Income Tax Appellate Tribunal - Ahmedabad
Aromix Pvt.Ltd.,, Baroda vs Department Of Income Tax on 5 October, 2011
आयकर अपीलीय अिधकरण, अहमदाबाद Ûयायपीठ 'बी', अहमदाबाद
सव[ौी ौी भवनेश सैनी,
ी, Ûयाियक सदःय एवं ौी ए.
ए.मोहन अलंकामोनी,
ामोनी लेखा सदःय के सम¢
IN THE INCOME TAX APPELLATE TRIBUNAL : 'B' BENCH : AHMEDABAD
Before Hon'ble Shri Bhavnesh Saini, J.M. & Hon'ble Shri A.Mohan Alankamony, A.M.)
आयकर अपील सं. ITA No. 3255/Ahd./2009 : िनधा[रण वष[ः- 2006-2007
I.T.O., Ward-1(1), Baroda -Vs- M/s. Aromix Pvt. Ltd., Baroda
(PAN : AACCA 9438K)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
अपीलाथȸ कȧ ओर से/ Appellant By : Shri Alok Johri, CIT, D.R.
ू×यथȸ कȧ ओर से / Respondent By : Shri Tushar P. Hemani
सुनवाई कȧ तारȣख / Date of Hearing : 05/10/2011
घोषणा कȧ तारȣख / Date of Pronouncement : 04/11/2011
आदे श / Order
Per Shri A. Mohan Alankamony, Accountant Member :
This appeal is filed by the Revenue, aggrieved with the order of the Learned Commissioner of Income Tax(Appeals)-I, Baroda in Appeal No.CAB-I/122/08-09 dated 22.09.2009 for the assessment year 2006-2007 passed under section 250 r.w.s.143(3) of the I.T. Act, 1961.
2. The Revenue has raised three grounds in its appeal wherein ground nos.2 and 3 are general in nature and do not require adjudication. Ground no.1 is reproduced hereinbelow.
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in deleting the addition u/s.40A(2)(b) of Rs.26,49,272/- made on account of the excess payment of interest to the associate concerns of the assessee."
3. The assessee is a resident company, originally in the business of manufacturing of industrial fragrance. However, during the previous year, the assessee has shown its business as financial and other relevant services. The assessee filed its return of ITA No. 3255-Ahd-09 income on 27.12.2006, which was processed under section 143(1) of the Act. Subsequently, the case was taken up for scrutiny assessment and the assessment was completed under section 143(3) of the Act on 14.11.2008. On verification of balance sheet and the details furnished by the assessee, the ld. AO observed that the assessee has obtained unsecured loans amounting to Rs.5,88,00,865/- from M/s.Sai Fragrance & Flavours Pvt. Ltd. and Zest Aromas P. Ltd. The assessee has also made interest payment of Rs.50,67,283/- to the above two companies @ 9 and 10% . Further, on verification, it was found that M/s. Sai Fragrance & Flavours P. Ltd. and Zest Aromas P. Ltd. were shareholders of the assessee company. From these facts, the ld. AO came to a conclusion that the assessee has made interest payment of Rs.50,67,283/- to the persons specified in the provisions of section 40A(2)(b) of the Act. It was also observed that the assessee had a bank deposit amounting to Rs.5,13,67,177/- as on 31.03.2006, making it obvious that the amount obtained as loan from the two companies mentioned above were deposited in the bank. The assessee has also received an amount of Rs.23,12,098/- as interest from the bank on these FDRs. The rate of interest paid by the bank to the assessee on the deposits was 4.5%. Thus, the interest earned on the bank deposits was much lower than the rate at which the assessee has made interest payment towards unsecured loan to the two associate companies attracting the provisions of section 40A(2)(b) of the I.T. Act. The assessee explained to the AO that to make up the deficit of interest paid to the associate persons and interest received on bank fixed deposits, the assessee had made agreement with M/s. Deegee Software Pvt. Ltd. by creating a third party charge on the bank FDR of the assessee in favour of M/s. DSPL for which, M/s. Deegee Software Pvt. Ltd. offered to pay the differential interest. The assessee had also explained that the transaction was made as a prudent businessman. However, the ld. AO made an addition of Rs.26,49,272/-, being the differential interest supplied by the assessee with the following observations:
i) The assessee as well as the auditor of the company has not disclosed the crucial information that the assessee had paid interest to persons attracted by the provisions of section 40A(2)(b) of the Act.2
ITA No. 3255-Ahd-09
ii) The assessee has obtained the funds from the two associate concerns and kept the same in the bank fixed deposits, earning lower interest than what was paid to the associate concerns.
iii) There is no direct nexus between the funds received as unsecured loan and the assessee's action of creating charge on FDRs in favour of Deegee Software Pvt. Ltd. Therefore, the income earned, subsequently by creating charge, coupled with the interest earned out of FDRs, is not a fair market value.
4. The assessee carried the matter before the ld. CIT(A). The ld. CIT(A), after analyzing the issue, arrived at a finding that the interest payment to the two companies viz. M/s. Sai Fragrance & Flavours P. Ltd. and Zest Aromas P. Ltd. were not to associate companies as provided under section 40A(2)(b) of the Act and further, the assessee had gained .25% to 1.25% from the two transactions of borrowing and lending and therefore, deleted the addition made by the ld. A.O. The relevant para of the ld. CIT(A)'s order is reproduced hereinbelow for reference.
6. I have considered the submissions of the Id. A.R. and the facts of the case. There are two aspects to the matter. The first is whether the provisions of section 40A(2)(b) would be applicable at all on the facts of the case. The second aspect is the substantive one with regard to the fact as to whether excessive payment of interest was made. Taking up the first aspect, it is seen that section 40A(2)(b) prohibits expenditure which is excessive or unreasonable having regard to the fair market value or the legitimate needs of the business or the benefit derived/accruing therefrom. However, the restrictions would apply only in the case of transactions between persons specified in section 40A(2)(b). In the case of a company, the provisions of section 40A(2)(b)(iv) & (vi) would be applicable. As per the provisions of these two sub-clauses, the transactions are hit if the assessee has a substantial interest in the business of the specified person or the specified person has a substantial interest in the business of the assessee. It is noteworthy that having any interest would not be sufficient to attract the provisions; the interest must be a substantial interest. In the explanation below section 40A(2) substantial interest had been defined, in the case of a company, to mean the beneficial owner of shares carrying not less than 20% of the voting power. In the instant case, SFF and ZAPL are joint shareholders along with one of the directors, Shri B.J. Shah. The combined shareholding of M/s SSF & ZAPL comes to 0.01799% of the voting power (total 9 shares out of 50,020 shares). Hence it is quite evident that neither SFF nor 3 ITA No. 3255-Ahd-09 ZAPL was a specified person in terms of sec. 40A(2)(b). On this account alone, the disallowance cannot be sustained.
6.1 Moreover, looking at the second aspect also, it is seen from the guarantee agreement entered into between DSPL and the assessee that the agreement provided as under:-
"The Borrower shall pay to the Guarantor on half yearly basis Differential Interest payment based on the interest payable @ 10.25% PA on the Fixed Deposit amount charged to Bank for Financial assistance minus Interest accrued, payable or paid by bank on such. Deposit kept with Bank and ensure that Aromix shall get at least Minimum Return of 10.25% per Annum (HALF Yearly payable) from both sources together (i.e. Interest from bank as well as differential interest from Borrower) during the period till Borrower enjoy such Facilities from Bank and charge on bank be released on Fixed Deposit of Guarantor. The said amount, of differential Interest be subject to Tax deducted at source per applicable provision of Income Tax Act from time to time.
The differential Interest Payment and Minimum Return be paid to Guarantor until otherwise decided between Parties to Agreement in writing for change based on chargeable Interest on Third Party Borrowing and interest payable on term or other relevant Fixed Deposit from time to time. "
5. The ld. D.R. stoutly argued before us that the assessee had paid interest on its borrowing @ 9 and 10% and deposited the borrowed fund in bank fixed deposit earning interest of 4.5%. By this act of the assessee, the assessee had incurred a loss by making excess payment to associate persons covered under section 40A(2)(b) of the Act. It was, therefore, prayed that the order of the ld. A.O. may be sustained.
6. The ld. A.R. relied upon the order of the ld. CIT(A) and contended that the addition has to be deleted in the light of the finding of the ld. CIT(A) that the payment made by the assessee towards interest were not related to associate concerns as covered under section 40A(2)(b) of the Act. Moreover, the assessee has wisely made a business transaction with M/s. Deegee Software Pvt. Ltd., earning interest and thereby made a net gain on the transaction to the extent of .25% to 1.25%. The ld. A.R. humbly submitted that the order of the ld. CIT(A) may be sustained.
4ITA No. 3255-Ahd-09
7. We have heard rival submissions and carefully perused the materials from the record. At the outset, we must say that the findings of the ld. CIT(A) with respect to the payment of interest made by the assessee to the two companies viz. M/s. Sai Fragrance & Flavours P. Ltd. and Zest Aromas P. Ltd. were not related to the associate concerns, the Revenue has not come out with sufficient materials before us to disprove the same. Further it is apparent that, when the whole transaction is viewed, the assessee has only gained from its activity of borrowing and furnishing bank guarantee. The Revenue has not come before us with any documentary evidence to prove contrary to the finding of the ld. CIT(A). Therefore, from the facts and circumstances of the case, we are left with no other option other than to confirm the order of the ld. CIT(A). It is ordered accordingly.
8. In the result, the appeal filed by the Revenue is dismissed.
इस आदे श कȧ घोषणा Ǒदनांकः 04/11/2011 को Ûयायालय मɅ कȧ गई ।
This Order pronounced in Court on 04/11/2011.
Sd/- Sd/-
(Bhavnesh Saini) (A.Mohan Alankamony)
Judicial Member Accountant Member
DATED : 04/11/2011
आदे श कȧ ूितिलǒप अमेǒषतः-
षतः-
1. अपीलाथȸ
2. ू×यथȸ
3. संबंिधत आयकर आयुƠ
4. आयकर आयुƠ- अपील-
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद ।
6. गाड[ फाइल
आदे श से,
उप/सहायक पंजीकार
आयकर अपीलीय अिधकरण, अहमदाबाद।
Talukdar/ Sr. P.S.
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