TaxTMI 
TaxTMI 
2023 (11) TMI 800
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (1) That on facts and in law, the ld.CIT(A) has grievously erred in partly confirming he disallowance of interest payment u/s.40A(2)(b) of the Act, by allowing the interest @15%instead of the claimed amount @18%. 4. The grievance of the assessee pertains to the disallowance of interest paid on loans taken, under section 40A(2)(b) of the Act allowing interest at the rate of 15% instead of 18% charged and claimed by the assessee. 5. The facts, as emanate from orders of the Revenue authorities, are that the assessee had taken loan from one of its directors and paid interest at the rate of 18%. The AO held that since the assessee was not able to justify the payment of interest at the rate of 18%, he treated 12% as the reasonable rate of interest and disallowed the balance interest claimed by the assessee. The ld.CIT(A), however found 15% tobe reasonable rate of interest, and accordingly, disallowance made by the AO restricted to Rs. 1.12,300/-. The finding of the ld.CIT(A) restricting the reasonable rate of interest to 15% as against 18% claimed by the assessee is at para-4.2.1, which reads as under: "4.2.1 The appellant has taken loan from one of its directors....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... As per the provisions of section 40A(2), the expenses incurred in relation to parties which are closely related are liable to be disallowed which are found to be excessive in relation to their fair market value by the AO. The provisions of section 40A(2) are reproduced hereunder for clarity: 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction : Provided that for an asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....te 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 ld.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 the ld.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. The ld.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. 10. The Hon'ble Madras High Court in the case of CIT vs NEPC India Ltd. 303 ITR 271 (Mad) has held that there should be some material available for the assessing officer for invok....
X X X X Extracts X X X X
X X X X Extracts X X X X
....report of the AO, comments of the assessee was sought for by the ld.CIT(A). After considering entire conspectus of the case, the ld.CIT(A) found that the assessee was unable to establish genuineness of its claim, since no evidence of any work done by the commission agents was filed by the assessee. Accordingly, he confirmed the order of the AO disallowing the entire commission expenses of Rs. 50,64,385/-. The relevant finding of the ld.CIT(A) at para 5.5 to 5.5.4 is as under: "5. I have considered the facts recorded in the assessment order, submissions of the appellant, remand report and rejoinder to the remand report. 5.5.1 Undoubtedly, appellant has submitted confirmation letters from various agents. I have examined these confirmation letters. There are total six foreign agents to whom commission has been claimed to be paid. In all these confirmation letters only receipt of payment by the appellant has been acknowledged. On some confirmation letters even the purpose of payment is not mentioned, for example in the case of A.P.Tec (Thailand). Further, in some oases, signature is different like in the case of BETTY MADRID, LIMA, PERU, signature on letter dated 26/2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to prove that payments were made for actual services rendered by the agents and such services were necessary/beneficial for the business of the appellant. As clear from the above observations, appellant has not been able to discharge this onus. As rightly noted by the AO, mere payment of amount would not entitle the appellant to claim deduction of such expenditure unless it was proved to be paid for commercial considerations. It was for the appellant to establish that the services were actually rendered and were necessary for the purpose of business. 5.5.4 In view of above, it is held that appellant could neither prove the genuineness of commission payment of Rs. 50,64,385/- to foreign parties nor the necessity of making such payments for business purpose. Therefore, such expenditure cannot be treated as incurred for the purpose of business and cannot be allowed as deduction against business income. Accordingly, the disallowance made by the AO of Rs. 50,64,385/- is hereby confirmed. Ground number 4 is dismissed. 16. The arguments of the ld.counsel for the assessee before us was that the ld.CIT(A)'s finding of the fact was incorrect which had lead to an adverse conclusio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....17. The ld.CIT(A) contended that having explained the purpose for making the commission payment duly explaining the necessity for the same and evidencing it by way of furnishing copy of contract entered into with the agents, their confirmations along with details of sales generated by them in respect of which the commission was paid, the assessee had duly discharged its onus of proving the genuineness of the commission paid. The ld.counsel for the assessee pointed out that the only reason for denying the claim of the assessee was that it could not produce any correspondence byway of email or otherwise demonstrating rendering of services by the commission agents. The ld.counsel for the assessee contended, in the light of voluminous evidences submitted by the assessee in which no infirmity has been pointed out by the Revenue ,denial of claim of the assessee for want of correspondences between the assessee and its agents was highly unjustified. He therefore pleaded that the disallowance made of commission expenses to the tune of Rs. 50,64,385/- be deleted. On the other hand, the ld.DR heavily relied on the order of the ld.CIT(A). 18. We have heard both the parties. The issue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l 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. In the light of the above, 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 to the tune of Rs. 50,64,385/-. The ground nos.2 and 3 raised by the assessee are allowed. 21. In the result, the appeal of the assessee is allowed. 22. Since we have allowed the quantum appeal of the assessee, the penalty imposed by the Revenue authorities under section 271(1)(c) of the Act on the additions confirmed by the Ld.CIT(A) have no legs to stand on. The penalty confirmed by the Ld.CIT(A) is therefore deleted. The appeal of the assessee, in ITA No. 241/Ahd/19 thus, stands allowed. 23. In the result, both the appeals of the assessee are allowed. Order pronounced in the Court on 10th November, 2023 at Ahmedabad. ============= Document....