40A(2)(a) to initiate action to disallow excessive or unreasonable expenditure. That before taking any final decision by invoking the power u/s 40A(2)(a) such decision should be based on reasons well founded which are judiciously acceptable. This proposition was reiterated in another decision in the case of CIT vs Forbes Tea Brokers 2009 (6) TMI 50 - MADRAS HIGH COURT The conditions to be fulfilled for applying the provisions of section 40A(2) of the Act were clearly not satisfied in the present case. Disallowance, therefore, made in the case of the assessee by treating 15% rate of interest as the reasonable rate of interest, as opposed to 18% claimed by the assessee is, we hold not tenable in law. The AO is directed to delete the disallowance made on interest paid to directors under section 40A(2)(b) of the Act. Commission paid on sale of goods disallowed for want of evidence - AO and the CIT (A) arrived at this conclusion on the basis that the assessee was unable to file any detail, showing country-wise sales made and being unable to file documentary evidences of exchange of communication between the assessee and its agents - HELD THAT - We have noted that it is fact on record, which has not been controverted by the Revenue, that the assessee is into business of manufacturing of pharmaceutical drugs and it is a hundred percent export-unit making all sales outside the country. It is also not denied that it has no persons outside the country to manage its sales. The fact that the sale of pharmaceutical drugs to any other jurisdiction requires necessary approvals and compliances is also not denied. It is not improbable but in fact is quite normal and necessary for any entity to engage services of certain persons to ensure uninterrupted sale of its products outside the country. Besides, we have noted that the assessee has filed all details of sales made to different countries. The assessee has also filed confirmation from all six agents who in some cases have mentioned invoices against which the commission has been paid. The assessee has also filed copies of shipping bills mentioning the fact of commission paid to the assessee. No infirmity worth its name has been pointed out by the ld.CIT(A), we fail to understand how any person of reasonable mind could arrive at a finding that the genuineness of the expenditure has not been established. It is not the case of the Revenue that the parties to whom the payment has been made and who have confirmed the same also, in any case denied the said facts in any inquiry conducted by the Revenue. Merely because, certain evidences indicating exchange between the assessee and its agents were not filed by the assessee, it does not take away the weight of all other voluminous evidences filed by the assessee to establish genuineness of the transactions. Moreover, we find that in the preceding, i.e A.Y 2011-12 and succeeding year , A.Y 2014-15, identical commission paid by the assessee has been accepted by the Revenue in scrutiny assessment. We hold that the assessee has established the genuineness of the claim of commission expenses and denial of the same is uncalled for, and therefore, the AO is directed to allow the claim of commission expenditure. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest payment under section 40A(2)(b) of the Income Tax Act.
2. Disallowance of commission expenses for want of evidence.
3. Penalty under section 271(1)(c) of the Income Tax Act.

Summary:

Issue 1: Disallowance of Interest Payment under Section 40A(2)(b)

The grievance of the assessee pertains to the disallowance of interest paid on loans taken from one of its directors, where the interest rate was 18%. The AO deemed 12% as reasonable, disallowing the excess, while the CIT(A) found 15% reasonable. The Tribunal noted that neither the AO nor the CIT(A) provided a cogent basis for determining the reasonable rate of interest. The Tribunal emphasized that under section 40A(2), the onus is on the Revenue to prove that the expenditure is excessive or unreasonable. The Tribunal cited precedents from the Madras High Court, stating that any disallowance under section 40A(2) must be based on well-founded reasons. Consequently, the Tribunal directed the AO to delete the disallowance made on interest paid to directors.

Issue 2: Disallowance of Commission Expenses

The assessee claimed commission expenses of Rs. 50,64,385 paid to foreign agents for sales facilitation. The AO disallowed the expenses due to lack of evidence. The CIT(A) upheld the disallowance, noting discrepancies in confirmation letters and absence of detailed documentation proving services rendered by the agents. The Tribunal, however, found that the assessee had provided substantial evidence, including confirmations from agents, details of country-wise sales, copies of contracts, and shipping bills. The Tribunal noted that the assessee had no presence outside the country and relied on agents for compliance and business facilitation. The Tribunal concluded that the disallowance was unjustified, especially since similar expenses were accepted in other assessment years. Therefore, the Tribunal directed the AO to allow the commission expenses.

Issue 3: Penalty under Section 271(1)(c)

Since the Tribunal allowed the quantum appeal of the assessee, the penalty imposed under section 271(1)(c) on the disallowed additions had no basis. Consequently, the Tribunal deleted the penalty.

Conclusion:

In the result, both appeals of the assessee were allowed. The Tribunal directed the deletion of disallowances related to interest payments and commission expenses, and also deleted the penalty under section 271(1)(c).