IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI PRADIPKUMAR KEDIA, ACCOUNTANT MEMBER ./ ITA No.2079/Ahd/2017 [Asstt.Year: 2013-14] Systronics (India) Ltd Vs. ITO, Ward-2(1)(3) B/116-129, Supath-II Complex Baroda. Nr.Juna Vadaj Bus Terminus Ashram Road Ahmedabad 380 013. PAN : AADCS 2709 J (Applicant) (Respondent) Assessee by : Shri Biren Shah, AR Revenue by : Shri S.K. Dev, Sr.DR % /Date of Hearing : 08/08/2019 % /Date of Pronouncement: 21 /08/2019 ORDER PER RAJPAL YADAV, JUDICIAL MEMBER: Assessee is in appeal before Tribunal against order of ld.CIT(A)-2, Vadodara dated 3.5.2017 passed for Asstt.Year 2013-14. 2. Assessee has taken four grounds of appeal. However, its grievance revolves around single viz. ld.CIT(A) has erred in upholding disallowance of interest amounting to Rs.55,37,500/- which was added by AO by restricting ITA No.2079/Ahd/2017 2 interest expenditure allowable at rate of 12% as against 18% claimed by assessee. 3. ld.counsel for assessee at very outset submitted that similar disallowance was made in Asstt.Year 2012-12, and dispute travelled upto Tribunal. Tribunal has deleted disallowance vide order dated 9.7.2019 passed in ITA No.319/Ahd/2017. He placed on record copy of Tribunal s order. On other hand, ld.DR was unable to controvert this fact. 4. We have duly considered rival submissions and gone through record carefully. While considering similar aspects, Tribunal has recorded following finding: 2. Assessee has take five grounds of appeal, but its grievance revolves around two issues viz. (a) ld.CIT(A) has erred in upholding disallowance of interest amounting to Rs.63,67,512/-, and (b) ld.CIT(A) has erred in confirming disallowance of foreign travel expenses of Rs.22,25,767/-. 3. Brief facts of case are that assessee-company has filed its return of income on 26.9.2012 declaring total income at Rs.1,96,47,205/-. case of assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon assessee. assessee at relevant time was engaged in business of manufacturing and trading of scientific electronics instruments and broadcast audio video equipments. It has shown turnover of Rs.4641.06 lakhs. On scrutiny of accounts, it revealed to AO that assessee company has paid interest of Rs.1,91,02,535/- to ASE Ltd. at rate of 18% on unpaid price of electronics division. It further emerges out that memorandum of understanding was executed with ASE Ltd. on 8.5.2010 vide which it was agreed that ASE would transfer its electronic division to assessee-company for consideration of Rs.23.77 crores. 50% of consideration was decided to be paid by way of issue of shares and balance 50% of consideration ITA No.2079/Ahd/2017 3 being unpaid price consideration to be paid by way of monthly payment of Rs.7 lakhs at simple interest of 12% per annum commencing from expiry of 3 years from date of execution of MOU. It is also pertinent to note that interest was to be payable from date of MOU i.e. 8.5.2010. Thereafter, some changes have been effected in rate of interest and interest was paid at rate of 18%. AO was of view that interest at rate of 12% is available in open market and interest paid on unpaid consideration over and above 12% deserves to be disallowed. With aid of section 40A(2)b), interest of Rs.63,67,512/- was disallowed. appeal to CIT(A) did not bring any relief to assessee. 4. ld.counsel for assessee submitted that no doubt in MOU dated 8.5.2010 assessee has agreed to pay simple interest at rate of 12% on unpaid purchase consideration; but later on 1.3.2012 in Board meeting it was resolved that interest will be payable at rate of 18%. It was also pointed out that assessee has submitted all these facts to AO in letter dated 2.3.2015. It was pointed that bank used to charge interest at rate of 14% on loan borrowed by assessee, but on loan from ASE Ltd. assessee was not required to furnish bank guarantee and could avoid so many other hurdles. ld.counsel for assessee took us through reply of assessee reproduced on page nos.2 to 4 of assessment order. On other hand, ld.DR relied upon orders of Revenue authorities. 5. It is pertinent to observe that in order to claim expenditure under section 37(1) of Income tax Act, assessee is required to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of nature described in sections 30 to 36, (c) expenditure must not be in nature of capital expenditure or personal expenditure of assessee, and (d) expenditure must be laid out or expended wholly and exclusively for purpose of business or profession. expression wholly employed in section 37 refers to quantification of expenditure while expression exclusively refers to motive, objective and purpose of expenditure. 6. In light of above, let us examine facts of present case. No doubt interest expenditure incurred ITA No.2079/Ahd/2017 4 by assessee has been considered by AO as incurred in connection with business. dispute between assessee and AO relates to rate of interest expenditure. AO was of view that assessee ought to have incurred interest expenditure at rate of 12% only and should not have paid at 18%. AO has made reference to terms of MOU executed on 8.5.2010, but lost sight of subsequent amendment carried out in resolution of Board of Directors. copy of such resolution passed by Board is placed at page no.18-19 of paper book. We have perused this resolution, and relevant part reads as under: 4. Revision of interest rate on Unpaid Consideration of acquisition of Electronic Undertaking- Board was informed that there were series of discussion and personal meetings between holding company Ambalal Sarabhai Enterprises Limited and Company from time to time regarding revision of rate of interest on unpaid consideration payable by company in respect of transfer of Electronic Undertaking by way of slump sale. Considering matter In totality it was decided to revise rate of interest from present rate of interest @12% to 18% per annum with effect from 1.4.2011 with half yearly rests. Noted and approved 7. As far as rate of 18% is concerned, it is not on higher side because on unsecured loans, Tribunal is unanimous in holding that market rate can be 16% to 20% because in that borrowings assessee used to avoid providing bank guarantee for loans and also could avoid execution of so many documentation and other processing formalities. AO has not compared this 18% with market rate of unsecured loans. He has compared this rate with bank loan vis- -vis MOU executed by assessee. Therefore, we are of view that there is no justification to disallow business expenditure incurred wholly and exclusively for purpose of business. ITA No.2079/Ahd/2017 5 5. There is no disparity on facts. interest was paid on loans from ASE Ltd. in last year as well as this year. This is same amount which is outstanding in this year also. According to assessee it has agreed for payment of interest at rate of 18% whereas AO was of view that this interest ought to be paid at rate of 12%, and amount over and above of 12% has been disallowed. Similar amount has been deleted by Tribunal as per finding extracted (supra). Therefore, respectfully following order of Tribunal in earlier year, we delete disallowance in this year also. 6. In result, appeal of assessee is allowed. Order pronounced in Court on 21st August, 2019. Sd/- Sd/- (PRADIPKUMAR KEDIA) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Systronics (India) Ltd. v. ITO, Ward-2(1)(3), Baroda