The Income Tax Appellate Tribunal (ITAT) of Delhi Bench, presided over by Shri R.K. Panda, Accountant Member, heard an appeal by Mukesh Kumar of Bhattu, Fatehabad, Haryana. The case, registered as ITA No. 6443/DEL/2019, pertained to the assessment year 2016-17. Mukesh Kumar challenged the disallowance of interest expenses paid to his sister concerns, which was initially made by the Assessing Officer (AO) and later upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The final tribunal order was pronounced on 22nd September 2021.
Mukesh Kumar, engaged in the wholesale trading of oil seeds, cotton, guar, and working as a commission agent, filed his return of income for the assessment year 2016-17, declaring a taxable income of Rs. 3,12,270. During the assessment proceedings, the AO observed that Mukesh Kumar had claimed interest expenses amounting to Rs. 22,89,134, which included payments made to two of his sister concerns—M/s Samjhai Nath Industries and Saraswati Ginning Pressing & Oil Mills. The AO disallowed these interest expenses, questioning why the appellant paid interest to creditors while not charging any interest from debtors.
The AO’s primary contention was that Mukesh Kumar had paid interest to his sister concerns but had not charged interest from his debtors, who owed significant amounts to him. The AO suspected that the arrangement with the sister concerns was a method of income diversion, thus disallowing the interest expenses.
In response, Mukesh Kumar explained that his business model as a commission agent did not typically involve charging interest from farmers (debtors) because they were the primary source of commission income. Instead, he charged a commission of 2.5% on goods sold, which was duly reflected in his Profit & Loss Account. He further argued that the interest payments made to his sister concerns were at the prevailing market rate, as determined by the Vyapar Mandal Association, and that these transactions were part of normal business operations. Mukesh Kumar provided evidence that TDS had been deducted on these interest payments and the returns had been duly filed.
Despite the appellant’s explanations, the CIT(A) upheld the AO’s disallowance, reasoning that the transactions with the sister concerns appeared to be designed to facilitate the diversion of income. The CIT(A) also noted that the interest rate paid to the sister concerns was higher than what was typically observed in similar trade practices, and the justification provided by Mukesh Kumar regarding the Vyapar Mandal Association was not supported by any documentary evidence. Therefore, the disallowance of Rs. 22,89,134 was confirmed.
Aggrieved by the order of the CIT(A), Mukesh Kumar appealed to the ITAT. His counsel, Shri Gautam Jain, strongly contested the CIT(A)’s decision, emphasizing that the trading transactions with the sister concerns were genuine and had been accepted as such by the Revenue. The counsel argued that the interest payments were made at a fair market rate and were justified as normal business expenses. He also cited several judicial precedents, including the decisions of the Hon’ble Supreme Court in SA Builders Ltd. vs. CIT and Hero Cycles (P) Ltd. vs. CIT, to argue that once the genuineness of the transactions was established, the Revenue could not question the business rationale behind them.
The ITAT carefully reviewed the arguments, the evidence on record, and the legal precedents cited. The Tribunal observed that Mukesh Kumar had indeed engaged in genuine business transactions with his sister concerns, and there was no evidence to suggest that the interest payments were excessive or unjustified. The Tribunal noted that the AO had failed to demonstrate that the provisions of Section 40A(2)(b) of the Income Tax Act, which governs payments to related parties, had been violated.
The ITAT also referred to the Hon’ble Supreme Court’s rulings in SA Builders and Hero Cycles, which established that the Revenue could not assume the role of a businessman and decide how much expenditure was reasonable. The Tribunal concluded that Mukesh Kumar had paid and received interest at the same rate (15%) and that the transactions were conducted at arm’s length. Therefore, the disallowance of the interest expenses was unwarranted.
In its final judgment, the ITAT set aside the order of the CIT(A) and directed the AO to delete the disallowed interest expense of Rs. 22,89,134. The Tribunal’s decision was pronounced in the open court on 22nd September 2021, allowing Mukesh Kumar’s appeal.
This case highlights the importance of substantiating business transactions with adequate evidence and adhering to legal precedents. The ITAT’s ruling reinforces the principle that the Revenue cannot arbitrarily disallow legitimate business expenses without concrete evidence of wrongdoing.
Order Pronounced in the Open Court on 22nd September 2021
Signed by:
Accountant Member: Shri R.K. Panda
Date of Pronouncement: 22nd September 2021
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