M/s Vogue Vestures Private Limited, Bangalore V. ACIT, Bangalore

ITA 1284/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63813 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 22-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Assessee Lawyers: NANU R MALLYA
• Section: 234B

Judgement Text

PAGE 1 OF 12 ITA NO.1284/ BANG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.1284/BANG/2011 (ASST. YEAR 2006-07) M/S VOGUE VESTURES PRIVATE LIMITED, 75, LALBAGHROAD, HULKUL COMPLEX, 2 ND FLOOR, OPP. URVASHI THEATRE, BANGALORE-27. PA NO.AABCV 8253 G VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-12(5), BENGALURU. (APPELLANT) (RESPONDENT) DATE OF HEARING : 22.11.2012 DATE OF PRONOUNCEMENT : 30.11.2012 APPELLANT BY : SHRI NANU R MALLYA, C.A. RESPONDENT BY : SMT. SUSAN THOMAS JOSE, JCIT OR DER PER GEORGE GEORGE K : THIS APPEAL OF THE ASSESSEE COMPANY IS DIRECTED AG AINST THE ORDER OF THE LEARNED CIT (A)-III, BANGALORE DATED 2 0.9.2011. THE RELEVANT ASSESSMENT YEAR IS 2006.07. 2. THE ASSESSEE COMPANY HAS RAISED FOUR GROUNDS. GR OUND NOS. I & IV ARE GENERAL IN NATURE AND NO SPECIFIC ADJUDICATI ON IS CALLED FOR, HENCE THE SAME ARE DISMISSED. GROUND NO. III IS NOT MAINTAIN ABLE, AS CHARGING OF INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT IS MANDATORY AND PAGE 2 OF 12 ITA NO.1284/ BANG/2011 2 CONSEQUENTIAL IN NATURE. THE ISSUE THAT RAISED IN SOLITARY GROUND [GROUND NO. II] IS WHETHER THE CIT (A) IS JUSTIFIED IN UPHOLDING THE DISALLOWA NCE OF RS.11,27,328/- BEING INTEREST EXPENSES ON UNSECURED LOANS. 3. THE ISSUE, IN BRIEF, IS AS UNDER: THE ASSESSEE IS A COMPANY [THE ASSESSEE IN SHORT ]. IT IS ENGAGED IN THE BUSINESS OF TRADING IN TEXTILES AND GARMENT ACCESSORIES. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSI DERATION WAS FILED ON 26/11/2006 ADMITTING A TOTAL INCOME OF RS.67,71,080 /-. THE ASSESSMENT WAS TAKEN UP FOR SCRUTINY BY ISSUANCE OF NOTICE UNDER SEC TION 143(2) OF THE ACT. 3.1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD INCURRED RS.50,70,893/- AS IN TEREST EXPENSES ON UNSECURED LOANS AVAILED FROM PERSONS WHO HAPPENED T O BE DIRECTORS OF THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT THE ASS ESSEE HAD ALSO RAISED SECURED LOANS FROM BANK AND FINANCIAL INSTITUTION F OR WHICH INTEREST WAS PAID AT THE RATE OF 14%. ACCORDING TO THE ASSESSING OFF ICER, SINCE THE ASSESSEE HAD PAID HIGHER INTEREST RATE ON LOAN SECURED FROM ITS DIRECTORS, IN COMPARISON TO INTEREST RATES ON LOANS FROM BANK AND FINANCIAL INSTITUTION, THE INTEREST PAYMENT TO THE ASSESSEES DIRECTORS WAS HIT BY THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. THEREFORE, THE ASSES SING OFFICER RESTRICTED THE INTEREST PAYMENTS ON LOANS SECURED FROM THE ASSE SSEES DIRECTORS @ 14% AND THE DIFFERENCE OF [RS.5070893 3943565] RS.11. 27 LAKHS HAS BEEN ADDED TO THE TOTAL INCOME OF THE ASSESSEE. PAGE 3 OF 12 ITA NO.1284/ BANG/2011 3 4. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE, AMON G OTHERS, BEFORE THE CIT (A) FOR RELIEF. AFTER DUE CONSIDER ATION OF THE CONTENTIONS OF THE ASSESSEE COUPLED WITH VARIOUS CASE LAWS AS R ECORDED IN HIS APPELLATE ORDER UNDER CONSIDERATION, THE CIT (A) HAD UPHELD T HE STAND OF THE AO ON THIS POINT. THE RELEVANT PORTIONS OF THE REASONS R ECORDED FOR REJECTING THE ASSESSEES CONTENTIONS BY THE CIT (A) ARE EXTRACTED AS UNDER: 6.5. THE ISSUE NOW ARISES AS TO WHETHER THE INTER EST PAYMENT, THOUGH APPARENTLY MADE FOR BUSINESS PURPOSES , IS YET HIT BY THE MISCHIEF OF SECTION 40A(2)(B) OF T HE ACT. FROM THE SUBMISSIONS MADE BY THE APPELLANT IN COURSE OF THE APPELLATE PROCEEDINGS, IT IS SEEN THA T HE HAS BASED HIS CLAIM MORE UPON THE PROVISIONS OF SEC TION 36(1)(III) OF I.T. ACT, 1961 AND THE CASE LAWS CITE D ARE ALSO WITH REFERENCE TO THIS SECTION. HOWEVER, IT I S SEEN THAT THE AO IN THE ASSESSMENT ORDER HAS NOT DOUBTED THE GENUINENESS OF THE INTEREST PAYMENTS U/S 36(1)(I II) AT ALL, BUT, HAS RATHER ONLY DISALLOWED A PORTION OF TH E PAYMENTS U/S 40A(2)(B) INSTEAD. THE APPELLANTS SUBMISSIONS DO NOT COVER THIS ASPECT OF ALLOW-ABILI TY U/S 40A (2)(B) EXPLICITLY AND TO THIS EXTENT, THE ARGUM ENTS ADVANCED ARE FOUND TO SOMEWHAT UNALIGNED WITH THE R ATIO OF THE ADDITIONS MADE IN THE ASSESSMENT ORDER. 6.6. IT IS PERTINENT TO NOTE THAT THE MAJOR PORTION OF THE UNSECURED LOANS HAVE BEEN RAISED FROM PERSONS WHO A RE INVOLVED WITH THE COMPANY AT A PERSONAL LEVEL, EITHE R AS DIRECTORS OR THEIR RELATIVES. THIS BEING THE CASE, IT IS NOT REASONABLE TO COMPARE THE RISK PROVISIONING ATTACHE D TO THESE LOANS WITH THAT WHICH MAY ATTEND LOANS RAISED FROM UNKNOWN OUTSIDE PARTIES. THERE IS A COMFORT LEVEL IN THE LENDERS SINCE THE MONEY IS INVESTED IN A COMPANY WHIC H IS RUN EITHER BY THEMSELVES OR BY THEIR RELATIVE. HENCE , TO RAISE THE ISSUE OF A PURELY COMMERCIAL RATE OF INTER EST AT 18% AS THE STANDARD RATE FOR BENCHMARKING, DOES NOT , TO PAGE 4 OF 12 ITA NO.1284/ BANG/2011 4 MY MIND, COALESCE WITH THE PRESENT ISSUE UNDER APPEA L. JUST AS SECURED LOANS ARE CHEAPER BECAUSE OF MORE FORMALITIES BEING INVOLVED, UNSECURED LOANS FROM DIRECTORS AND RELATIVES NEED NOT NECESSARILY BE COST LIER SINCE HERE THE RISKS ARE MORE CONTROLLABLE AND THE RISK FORMALITIES CAPABLE OF BEING DRASTICALLY CURTAILED. HENCE, I FIND THAT THE CASE LAWS RELIED UPON BY THE APPELLA NT ARE NOT ON ALL FOURS WITH THE CIRCUMSTANCES OF THE PRES ENT CASE. THOUGH THERE ALSO EXIST CASE LAWS THAT HOLD THAT THE DEPARTMENT CANNOT STEP INTO THE SHOES OF THE ASSESSEE, THE PRESENT CASE INVOLVES A CLEAR DISTINC TION SINCE THE INVOLVEMENT OF THE COMPANYS OWN DIRECTORS AND THEIR RELATIVES AS LOAN CREDITORS DETRACTS FROM A P URELY COMMERCIALLY-EXPEDIENT APPROACH, AND ALLOWS FOR DISCRETION IN NEGOTIATION OF THE TERMS OF THE LOANS NORMATIVELY ALWAYS KEEPING IN MIND THE BEST INTEREST OF THE COMPANY. THE RISK CLIMATE ACCOMPANYING THESE LO ANS IS EASILY DISTINGUISHABLE FROM THAT WHICH MAY ATTEND LOANS FROM OUTSIDERS OR PURELY COMMERCIAL ORGANIZATIONS. THOUGH THE APPELLANT STRIVES TO INCLUDE THE PRESENC E OF OUTSIDE PERSONS TO BOLSTER ITS ARGUMENT ABOUT COMMERCIAL RATES, THE FACT REMAINS THAT MOST OF THE LOAN CREDITORS ARE OUTSIDERS ONLY IN A PHYSICAL SENSE, B UT ARE ACTUALLY RELATIVES OF THE DIRECTORS. BY SIMULTANEOU SLY CLAIMING THE NON-APPLICATION OF SEC.40A(2)(B), AND APPARENTLY ALSO KEEPING AN EYE ON THE REQUIREMENT OF SEC.3(1)(III)(D) OF THE COMPANIES ACT REFERRED TO A BOVE, THE APPELLANT COULD BE REDUCING HIMSELF TO HAVING HIS FEET ON TWO BOATS AT THE SAME TIME, AS IT WERE. IN VIEW OF THE ABOVE, I FIND NO COERCIVE REASON TO INTERFER E WITH THE ORDER OF THE AO ON THIS COUNT AND ACCORDINGLY SU STAIN THE ADDITION MADE TO THE EXTENT OF RS.11,27,328/-. 5. AGGRIEVED, THE ASSESSEE HAS COME UP WITH THE PR ESENT APPEAL. DURING THE COURSE OF HEARING, THE SUBMISSIONS MADE BY THE LEARNED AR ARE SUMMED UP AS UNDER: PAGE 5 OF 12 ITA NO.1284/ BANG/2011 5 - THAT IT IS GENERALLY ACCEPTED TRADE PRACTICE THAT UNSECURED LOANS CARRY HIGHER RATE OF INTEREST THAN SECURED LOANS BECAUSE IN SECURED LOANS, THE LENDER HAS MORE SECURITY AND THE CHANCES OF RECOVERY OF PRINCIPA L AND INTEREST ARE HIGHER AND, THEREFORE, LENDERS ARE WILLING TO LEND AT LESSER RATE OF INTEREST FOR SECU RED LOANS; - THAT AS THE COMPANIES ACT, 1956 PUTS RESTRICTION ON PRIVATE LIMITED COMPANIES U/S 3(1)(III) OF THE ACT, THE ASSESSEE BEING A PRIVATE LIMITED COMPANY WAS SUBJECT TO THIS RESTRICTION AND, THEREFORE, FOR ANY FUNDS BEYON D THAT PROVIDED BY BANKING AND FINANCIAL INSTITUTIONS, HAD TO BE BORROWED FROM DIRECTORS AND THEIR RELATIVES AND, HENCE, IT HAD BORROWED FUNDS FROM ITS DIRECTORS AND THEIR RELATIVES; - THAT THERE WERE/ARE LOT OF LIMITATIONS AND RESTRICT IONS IN BORROWING FROM BANKS AND FINANCIAL INSTITUTIONS AS THEY HAVE TO FOLLOW THE STATUTORY REGULATIONS SUCH AS RES ERVE BANK OF INDIA GUIDELINES, BANKING REGULATIONS ACT E TC., AND THAT THE LENDING INSTITUTIONS OR BANKS THEMSELV ES HAVE VARIOUS NORMS WHILE LENDING LOANS AND RATE OF INTEREST TO BE CHARGED; - THAT THE BANKS AND FINANCIAL INSTITUTIONS VERIFY TH E FINANCIAL STATEMENTS BEFORE LENDING SUCH LOANS AND ALSO ACCEPTS OTHER LOANS BORROWED FROM OTHER BANKS, FINA NCIAL INSTITUTIONS AND OTHER PARTIES; - THAT AFTER ASCERTAINING THE PREVALENT RATE OF INTER ESTS CHARGED BY THE PRIVATE BANKS SUCH AS KOTAK MAHINDRA BANK, HDFC BANK ETC., IT WAS CLAIMED THAT PRIVATE UNSECURED BUSINESS LOANS CARRY HIGHER RATE OF INTERE ST THAN SECURED LOANS FROM THE BANKS; - THAT WHEN THE BANKING INSTITUTIONS WERE CHARGING IN TEREST IN THE RANGES OF 18 22% ON UNSECURED BUSINESS LOA NS, PAGE 6 OF 12 ITA NO.1284/ BANG/2011 6 THE INTEREST RATE CHARGED BY THE DIRECTORS AND THEIR RELATIVES OF THE ASSESSEE @ 18% WERE QUITE REASONAB LE, AND THAT THE INTEREST PAID WAS MUCH LOWER THAN UNSECURED BUSINESS LOANS IN THE MARKET; - RELIES ON CASE LAWS : UPPER INDIA PUBLISHING HOUSE (P) LTD V. CIT 117 ITR 569 (SC); CORONATION FLOUR MILLS V. ACIT (2010) 188 TAXMAN 25 7 (GUJ) 5.1. ON THE OTHER HAND, THE LEARNED DR SUPPORTED T HE STAND OF THE AUTHORITIES BELOW. SHE FURTHER SUBMITTED THAT THE CIT (A) HAD, IN FACT, ANALYZED THE ISSUE IN DEPTH AND ARRIVED AT A CONCLUS ION THAT THE AO WAS JUSTIFIED IN RESTRICTING THE PAYMENT OF INTEREST ON UNSECURED LOANS AT 14%. IT WAS, THEREFORE, PLEADED THAT AS THERE WAS NO ANY INFIRMITY IN THE FINDINGS OF THE CIT (A), THERE WAS NO NEED FOR THIS BENCH TO INTERVENE AT THIS POINT OF TIME AS CLAIMED BY THE ASSESSEE. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, DULY PERUSED THE RELEVANT CASE RECORDS AND ALSO THE PAPE R BOOK FURNISHED BY THE LEARNED A R DURING THE COURSE OF HEARING WHICH CONT AINED, AMONG OTHERS, DOCUMENTARY EVIDENCES AND COPIES OF CASE LAWS. 6.1. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HA D DURING THE PERIOD UNDER CONSIDERATION, SECURED LOANS OF RS.5.2 3 CRORES AND UNSECURED LOANS TO THE EXTENT OF RS.2.32 CRORES AND THE TURNO VER OF THE ASSESSEE ALSO INCREASED MANIFOLD FROM RS.20.89 CRORES AS ON 31.3. 2005 TO RS.46.8 CRORES AS ON 31.3.2006 WHICH HAD UNDOUBTEDLY RESULTED IN FO R THE ASSESSEE TO AVAIL PAGE 7 OF 12 ITA NO.1284/ BANG/2011 7 LOANS FROM ALL QUARTERS TO MEET ITS BUSINESS REQUIR EMENTS. IT IS ALSO AN UNDENIABLE FACT THAT THERE WERE LOT OF RESTRICTIONS IN AVAILING THE SECURED LOANS FROM THE NATIONALIZED BANKS/FINANCIAL INSTITU TIONS THANKS TO THE RBI GUIDELINES AND SURETY NORMS. 6.2. THE CIT (A) HAD ALSO UNRESERVEDLY ACKNOWLEDGED THAT - 6.4. FROM A REVIEW OF THE ACCOUNTS, I FIND THAT T HE TOTAL BORROWINGS MADE BY THE COMPANY AS ON 31.03.2006 WERE RS.7,56,80,316/- (BEING SECURED LOANS OF RS.5,23,96,694/- FROM BANKS/FINANCIAL INSTITUTIONS AND RS.2,32,83,822/- IN THE FORM OF UNSECURED LOANS). IT IS SEEN FROM THE BALANCE SHEET THAT LOAN FUNDS HAVE INCREASED FROM RS.4,56,90,844/- AS ON 31.3.05 TO RS.7,56,80,316/- AS ON 31.3.06 AND CURRENT ASSETS H AVE CORRESPONDINGLY RISEN FROM RS.4,97,92,988/- TO RS.8,39,83,647/-. SHARE CAPITAL HAS GONE UP FROM RS.24,05,000/- TO RS.74,05,000/- DURING THE YEAR IN QUESTION AND RESERVES AND SURPLUS FROM RS.24,22,802 /- TO RS.51,22,045/-. FROM THESE FIGURES, IT BECOMES CLE AR THAT IT WAS THE LOAN FUNDS THAT HAVE BEEN PRIMARILY USED TO FUND THE CURRENT ASSETS, AND THE APPELLANTS CLA IM THAT INTEREST WAS PAID FOR BUSINESS PURPOSES IS FOUND TO BE TENABLE AND ADMISSIBLE. 6.3. MOREOVER, IT HAS BEEN ACKNOWLEDGED UNIVERS ALLY THAT THERE WERE PLENTY OF LIMITATIONS/RESTRICTIONS IN BORROWING FROM THE BANKS AND FINANCIAL INSTITUTIONS AS THEY WERE OBLIGED TO FOLLO W VARIOUS STATUTORY REGULATIONS LAID DOWN BY THE RBI. FURTHER, COUNTERI NG THE AOS AND CIT(A)S OBSERVATIONS THAT THE INTEREST ON SECURED LOANS WER E LOWER THAN THE UNSECURED LOANS, THE LEARNED A R SUBMITTED THAT IT WAS GENERALLY ACCEPTED TRADE PRACTICE THAT UNSECURED LOANS CARRY HIGHER RAT E OF INTEREST THAN THAT PAGE 8 OF 12 ITA NO.1284/ BANG/2011 8 OF THE SECURED LOANS BECAUSE IN SECURED LOANS THE L ENDER HAD MORE SECURITY AND THE CHANCES OF RECOVERY OF THE PRINCIPAL AMOUNT AND INTEREST ARE HIGHER AND THUS, THE LENDERS WERE OBLIGED TO LEND AT A LES SER RATE OF INTEREST FOR SECURED LOANS. THIS ARGUMENT OF THE LEARNED AR, IN OUR VIEW, CARRIES MORE WEIGHT. THUS, THE MOOT QUESTION NOW IS: WHAT IS T HE REASONABLE COMMERCIAL INTEREST RATE ON UNSECURED BUSINESS LOANS? TO DRIV E HOME HIS POINT, THE LEARNED AR CITED SOME OF THE BANKS WHICH WERE CHARG ING RATE OF INTEREST ON UNSECURED LOANS. THE DETAILS ARE AS UNDER: NAME OF THE BANK RATE OF INTEREST (I) KOTAK MAHINDRA BANK 19.5% [REFER: PAGE 34 OF PAPER BOOK] (II) HSBC BANK 21.0%[REFER: P AGE 37 OF PAPER BOOK] 6.4. IT IS ALSO NOT UNCOMMON TO THE FACT THAT MOST OF THE BANKING INSTITUTIONS ARE CHARGING MORE THAN 18% OF INTEREST ON UNSECURED LOANS WHEN COMPARED TO 14% BEING CHARGED FOR SECURED LOANS BY T HE NATIONALIZED BANKS. 6.5. AT THIS JUNCTURE, LET US TURN OUR ATTENTION T O ANALYZE THE JUDICIAL VIEW ON A SIMILAR ISSUE. (I) SOM DUTT GOEL & SONS V. ITO (2009) 27 DTR (DEL)(TRIB)263: THE BRIEF FACTS OF THE CASE WERE THAT THE ASSESSEE HAD TAKEN CERTAIN LOANS FROM THE PERSONS/ENTITIES WHICH WERE COVERED U/S 40A(2)(B) OF THE ACT AND IT HAD PAID INTEREST @ 18% ON SUCH UNSE CURED LOANS TO THE RELATIVE. HOWEVER, THE AO CAME TO A CONCLUSION THA T, AFTER EXAMINING THE FACTS OF THE ISSUE, THE MARKET RATE OF THE INTEREST ON LOANS AT THE RELEVANT PAGE 9 OF 12 ITA NO.1284/ BANG/2011 9 TIME WAS BETWEEN 11.5% - 12%, THE ASSESSEE BY PAYING INTEREST @ 18% ON THE LOANS TAKEN FROM THE RELATIVE HAD VIOLATED THE PROV ISIONS OF S.40A(2)(B) OF THE ACT AND, ACCORDINGLY, DISALLOWED THE EXCESS INT EREST RATE OF 6% WHICH HAS BEEN RESTRICTED TO 3% BY THE CIT (A). WHEN THE ISSUE TRAVELLED TO THE TRIBUNAL, THE HONBLE BENCH HAD, AFTER TAKING INTO ACCOUNT THE RIVAL SUBMISSIONS, RECORDED ITS FINDINGS THUS .SEC. 40A(2)(B) OF THE ACT PROVIDES THAT IF AN ASSESSEE AVAILED ANY BENEFIT OR SERVICES FROM THE PERSONS/ENTITIES COVERED BY CL. (2) AND SUCH SERVICE S OR BENEFIT IS AVAILED OVER AND ABOVE THE MARKET COST F OR SUCH SERVICES AND BENEFITS THEN THIS EXCESS AMOUNT WOULD NOT BE ALLOWED TO THE ASSESSEE AS DEDUCTION. IN TH E PRESENT CASE, THE ASSESSEE HAS PAID THE INTEREST @ 18 PER CENT ON THE LOANS TAKEN FROM THE PERSONS COVERE D BY THE CL. (B) OF S. 40A(2) OF THE ACT. THE ARGUMENT OF THE ASSESSEE IS THAT AGAINST THESE LOANS IT HAS NOT PRO VIDED ANY SECURITY. IT CAN TAKE LOANS AT ANY POINT OF TIME AND CAN REPAY AT ANY POINT OF TIME. HAD THE LOANS BEEN T AKEN FROM THE BANK OR ANY OTHER FINANCIAL INSTITUTION, IT WAS REQUIRED TO COMPLETE A LOT OF PAPER FORMALITIES AND IT CAN REPAY THE AMOUNT ACCORDING TO THE CONDITIONS ENUMERA TED IN THE AGREEMENT. IT WAS ALSO SUPPOSED TO GIVE SEC URITY FOR THE AMOUNTS. WE ALSO FIND THAT IN THE PAST, IN TEREST WAS PAID @ 24 PER CENT. THIS YEAR ASSESSEE HAS ITSE LF REDUCED THE PAYMENT OF INTEREST TO 18 PER CENT. TAK ING INTO CONSIDERATION THESE FACTS AND THE DIFFICULTIES IN OBTAINING LOAN FROM THE BANK OR THE FINANCIAL INSTI TUTION, IF ASSESSEE HAS PAID A LITTLE HIGHER RATE OF INTERE ST THEN IT WOULD NOT BE CONSIDERED THAT IT WAS PAID IN VIOL ATION OF S.40A(2) OF THE ACT PAGE 10 OF 12 ITA NO.1284 /BANG/2011 10 (II) DCIT V. MANISHA DYG. & PTG. WORKS (P) LTD, SURAT ITA NOS.2579 & 2580/AHD/2009 DATED: 13.5.2011: (I) THE ISSUE, IN BRIEF, WAS THA T PENALTY U/S 271(1)(C) OF THE ACT WAS IMPOSED ON THE ASSESSEE FOR THE AYS 2004-05 & 2 005-06 ON THE BASIS OF DISALLOWANCE OUT OF INTEREST PAYMENT OF RS.10,12, 500/- AND ADDITION OF RS.11.95 LAKHS MADE ON ACCOUNT OF FALL IN GP IN THE ASSESSMENT ORDERS. HOWEVER, THE CIT (A) CANCELLED THE PENALTY BY OBSERVI NG THAT THE DISALLOWANCE OF INTEREST U/S 40A (2) (B) OF THE ACT WAS A TECHNICAL DISALLOWANCE. SINCE THERE WAS NO FURNISHING OF INA CCURATE PARTICULARS OR CONCEALMENT OF INCOME, NO PENALTY CAN BE LEVIED ON T HIS ISSUE. WHEN THE REVENUE TOOK UP THE ISSUE WITH THE TRIBUNAL WITH A REQUEST TO REVERSE THE FINDINGS OF THE CIT (A), THE HONBLE BENCH HAS OBSE RVED AS UNDER: 6. WE NOTICE THAT THE TRIBUNAL IN ITA NO.3600/AHD/2007 & ITA NO.3205/AHD/2007 ASST. YEAR 2002-03 IN THE CASE OF THE ASSESSEE, DELETED TH E ADDITION IN RESPECT OF INTEREST BY OBSERVING AS UNDE R: 6. THE SUBMISSIONS WERE CONSIDERED. IT IS A WELL SETTLED LAW THAT SECTION 40A (2) (B) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST HELD THAT EXPENDITURE WAS EXCESSIVE AND UNREASONABLE AS HELD BY THE HON. SUPREME COURT IN THE CASE OF UPPER INDIA PUBLISHING HOUSE (P) LTD V. CIT 156 ITR 585 (SC), IT IS TRUE THAT SECURED LOAN FROM BANK WAS AVAILABLE AT THE RELEVANT TIME @ 11.25%. IN THE PRESENT CASE, THE ASSESSEE HAS OBTAINED UNSECURED LOAN FROM DIRECTORS AND ITS RELATIVES. THE LOAN WAS TAKEN FOR THE PURPOSE OF BUSINESS, THEREFORE, INTEREST PAID IS ALLOWABLE U/S 36(1)(III) OF THE INCOME- PAGE 11 OF 12 ITA NO.1284 /BANG/2011 11 TAX ACT, 1961. IT IS A WELL KNOWN FACT THAT RATE OF INTEREST @ 18% ON UNSECURED LOAN AT THE RELEVANT ASSESSMENT YEAR WAS FAIR AND REASONABLE. WE, THEREFORE, DELETE THE DISALLOWANCE OF RS.10,12,500/- MADE BY THE AO (II) IN ESSENCE, THE HONBLE BEN CH HAD AFFIRMED THE FINDINGS OF THE EARLIER BENCH THAT THE PROVISIONS OF S. 40 A (2 )(B) OF THE ACT HAVE NO APPLICATION UNLESS IT WAS FIRST HELD THAT THE EXPEN DITURE WAS EXCESSIVE AND UNREASONABLE. 6.6. TAKING INTO ACCOUNT THE FACTS AND CIRCUMSTANC ES OF THE ISSUE AS DISCUSSED IN THE FORE-GOING PARAGRAPHS, IN CONFORMI TY WITH THE FINDINGS OF THE HONBLE BENCHES OF THE TRIBUNALS AND THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF UPPER INDIA PUBLISHING HOUSE ( P) LTD V. CIT CITED SUPRA, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN ARRIVING AT A CONCLUSION THAT THE ASSESSEE HAD V IOLATED THE PROVISIONS OF S.40A (2)(B) OF THE ACT. IN A NUT-SHELL, THIS ISSU E IS DECIDED IN FAVOUR OF THE ASSESSEE. 7. IN THE RESULT , THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF NOVEMBER, 2012 SD/- SD/- (JASON P BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER PAGE 12 OF 12 ITA NO.1284 /BANG/2011 12 COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNE D. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.