An analysis of judgment of ITAT in case of Emami Chisel Art – reasonable rate of interest - a case of high pitched assessment and harassment. (Part-2)

[CA DEV KUMAR KOTHARI]

I.T.O. Ward 9(2), Kolkata Vs. Emami Chisel Art Pvt. Ltd. - 2014 (2) TMI 859 - ITAT KOLKATA

The case of Emami Chisel Art Pvt. Ltd (ECA):

As discussed in this article with help of related judgment of the Tribunal it appears that learned AO made disallowance of interest alleged as excessive ignoring various business aspects, facts and circumstances. In fact it can be said that learned AO did not consider ground realities, facts and circumstances simply to make a high pitched assessment order.

One of issues in disputes:

One issue about loss on sale of stock-in-trade has been considered in article part –I about analysis of the same judgment of ITAT. The other issue now discussed in second part is about disallowance of interest paid ( @ around 15%) which the considered as excessive as he assumed a lower rate of 12% as reasonable rate. Learned AO did not consider (rather say deliberately ignored) many factual aspects prevailing at the relevant time about share holders of company, new business, non bankable stock-in-trade, and market rate of interest etc. just to make a disallowance.

Grounds of the revenue before Tribunal on this issue was as follows:

“That the Ld.CIT(A) was not justified in law and in fact in deleting the addition of Rs. l8,93,568/-made on account of excess interest paid on unsecured loan by invoking the provisions of section 40A(2)(b) of the Act. “

“That the Ld.CIT(A) was not correct in holding that disallowance of Rs.18,93,568/-on account of excess interest paid is not based on any tangible evidence, despite the fact that provision of section 40A(2)(b) of the Act is clearly applicable in this case.”

Facts as assumed by the AO as analyzed by Tribunal:

The AO also found that the assessee had taken unsecured loan from four companies at an average rate of interest @14.5%. By observing that unsecured loans were taken from major share holders of the assessee company having substantial interest of the assessee, by invoking the provisions of section 40A(2) of the Act, the AO disallowed the interest paid of Rs.18,93,568/-which in excess of @12% .

Finding and order of CIT(A) as analyzed by the Tribunal (including some aspects discussed by the learned CIT(A) as common aspects discussed by him in relation to loss allowed on sale of stock –in-trade but having bearing on allowability of interest are as follows: 

1. AO was given opportunity of hearing by issue of notice and also by specific letter to offer his comments on further documents filed by the appellant and to make his representations by 12.10.11 and the case was fixed on 14.10.11.
2. Neither any written submission has been sent nor the learned AO has made appearance till the next and final hearing on 18.10.11
3. I have carefully perused the Show Cause Notice issued by the AO to appellant, the reply filed by appellant before the AO and other explanations, evidences filed before the AO, the assessment order, and explanations and evidences filed before me.
4. On perusal of the same, I notice that the AO has ignored various vital aspects of business of appellant. As rightly pointed out in grounds of appeal. AO has not at all addressed to various vital facts and contentions made by appellant before him.
5. I also find that the AO has acted upon some apprehensions and not on facts. From various statements made in the assessment order it is seen that it is not based on actual facts of the case but is based on several inferences which can possibly be drawn.
6.  It is noticed that the AO has ignored various business aspects of appellant that:

(i)       this was first year of business, the business was new for appellant,

(ii)      the business of paintings and other art fact etc. is a high risk business,

(iii)     this is reason that banks and NBFC are not allowed to finance against stock of paintings etc.,

(iv)     Furthermore, apparently time allowed to appellant company for explaining the matters covered in SCN was very short.

(v)      Even if it is an associate concern — having some common shareholders or directors or by having a common part of its name EMAMI, genuine transactions between associates or related parties at market price determined in open auction, cannot be disregarded merely because in some transactions there is loss.

Observations, finding and order of Tribunal are analyzed below:

The ld.CIT(A) has also deleted the disallowance of interest of Rs.18,93,568/-by invoking the provisions of section 40A(2) of the I.T Act 1961 after having following observations:

1. “AO has applied S. 40A(2)(b) and disallowed interest paid in excess of rate above 12% p.a. AO has stated that market rate of interest was 9-12% but he has not given any basis for the same.
2. AO has not brought any material to show that the appellant could have obtained loans at interest rate of 12% p.a. in the given circumstances.
3. On the other hand A/R submitted that any party is not a person specified in S. 40A (2) (b) as appears from details of shareholders of company.
4. All loans were unsecured and un guaranteed loans,
5. the rate of interest of 14-15% was reasonable rate in view of high risk business of assessee and the fact that banks and NBFC cannot lend money against paintings etc. as they are not approved securities.
6. The A/R has also filed certain loan documents in case of other old established concerns as follows:

1      HSBC to Frank Ross Limited-15.50% on overdraft payable monthly (dt.03. 11.07)

2     Yes Bank to Emami Retail P. Ltd PLR 15.50% -2.25% rate of interest charged 13.25% on monthly rest.( dt. 04.07.08)

3      ILFS to Suraj Viniyog P. Ltd 14.50% payable monthly. (dt. 26.07.07)

4      ILFS to Suraj Viniyog P. Ltd Rollover Short Term loan 14.5% (dt.06.11.07)

5      ILFS to Pan Emami Cosmed Ltd 14.5% (dt.06.11.07)

6      Birla Global Finance Ltd to Pan Emami Cosmed Ltd 15.85% (period 11-31 March 08)

7      A chart received from Yes Bank showing movement of Prime Lending Rate also show that during 2007-08 PLR was 14.75-15.50%.

g.  All these shows that prevailing market rate of interest on secured and guaranteed loans taken by some well established old companies of very large   size was in range of 13.25% to 15.50%. Prime Lending Rate (PLR) of banks was also in range of 14.75-15.50% during the previous year.

h. The documents in respect of the above loan transactions of other parties were also submitted to the AO and he was given an opportunity. However, AO has not sent any comments or objections.

i. During hearing the learned A/R also stated that in case of unsecured and unguaranteed loans the rate of interest is usually PLR + 2 to 4% and such loans are granted by banks for very small amount as personal loans against security of post dated cheques and repayable in EMI.

j. Thus, rate of interest for unsecured and unguaranteed loans from bank was in range of 17-19% payable monthly in EMI.

k. In view of the totality of facts and particularly considering that loans were unsecured and unguaranteed loans, I am of the view that the AO was not justified to assume reasonable rate of interest @12% and in disallowing interest paid above 12%.

l. The AO has not brought anything on record to suggest that there were willing money lenders who could lend capital @ 12% to the appellant or that appellant could have borrowed capital @12%.

m. Therefore, disallowance of Rs.18,93,568/-is not based on any tangible evidence and is directed to be deleted. “                        

Observations and order of Tribunal:

With respect to disallowance of interest paid in excess of @ 12% u/s. 40A(2)(b) of the I.T Act 1961, we find that prevailing market rate of interest even in respect of secured loan was @12% and in respect of unsecured and unguarateeed loan the rate of interest was ranging from 15-18%.

Since the loan taken by the assessee was unsecured, the rate of interest paid by the assessee was very much reasonable.

The detailed finding has been recorded by the ld.CIT(A) at para 5.3 for coming to the conclusion that the rate of interest paid by the assessee was reasonable and no disallowance is warranted u/s. 40A(2)(b) of the Act.

The findings so recorded by the ld.CIT(A) as reproduced above, have not been controverted by the ld. DR by bringing any positive material on record.

Accordingly, we do not see any reason to interfere with the finding of the ld.CIT(A), which is as per material on record. In the result, the appeal of the revenue is dismissed.

Observations of author:

As noted in the order of the CIT(A), learned AO made disallowance ignoring facts, circumstances, The AO deliberately ignored various aspects. Learned AO wrongly considered that parties were related parties and were covered by S. 40A (2) (b). The disallowance was patently wrong.

The assessee had also suffered losses due to demands raised by the AO which remained due and a significant part of the same was forcibly collected also by the AO. This also badly affected the business carrying capacity of assessee.                      

In such cases Tribunal can allow cost of appeal in favor of assessee. Allowing such costs, may reduced tendency of tax authorities in making high pitched assessments.

Let us hope that revenue will not dispute order of CIT(A) confirmed by Tribunal by filing an appeal before High Court. Let us hope that the senior counsels of revenue will not recommend filing of appeal against the order of Tribunal. However, it is unfortunate that even very senior counsels also think about their pecuniary gains and recommend indulging into un-necessary litigation.

As a recent instance we find that senior Advocate Ram Jethmalani appeared for Murugan while Advocate Yug Mohit Chaudhary represented Santhan and Perarivalan before the Supreme Court to fight the case of some of murderers of Rajiv Gandhi. They also won the case by reducing capital / death sentence to life sentence on the ground that their mercy petition were sent to the President of India in 2000 and was rejected after 11 years and they suffered during this long period. It is worth to note that the Petitioners were convicted in 1998 for Rajiv Gandhi's assassination. Their mercy petition was sent to the President of India in 2000 and was rejected after 11 years. The Madras High Court had, however, stayed their hanging in 2011 and now the supreme Court has liberally considered their petition to waive their hanging.

We also find that Ram Jethmalani and Vaiko celebrate and eat sweets on their win as Rajiv Gandhi's killers skip death due to their art of arguing such serious criminal cases.

Read more at: http://news.oneindia.in/chennai/ram-jethmalani-vaiko-celebrate-as-rajiv-gandhi-s-killers-skip-death-1397818.html

This incidence also seriously demand that un-necessary litigation, with lot of delays must come to an end so that loss of brain power in handling such litigation can be avoided and culprits are booked and penalized as soon as possible.

In personal view of author, great lawyers like Ramjethamalani ji and Vaiko should not have fought the cases of such murderers, and other criminals.

Having available services of such advocates and liberal bails, and light punishments is one of important reason that criminals have much less fear than what they should have before committing a crime.