Aflon Alplast Pvt.Ltd., Ahmedabad V. The Income tax Officer,Ward-1(1), Ahmedabad

ITA 1186/AHD/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85584 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 19-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 30-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SONIA KUMAR
• Keywords: Depreciation; Commercial expediency; Onus to prove
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD (BEFO RE SHRI MUKUL KR. SHRAWAT, J.M. & SHRI ANIL CHATURVEDI , A.M.) I. T. A. NO. 1186 / AHD/ 20 1 2 (A SSESSMENT YEAR: 2008 - 09) AFLON ALPLAST PVT. CITY MILL COMPOUND, KANKARIA ROAD, KANKARIA, AHMEDABAD 380 022 V/S INCOME TAX OFFICER, WARD 1(1), AHME DABAD (APPELLANT) (RESPONDENT) PAN: AACCA3742L APPELLANT BY : SMT. URVASHI SODHAN, A.R. RESPONDENT BY : S MT. SONIA KUMAR, SR. D.R ( )/ ORDER DATE OF HEARING : 19 - 01 - 2015 DATE OF PRONO UNCEMENT : 30 - 01 - 2015 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) - 6 , AHMEDABAD DATED 13.04.2012 FOR A.Y. 2008 - 09. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. 3. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF PTF POLYMER PRODUCTS MEANT FOR INDUSTRIAL USE. ASSESSEE ELECTRONICALLY FILED IT S RETURN OF INCOME FOR A.Y. 08 - 09 ON 30.09.2008 DECLARING ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 2 TOTAL INCOME AT RS. 3,80,7 93/ - . THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) VIDE ORDER DATED 13.12.2010 AND THE TOTAL INCOME WAS DETERMINED AT RS. 24,80,714/ - . AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE L D. CIT(A) WHO VIDE ORDER DATED 13.04.2012 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS; - 1. THE CIT(A) HAS ERRED IN FACT IN CONFIRMING APPL ICABILITY OF SEC.L4A AND IN CONFIRMING DISALLOWANCE OF RS.3,1 !,390/ - MADE BY THE AO U/S. 14A/RULE 8D. IT IS SUBMITTED THAT LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE JUDICIAL PRONOUNCEMENTS, THE CITA OUGHT TO HAVE DELETED THE DISALLOWANCE OF RS. 3,1 1,390/ - MADE U/S. 14A. 2. THE CIT(A) HAS ERRED IN CONFIRMING DISALLOWANCE OUT OF MOTOR CAR EXPENSES RS. 1,15,313/ - / - AND MOTOR CAR DEPRECIATION OF RS. 1,04.231/ - TREATING THE SAME TO BE 'NON BUSINESS' EXPENDITURE. IT IS SUBMITTED T HAT THE MOTOR CAR IS USED FOR BUSINESS OF THE APPELLANT AND THERE IS NO PERSONAL OR NON BUSINESS ELEMENT AND SINCE THE EXPENDITURE IS NOT OF CAPITAL NATURE. CITA OUGHT TO HAVE DELETED THE ENTIRE DISALLOWANCE OF MOTOR CAR EXPENSES OF RS. 1,15, 313/ - AND MO TOR CAR DEPRECIATION OF RS. 1,04,231/ - . 3. CITA HAS ERRED IN INVOKING PROVISIONS OF SEC. 40A(2)(B) AND IN CONFIRMING DISALLOWANCE OF RS. 7.81,962/ - MADE BY THE 1TO U/S. 40(A)(2)(B). IT IS SUBMITTED THAT ON FACTS AND CIRCUMSTANCES OF THE CA SE AND JUDICIAL PRONOUNCEMENT ON THE SUBJECT, THE CITA OUGHT TO HAVE DELETED THE ENTIRE DISALLOWANCE OF RS. 7,81,962/ - . SINCE INTEREST PAYMENT @ 24% IS FAIR & REASONABLE, KEEPING IN MIND THE PREVAILING THE RATES OF PAYMENT OF I NTEREST. WITHOUT PREJUDICE TO ABOVE AND IN THE ALTERATIVE, IT IS SUBMITTED THAT DISALLOWANCE U/S.40(A)(2B) OF RS. 7,81,962/ - AND DISALLOWANCE OF RS. 3,11,390/ - U/S.L4A/RULE 8D AMOUNT TO DOUBLE TAXATION/MULTIPLE ADDITION OF THE SAME AMOUNT WHICH IS AGAINST PRINCIPLES OF EQUITY AND JUSTICE AND THEREFORE IT IS SUBMITTED THAT THE DISALLOWANCE OF RS. 7,81,962/ - MADE U/S.40A(2B) BE DELETED 1 ST GROUND IS NOT PRESSED AND THEREFORE DISMISSED AS NOT PRESSED. 2 ND GROUND IS W ITH RESPECT TO DISALLOWANCE OF M OTOR C A R EXPENSES AND DEPRECIATION ON MOTOR C AR. ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 3 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O NOTICED THAT ASSESSEE HAS CLAIMED DEPRECIATION OF RS. 1,04,231/ - ON THE MOTOR CAR AND ALSO CLAIMED MOTOR C AR EXPE NSES OF RS. 1,15,313/ - . A.O FURTHER NOTICED THAT TH E CAR WAS IN THE NAME OF THE DIRECTOR AND NOT IN THE NAME OF ASSESSEE. THE ASSESSEE WAS THEREFORE ASKED TO JUSTIFY THE CLAIM OF EXPENSES TO WHICH ASSESSEE INTERALIA SUBMITTED THAT THE ASSESSEE WAS THE BENEFICIAL OWNER OF ALL THE ASSETS AND THE COMPANIES FU NDS HAVE BEEN UTILIZED FOR THE PURCHASE OF CAR. IT WAS FURTHER SUBMITTED THAT THE CAR WAS USED FOR THE PURPOSE OF BUSINESS AND THEREFORE THE CLAIM OF ASSESSEE WAS ALLOWABLE . THE SUBMISSION OF THE ASSESSEE WAS NO T FOUND ACCEPTABLE TO THE A.O A S HE WAS OF TH E VIEW THAT THE ASSESSEE AS A COMPANY AND THE DIRECTOR OF THE COMPANY ARE SEPARATE ENTITIES AND THE ONUS OF PROVING THE USAGE OF THE ASSETS FOR THE PURPOSE OF BUSINESS IS ON THE ASSESSEE. HE WAS FURTHER OF THE VIEW THAT MERELY BY ENT ERING THE MOTOR C AR IN THE BLOCK OF ASSETS OF THE ASSESSEE DOES NOT PROVE THE USAGE OF THE ASSETS FOR THE BUSINESS AND THE PAYMENT MADE BY THE ASSESSEE FOR PURCHASE OF CAR IN THE NAME OF DIRECTORS DOES NOT MAKE THE ASSESSEE AS A BENEFICIAL OWNER SINCE THE PAYMENT CAN BE TREATED AS LOAN. HE FURTHER RELYING ON THE DECISION OF HON BLE APEX COURT IN THE CASE OF TAMIL NADU CIVIL SUPPLIES CORPORATION LTD. VS. CIT 249 ITR 214 AND THE DECISION IN THE CASE OF M.M. FISHERIES PVT. LTD. VS. CIT 277 ITR 204 DENIED THE CLAIM OF DEPRECIATION. H E ALSO DISALLOWED THE EXPENDITURE ON MOTOR C AR AMOUNTING TO RS. 1,15,313/ - FOR THE REASON THAT ASSESSEE COULD NOT PROVE THAT THE EXPENSES HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. AGGRIEVE D BY THE ORDER OF A.O, ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF A.O BY HOLDING AS UNDER: - 4.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. THE BASIC FACT IS THAT DIRECTOR OF THE COMPANY PURCHASED MOTOR CAR IN HIS NAM E AND THE BILL FOR THE SAID PURCHASE IS ALSO IN THE NAME OF DIRECTOR. THEREFORE APPELLANT COMPANY IS NOT THE LEGAL OWNER OF THE MOTOR CAR. FOR CLAIM OF DEPRECIATION, THE TWO CONDITIONS ARE TO BE FULFILLED NAMELY - APPELLANT MUST BE OWNER OF THE ASSET AND THU S IF MUST BE USED FOR THE PURPOSE OF APPELLANT'S BUSINESS. IN THIS CASE APPELLANT IS NOT THE OWNER SINCE THE OWNERSHIP VESTS WITH THE DIRECTOR WHO IS A SEPARATE ENTITY THAN THE APPELLANT COMPANY. AS REGARDS USE FOR THE PURPOSE OF BUSINESS, ASSESSING OFFICE R CALLED FOR THE DETAILS OF USE OF CAR BUT THE SAME WERE NOT FURNISHED. THEREFORE USE OF CAR FOR THE PURPOSE OF COMPANY'S BUSINESS IS NOT ESTABLISHED BY THE APPELLANT. ALTHOUGH THE ONUS TO PROVE THE USER OF ASSET WAS ON THE APPELLANT, THE SAME WAS NOT DISC HARGED ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 4 EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE UNDERSIGNED. CLAIM OF AN EXPENSE IN THE COMPANY ACCOUNTS IS NOT AN EVIDENCE TO PROVE THAT ASSET WAS USED FOR THE BUSINESS OF THE COMPANY. IN THE ABSENCE OF ANY TANGIBLE EVIDENCE TO PROVE THE BUSINESS USE OF THE MOTOR CAR PURCHASED IN THE NAME OF DIRECTOR, IT IS HELD THAT THE MOTOR CAR WAS NOT USED FOR THE PURPOSE OF APPELLANT'S BUSINESS. COMING TO THE APPELLANT'S ARGUMENT OF BENEFICIAL OWNERSHIP, APPELLANT SUBMITTED THAT PAYMENT FOR THE CAR WAS MADE B Y THE COMPANY AND HENCE THE APPELLANT IS THE BENEFICIAL OWNER. PAYMENT WILL NOT DETERMINE THE OWNERSHIP SINCE PAYMENT CAN BE MADE BY WAY OF LOAN ALSO. IN FACT MAJOR PAYMENT IS MADE BY FINANCE COMPANY BUT FT IS NOT THE BENEFICIAL OWNER. SINGE BOTH APPELLANT AND ITS DIRECTOR ARE SEPARATE ENTITIES AND. .DIRECTORS .ARE NOT PERMANENT, IT CANNOT BE SAID THAT APPELLANT COMPANY HAS GOT COMPLETE DOMINION OVER THE MOTOR CAR. SINCE MOTOR CAR. IS IN POSSESSION AND CONTROL OF THE DIRECTOR IN WHOSE NAME THE SAME STAND, T HERE IS NO DOMINION OR CONTROL OF THE APPELLANT COMPANY ON THE SAID MOTOR CAR. THOUGH PURCHASED FROM THE FUNDS PROVIDED BY IT, APPELLANT CANNOT BE SAID TO BE BENEFICIAL OWNER FOR THE PURPOSE OF CLAIMING DEPRECIATION. APPELLANT RELIED UPON THE DECISIONS OF ITAT AHMEDABAD AND ALSO CERTAIN HIGH COURTS INCLUDING SUPREME COURT DECISION IN THE CASE OF MYSORE MINERALS LTD, IT WOULD BE VERY RELEVANT TO REFER THREE - MEMBER DECISION OF HONORABLE SUPREME COURT IN THE CASE OF TAMIL NADU CIVIL SUPPLIES CORPORATION LT D VERSUS CIT REPORTED IN 249 ITR 214. IN THIS LARGER BENCH DECISION OF APEX COURT, EARLIER DECISION OF MYSORE MINERALS LTD WAS ALSO CONSIDERED. THE SAID DECISION WAS DISTINGUISHED ON FACTS AND IF WAS HELD THAT SINCE ASSESSEE HAS NOT ACQUIRED DOMINION OVER ASSET IN QUESTION, CLAIM OF DEPRECIATION IS NOT ALLOWED. IN ANOTHER DECISION OF DELHI HIGH COURT IN THE CASE OF MM FISHERIES PRIVATE LTD VERSUS CIT, 277 ITR 204, ON THE IDENTICAL ISSUE OF CLAIM OF DEPRECIATION ON VEHICLES REGISTERED IN THE NAME OF DIRECTOR S, THE SAME WAS DECIDED AGAINST THE ASSESSEE. IN THE LIGHT OF THESE TWO LANDMARK DECISIONS, THE ISSUE IS NOT HELD TO BE COVERED BY THE DECISION OF JURISDICTIONAL ITAT SINCE THESE DECISIONS WERE NOT CONSIDERED THEREIN. ONUS IS ON THE APPELLANT TO PROVE THE DOMINION OVER THE ASSET AS WELL AS USE FOR THE PURPOSE OF BUSINESS. IF APPELLANT IS NOT ABLE TO PROVE EITHER IN THE LIGHT OF LARGER BENCH DECISION OF SUPREME COURT, CLAIM OF DEPRECIATION OH ASSETS STANDING IN OTHERS NAME CANNOT BE ALLOWED. 5. AGGRIEVED BY TH E AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 6. BEFORE US, LD. A.R REITERATED THE SUBMISSIONS MADE BEFORE A.O AND LD. CIT(A). HE FURTHER PLACED RELIANCE ON THE DECISION OF HON BLE APEX COURT IN THE CASE OF ICDS LTD. 350 ITR 527 DECI SION OF GUJARAT HIGH COURT IN THE CASE OF ARAVALI FINLEASE LTD. 341 ITR 280 (GUJ) AND THE DECISION OF AHMEDABAD TRIBUNAL IN THE CASE OF SWATI AUTOLINK PVT. LTD. ITA NO. 1471/AHD/2010. THE LD. A.R. FURTHER ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 5 SUBMITTED THAT NO SUCH DISALLOWANCE HAS BEEN MADE I N EARLIER YEARS. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O AND LD. CIT(A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT A.O HAS DISALLOWED THE CLAIM OF DEPRECIATION ON MOTOR CARS MAINLY FOR THE REAS ON THAT THE MOTOR C AR WA S IN THE NAME OF THE DIRECTOR AND NOT IN THE NAME OF THE ASSESSEE. HE HAS FURTHER DISALLOWED THE CLAIM OF THE ASSESSEE FOR EXPENSES FOR THE REASON THAT ASSESSEE COULD NOT PROVE THAT THE EXPENSES HAVE BEEN INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS AND WERE NOT IN PERSONAL IN N ATURE. ON PERUSING THE B ALANCE SHEET PLACED BY THE ASSESSEE IN THE PAPER BOOK , IT IS SEEN THAT THE MOTOR C AR IS REFLECTED IN THE SCHEDULE OF FIXED ASSETS. BEFORE US, REVENUE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO CONTROVERT THE SUBMISSIONS OF ASSESSEE THAT THE FUNDS OF ASSESSEE HAS BEEN USED FOR THE PURCHASE OF MOTOR CAR. WE FURTHER FIND THAT ON IDENTICAL FACTS, IN THE CASE OF SWATI AUTOLINK PVT. LTD. VS. ITO (SUPRA), THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE CO - ORDINATE BENCH BY HOLDING AS UNDER: - 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS UNDISPUTED FACT THAT THE VEHICLE IS STANDING IN THE NAME OF THE DIRECTOR OF THE COMPANY BUT T HE SAME IS CONSIDERED AS PART OF FIXED ASSET OF THE ASSESSEE. THE SUBMISSION OF THE ASSESSEE THAT FOR THE PURCHASE OF VEHICLE, THE FUNDS OF THE ASSESSEE HAS BEEN USED COULD NOT BE CONTROVERTED BY THE REVENUE BY BRINGING ANY MATERIAL ON RECORD. WE FIND THAT THE CO - ORDINATE BENCH IN THE CASE OF STUDIO - 3 ARCHITECT PVT LTD (SUPRA) HELD AS UNDER: - '5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE RELEVANT PROVISIONS OF SECTION 32 OF THE ACT STIPULATE DEPRECIATION IN RESPECT OF BUILD ING, MACHINERY, PLANT OR FURNITURE 'OWNED BY THE ASSESSEE' AND 'USED' FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. INDISPUTABLY, THE INNOVA CAR WAS PURCHASED WITH THE FUNDS OF THE COMPANY AND USED BY THE ASSESSEE FOR THE PURPOSES OF ITS BUSINESS. THE CO NTROVERSY IS IN REGARD TO OWNERSHIP OF THE CAR. THE CONTENTION OF THE ASSESSEE IS THAT CAR BEING NOT REGISTERED UNDER THE MOTOR VEHICLES ACT IN THE NAME OF THE COMPANY, BY ITSELF IS NOT SUFFICIENT TO HOLD THE CONTRARY. THE FACTUAL POSITION AS STATED BY THE ASSESSEE IS NOT DISPUTED BY THE REVENUE. THE CONTENTION OF THE REVENUE IS THAT UNLESS THE CAR IS REGISTERED IN THE NAME OF THE ASSESSEE UNDER THE MOTOR VEHICLES ACT, THE ASSESSEE WOULD NOT BE ENTITLED TO DEDUCTION OF DEPRECIATION ALLOWANCE IN RESPECT THER EOF. WE ARE OF THE OPINION THAT THE ASSESSES, WHO HAD PURCHASED THE CAR FOR VALUABLE CONSIDERATION AND USED THE SAME FOR ITS BUSINESS, CANNOT BE DENIED THE BENEFIT OF DEPRECIATION ON THE GROUND THAT THE TRANSFER WAS NOT RECORDED UNDER THE MOTOR VEHICLES AC T OR THAT THE VEHICLE STOOD IN THE NAME OF A DIRECTOR OF THE ASSESSEE COMPANY IN THE RECORDS OF THE AUTHORITIES UNDER THE MOTOR VEHICLES ACT. 5.1 THE AFORESAID VIEW IS SUPPORTED BY THE DECISION IN THE CASE OF CIT VS. NAVDURGA TRANSPORT CO., 235ITR 150 (ALL ), WHEREIN THE ISSUE WAS AS TO WHETHER FIRM WAS ENTITLED TO DEPRECIATION ON CARS, BROUGHT IN TO THE FIRM FOR USE OF BUSINESS OF THE FIRM, EVEN THROUGH CARS CONTINUED TO BE REGISTERED IN THE NAME PARTNERS. HON 'BLE ALLAHABAD HIGH COURT HELD THAT THE TRIBUNA L RIGHTLY REACHED THE CONCLUSION THAT THE ASSESSEE OWNED AND USED THE THREE VEHICLES WITHIN THE MEANING OF S. 32 OF THE ACT. SIMILAR VIEW WAS TAKEN IN THE CASE OF CIT VS, MOHD. BUS SHOKAT ALI (NO.2), 256 ITR 357 (RAJ), CIT VS FAZILKA DABWALI TPT CO. LTD (2 004) 270 ITR398 (P & H), CIT V. SALKIA TRANSPORT ASSOCIATES [1983] 143 ITR 39/13 TAXMAN 191 (CAL), CIT V. NIDISH TRANSPORT CORPN. [1910] 185 ITR 669/[1989] 44 TAXMAN 351(KER.), CITV. DILIP SINGH BAGGA [1993] 201 ITR 995/11994] 77 TAXAMAN 66 (BOM), CIT V NA VDURGA TRANSPORT CO. [1999] 235 ITR 158 ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 6 (ALL.) AND CIT V BASTI SUGAR MILLS CO. LTD. [2002] 257 ITR 88/123 TAXMAN 693 (DELHI) AS ALSO BY THE ITAT IN THEIR DECISION IN THE CASE OF THE CURIOUS HOUSE (P) LTD. V ITO (1980) 9 TTJ 348 (INDORE) AN D ITO VS. MODI AG ENCY, ITA NO. 198/GAU/L977 - 78 (GAUHATI). 5.2. IN THE LIGHT OF THE VIEW TAKEN IN THE AFORESAID DECISIONS, MERE NON - REGISTRATION OF A VEHICLE IN THE NAME OF THE COMPANY UNDER THE MOTOR VEHICLES ACT, CANNOT DISENTITLE IT IN REGARD TO ITS CLAIM OF DEPRECIATION , WHEN THE FACTS ON RECORD ARE UNDISPUTED THAT THE ASSES SEE COMPANY HAS, IN FACT, MADE THE INVESTMENT IN PUR CHASE OF THE VEHICLE AND SUCH VEHICLE IS BEING USED FOR ITS BUSINESS. THE REQUIREMENT OF SECTION 32 IS THAT THE VEHICLE MUST BE OWNED BY THE ASSES SEE AND NOT THAT THE ASSESSEE MUST BE A 'REGISTERED OWNER' OF THE SAME UNDER THE MOTOR VEHICLES ACT. THEREFORE, WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE ID. CIT(A). CONSEQUENTLY GROUND NO. 1 RELATING TO DISALLOWANCE OF DEPRECIATION ON MOTOR C AR IS DISMISSED. 8. BEFORE US, REVENUE HAS NOT BEEN BROUGHT ANY CONTRARY BINDING DECISION IN ITS SUPPORT NOR COULD POINT ANY DISTINGUISHABLE FEATURE OF THE PRESENT CASE TO THAT OF SWATI AUTOLINK (SUPRA) . WE THEREFORE , RESPECTFULLY FOLLOWING THE DECISION OF T HE CO - ORDINATE BENCH IN THE CASE OF SWATI AUTOLINK PVT. LTD. (SUPRA) HOLD THAT THE CLAIM OF DEPRECIATION AND EXPENDITURE COULD NOT HAVE BEEN DISALLOWED IN THE PRESENT CASE. THUS THIS GROUND OF ASSESSEE IS ALLOWED. 3 RD GROUND IS WITH RESPEC T TO DISALLOWAN CE MADE U/S. 40A (2 )(B ) OF THE ACT. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O NOTICED THAT ASSESSEE HAS INCURRED INTEREST EXPENSES OF RS. 15,63,925/ - WHICH INCLUDED THE INTEREST PAID TO DIRECTORS AND OTHER PER SONS REFERRED TO IN SECTION 40A (2 )(B ). HE ALSO NOTICED THAT ASSESSEE HAD PAID INTEREST @ 24% TO THE DIRECTORS AND OTHER RELATED PERSONS. THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENT OF HIGH INTEREST TO WHICH ASSESSEE INTERALIA SUBMITTED THAT FOR GETTING FINANCE FROM BANK S CUMBERSOME PROCEDURE ARE REQUIRED TO BE FOLLOWED WHEREAS NO SUCH CUMBERSOME PROCEDURE ARE REQUIRED ON THE BORROWINGS FROM RELATED PARTIES . IT WAS FURTHER SUBMITTED THAT NO DISALLOWANCE OF INTEREST ON SUCH DEPOSITS WERE MADE IN EARLIER YEARS. THE SUBMISSION OF THE ASSESSEE WAS NO T FOUND ACCEPTABLE TO THE A.O A S HE WAS OF THE VIEW THAT ASSESSEE HAS PAID INTEREST AT 24% WHEN THE FUNDS ARE AVAILABLE AT 12% OR LESS FROM BANKS. HE FURTHER NOTED THAT ASSESSEE HAS NOT PROVED COMMERCIAL EXPEDIENCY. HE ACCORDINGLY CONSIDERED THAT THE PA YMENT OF 24% PAID BY THE ASSESSEE TO EXCESSIVE AND THEREAFTER DISALLOWED 50% OF THE EXPENDITURE AND THUS MADE DISALLOWANCE OF RS. 7,81,962/ - . AGGRIEVE D BY THE ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 7 ORDER OF A.O, ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF A.O BY HOLDIN G AS UNDER: - 5.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. IT IS NOT IN DISPUTE THAT THE PARTIES TO WHOM INTEREST WAS PAID ARE RELATED AND COVERED WITHIN THE PROVISIONS OF SECTION 40 A (2) OF IT ACT. IF A NY EXCESS PAYMENT IS MADE TO THE RELATED PARTIES, SUCH EXCESS PAYMENT IS NOT ALLOWABLE AS AN EXPENSE. ASSESSING OFFICER BROUGHT OUT THE DETAILS OF INTEREST PAYMENT TO RELATED PARTIES AND .UNRELATED PARTIES AND IT IS ESTABLISHED THAT RELATED PARTIES WERE PA ID MORE INTEREST THAN UNRELATED PARTIES ON THE SIMILAR LOANS RECEIVED BY APPELLANT. THE ARGUMENT OF THE APPELLANT THAT LOANS RECEIVED FROM RELATED PARTIES ARE PERMANENT AND MORE STABLE IS FOUND TO BE INCORRECT BY THE ASSESSING OFFICER SINCE THERE WERE REGU LAR INFLOW AND OUTFLOW OF FUNDS FROM THE ACCOUNTS OF THESE RELATED PARTIES. THIS MAKES IT VERY CLEAR THAT THE FUNDS PROVIDED BY RELATIVES WERE NOT STABLE OR PERMANENT. RATHER THEIR LOAN ACCOUNTS WERE USED AS CURRENT ACCOUNT FOR THE CONVENIENCE OF LENDERS. BY NO REASONS INTEREST RATE ON SUCH LOAN CAN BE HIGHER THAN INTEREST PAID TO OUTSIDERS FOR RELATIVELY STABLE LOANS. CONSIDERING THIS I DO NOT FIND ANY REASON OR MATERIAL FOR PAYING HIGHER INTEREST TO RELATED PARTIES THAN TO OUTSIDERS WHO WERE ALSO NOT PROV IDED ANY SECURITY FOR OBTAINING LOANS BY THE APPELLANT. THE RATE OF INTEREST PAID TO RELATED PARTIES IS EVEN HIGHER THAN BANK FINANCING WHICH IS NORMALLY HIGHER THAN PRIVATE FINANCING. THERE ARE SEVERAL DECISIONS AS PER WHICH EXCESS PAYMENT OF EXPENSES MAD E TO RELATED PARTIES ARE TO BE DISALLOWED. SOME OF THESE DECISIONS ARE AS UNDER - 1 - MADANLAL RADHESHYAM V. INCOME - TAX OFFICER, 80 TAXMAN 338 (INDORE) ITAT INDORE BENCH 'SECTION 40A(2) OF THE INCOME - TAX, 1961 - BUSINESS DISALLOWANCE EXCESSIVE OR UNREASONABLE PAYMENTS TO PARTNERS, RELATIVES, ETC. ASSESSMENT YEAR 1988 - 89 - INTEREST AT 18 PER CENT WAS PAID TO WIFE OF ONE OF PARTNERS OF ASSESSEE - FIRM WHILE OTHER CREDITORS WERE PAID INTEREST AT 12 PER CENT OR 13 PER CENT - WHETHER PROVISIONS OF SECTION 40A(2) WERE ATTRACTED - HELD, YES - WHETHER, TAKING INTO CONSIDERATION FACT THAT PARTNER'S WIFE HAD DEPOSITED A LARGE AMOUNT WITH ASSESSEE - FIRM ON LONG - IEIM BASIS AS COMPARED TO OTHER CREDITORS, INTEREST IN EXCESS OF 15 PER CENT COULD BE CONSIDERED UNREASONABLE AND D ISALLOWED - HELD, YES' 2 - CORONATION FLOUR MILLS VS. ASSISTANT COMMISSIONER OF INCOME - TAX [2010] 88 TAXMAN 257 (GUJ.) HIGH COURT OF GUJARAT 'SECTION 40A(2) OF THE INCOME - TAX ACT, 196F1 - BUSINESS DISALLOWANCE EXCESSIVE OR UNREASONABLE PAYMENTS - ASSESSMENT Y EAR 1988 - 89 - WHETHER FOR MAKING DISALLOWANCE UNDER SECTION 40A[2) ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING AS TO WHETHER EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATION TO ANY ONE OF THREE REQUIREMENTS PRESCRIBED IN SECTION WHICH ARE INDEPEN DENT AND ALTERNATIVE TO EACH OTHER; FOR MAKING DISALLOWANCE, ALL THREE REQUIREMENTS NEED NOT EXIST SIMULTANEOUSLY - HELD, YES - WHETHER WHERE ASSESSING OFFICER HELD A PART OF EXPENDITURE ON ACCOUNT OF REPAIR AND MAINTENANCE TO BE EXCESSIVE HAVING REGARD TO LEGITIMATE NEEDS OF BUSINESS AND FOR RECORDING SUCH A FINDING COGENT REASONS WERE ASSIGNED BY HIM, HE WAS JUSTIFIED IN DISALLOWING SUCH EXCESS PAYMENT UNDER SECTION 40A(2) AND THERE WAS NO NEED TO RECORD A FINDING ON MARKET VALUE OF SERVICES - HELD, YES' 3 - ANANDJI SHAH V. COMMISSIONER OF INCOME - FAX [1990] 51 TAXMAN 29 KERALA 'SECTION 40A(2) OF THE INCOME - TAX ACT, 1961 - BUSINESS DISALLOWANCE - EXCESSIVE OR UNREASONABLE EXPENSES - ASSESSMENT YEARS J974 - 75 AND 1978 - 79 - T WAS WIFE OF MANAGING PARTNER OF ASSESS EE - FIRM - ON DEATH OF T, HER ESTATE WAS DIVIDED EQUALLY BETWEEN N AND S WHOSE FATHER AND HUSBAND RESPECTIVELY WERE OIL PARTNERS OF ASSESSEE - FIRM - ASSESSEE - FIRM PAID CERTAIN INTEREST AT RATE OF 24 PER CENT TO SUCCESSORS OF ESTATE OF T AND CLAIMED DEDUCTION - WHETHER SECTION 40A(2J WAS ATTRACTED IN THIS CASE AND CONSEQUENTLY, PAYMENT OF INTEREST AT RATE OF 24 PER CENT BY ASSESSEE TO SUCCESSORS OF ESTATE OF J WAS EXCESSIVE AND THAT ONLY INTEREST AT 18 PER CENT COULD BE SAID TO BE REASONABLE - HELD, YES CONSIDE RING THE AFORESAID DECISIONS, IT IS CLEAR THAT INTEREST PAID TO RELATIVES IN EXCESS OF INTEREST PAID TO OUTSIDERS OR BANK IS EXCESSIVE AND UNREASONABLE AND THE SAME IS DISALLOWABLE. FACTS OF THE APPELLANT'S CASE ARE IDENTICAL TO THE FACTS OF THE CASE DECID ED BY 'HONORABLE ITAT INDORE BENCH. IN THAT CASE ALSO APPELLANT CLAIMED THAT FUNDS BORROWED FROM RELATIVES WERE LARGE AND FOR LONG PERIOD WHICH WAS NOT FOUND ACCEPTABLE BY THE TRIBUNAL AND THE DISALLOWANCE OF EXCESS .INTEREST WAS CONFIRMED. DECISIONS OF HO NORABLE GUJARAT HIGH COURT AND KERALA HIGH COURT ARE ALSO SUPPORTING THE ASSESSING OFFICER'S ACTION OF DISALLOWING EXCESS INTEREST PAID TO RELATIVES. RESPECTFULLY FOLLOWING THESE DECISIONS IN THE LIGHT OF FACTS OF THE APPELLANT, THE DISALLOWANCE OF INTERES T MADE BY THE ASSESSING OFFICER IS CONFIRMED. ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 8 10. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 11. BEFORE US, LD. A.R REITERATED THE SUBMISSIONS MADE BEFORE A.O AND LD. CIT(A). HE FURTHER SUBMITTED THAT TO AVAIL FINANCE FROM BANK VARIOUS FORMALITIES ARE REQUIRED TO BE COMPLIED WITH AND THE PROCEDURES ARE CUMBERSOME AND TIME CONSUMING. FURTHER CONSIDERING THE PROCESSING CHARGES, COMMITMENT FEES ETC CHARGE BY THE BANK, THE EFFECTIVE RATE OF INTEREST WORKS OUT TO 18%. ON TH E OTHER HAND THE DEPOSITS FROM THE PARTIES FROM WHOM THE ASSESSEE HAS TAKEN THE FUNDS THERE IS NO FIX ED PERIOD OF REPAYMENT AND THE FUNDS ARE AVAILABLE AS AND WHEN REQUIRED. IT WAS FURTHER SUBMITTED THAT ASSESSEE HAD ALSO OBTAINED LOANS FROM THE SAME PARTI ES IN EARLIER YEARS AND HAD PAID INTEREST BUT NO DISALLOWANCE OF INTEREST WAS MADE WHILE FRAMING THE ASSESSMENTS. HE THEREFORE SUBMITTED THAT NO DISALLOWANCE BE MADE IN PRESENT CASE. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O AND LD. CIT(A). 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. BEFORE US, LD. A.R. HAS SUBMITTED THAT ASSESSEE HAD BORROWED FUNDS FROM RELATED PARTIES IN EARLIER YEARS ALSO AND NO DISALLOWANCE ON ACCOUNT OF INTEREST WAS MADE BY THE REVENUE WHIL E FRAMING THE ASSESSMENT U/S. 143(3). THE AFORESAID SUBMISSION OF THE ASSESSEE HAS NOT BEEN CONTROVERTED BY REVENUE BY BRINGING ANY CONTRARY MATERIAL ON RECORD. A.O WHILE DISALLOWING THE EXPENSES HAS NOTED THAT THE LOANS FROM BANK A RE AVAILABLE @ 12% OR LE SS. HOWEVER WE FIND THAT A.O HAS NOT PLACED ON RECORD ANY EVIDENCE OF SUCH INTEREST BEING CHARGED BY THE BANKS. IT IS ALSO ASSESSEE S SUBMISSION THAT THE LOANS OBTAINED FROM THE RELATED PARTY ARE IN THE NATURE OF UNSECURED LOAN WHEREAS THE LOAN FROM BANK A RE IN THE NATURE OF SECURED LOAN WHERE THE ASSESSEE IS REQUIRED TO PROVIDE SECURITY AND ALSO REQUIRED TO COMPLY WITH OTHER FORMALITIES . THESE SUBMISSIONS OF ASSESSEE HAVE ALSO NOT BEEN CONTROVERTED BY REVENUE BY PLACING ANY CONTRARY MATERIAL ON RECORD. FUR THER NO MATERIAL HAS BEEN BROUGHT ON RECORD BY REVENUE TO ITA NO 1186/AHD/2012 . A.Y. 2008 - 09 9 DEMONSTRATE THAT THE FUNDS BORROWED BY THE ASSESSEE HAVE BEEN USED FOR NON BUSINESS PURPOSES. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT NO DISALL OWANCE ON ACCOUNT OF I NTEREST I S REQUIRE D IN THE PRESENT CASE AND THEREFORE DIRECT THE DELETION OF DISALLOWANCE . THUS THIS GROUND OF ASSESSEE IS ALLOWED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 30 - 01 - 201 5 . SD/ - SD/ - ( MUKUL KR. SHRAWAT ) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2 . THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD