2014 (2) TMI 859 - AT - Income Tax

Disallowance of loss on sale of paintings Held that - The CIT(A) was of the view that the assessee has earned profit in respect of paintings sold to very same purchasers amounting to Rs.2.21 crores - the painting sold was constituting assessee s stock-in-trade, had the assessee any intention to evade any tax, the assessee could have valued stock at cost price or market price, whichever is lower - the assessee has sold some of the paintings to the very same party at profit of Rs. 2.21 crores, which was more than the loss suffered by the assessee in respect of sale of other paintings to the very same party - Had the assessee any intention to reduce its profit or to evade any tax, he could have easily managed to show marginal profit in respect of transaction with the very same party and could have easily come out from the doubts raised by the AO by showing net profit the findings of the CIT(A) have not been controverted by the revenue by bringing any positive material on record thus, there is no reason to interfere in the order of CIT(A) in deleting the loss Decided against Revenue. Deletion made u/s 40A(2)(b) of the Act - Excess interest paid on unsecured loan Held that - The 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% - the loan taken by the assessee was unsecured, the rate of interest paid by the assessee was very much reasonable - 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 of the CIT(A) have not been controverted by the revenue by bringing any positive material on record thus, there is no reason to interfere with the finding of the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of loss on sale of paintings.
2. Deletion of addition on account of excess interest paid on unsecured loans by invoking the provisions of section 40A(2)(b) of the Act.

Detailed Analysis of the Judgment:

1. Deletion of Addition on Account of Disallowance of Loss on Sale of Paintings:
The revenue challenged the deletion of the addition of Rs. 1,78,00,000/- made by the Assessing Officer (AO) on account of disallowance of loss on sale of paintings to M/s Emami Frank Ross Ltd. The AO contended that the loss was a fabricated device to evade tax, as M/s Emami Frank Ross Ltd. was a closely held company under the same management as the assessee. The AO alleged that the transactions were premeditated to create a fake loss for tax evasion purposes.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, observing that the AO ignored various vital aspects of the business of the appellant. The CIT(A) noted that the AO's assessment was based on inferences rather than actual facts, and the business of trading in art works is inherently high-risk, with fluctuating values. The CIT(A) emphasized that the auction was well-advertised and open to the public, including online bidding, and the sales were genuine transactions aimed at reducing inventory and interest burden.

The CIT(A) also highlighted that the AO failed to provide evidence that the market price of the paintings was higher than the sale price. The CIT(A) referenced judgments in Eveready Industries India Ltd. Versus CIT and CIT V. M/s Pivet Finance Ltd., which held that losses in genuine transactions cannot be disallowed even if they result in reduced tax liability. The Tribunal upheld the CIT(A)'s findings, noting that the assessee had also earned substantial profits in other transactions with the same party, indicating no intent to evade taxes.

2. Deletion of Addition on Account of Excess Interest Paid on Unsecured Loans:
The revenue also contested the deletion of the addition of Rs. 18,93,568/- made by the AO on account of excess interest paid on unsecured loans by invoking section 40A(2)(b) of the Act. The AO had assumed a reasonable rate of interest at 12% and disallowed the excess interest paid above this rate.

The CIT(A) deleted the disallowance, stating that the AO did not provide any basis for the assumed market rate of interest and failed to show that the appellant could have obtained loans at 12%. The CIT(A) noted that the loans were unsecured and unguaranteed, and the rate of interest of 14-15% was reasonable given the high-risk nature of the business. The CIT(A) referenced loan documents from other companies showing interest rates ranging from 13.25% to 15.50% for secured loans, indicating that the rate paid by the appellant was reasonable.

The Tribunal upheld the CIT(A)'s findings, noting that the prevailing market rate for unsecured loans was higher than 12%, and the AO's disallowance was not based on tangible evidence.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletion of the additions on both counts. The Tribunal found that the transactions were genuine and the interest rates reasonable, with no evidence of tax evasion.