LALITA KUMARI, ANTA DISTRICT BARAN V. COMMISSIONER OF INCOME TAX (APPEALS), NFAC, DELHI

ITA 217/JPR/2023

AI Insights

The case involves Lalita Kumari, the appellant, who contested the disallowance of Rs. 1,52,850 on interest paid to relatives at an 18% rate, which was deemed excessive compared to the prevailing market rate of 12%. The interest was disallowed by the Assessing Officer (AO) under section 40A(2)(a) of the Income Tax Act, which was upheld by the CIT(A). The Tribunal, however, found that the interest payments were made from interest-free funds and were used for business purposes, thus not violating the provisions of the Act. Additionally, it was determined that one of the payees was not a relative under the legal definition, making the application of section 40A(2)(a) incorrect.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 132328 (ITAT-JAIPUR)
• Duration Of Justice: 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-06-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 04-07-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 05-04-2023
• Other Referred Cases: CIT vs Jugal Kishore Dangayach, CIT vs HDFC Bank LTD., ACIT vs Ram Kishan Verma
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Commercial expediency; TDS
• Section: 143(3); 143(2)

Judgement Text

vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”SMC” JAIPUR Mk0 ,l- lhrky{eh] U;kf;d lnL; ,oa Jh jkBksM deys'k t;UrHkkbZ] ys[kk lnL; ds le{k BEFORE: DR. S. SEETHALAKSHMI, JM & SHRI RATHOD KAMLESH JAYANTBHAI, AM vk;dj vihy la-@ ITA. No. 217/JP/2023 fu/kZkj.k o"kZ@Assessment Years : 2016-17 Lalita Kumari Prem Prakash & Co. Prem Prakash & Co., Anta, Rajasthan cuke Vs. CIT Appeals, NFAC, Delhi LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: ADHPK 9191 L vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Priyank Kabra (C.A.) jktLo dh vksj ls@ Revenue by : Smt Monisha Chaudhary (Addl. CIT) a lquokbZ dh rkjh[k@ Date of Hearing : 23/05/2023 mn?kks"k.kk dh rkjh[k@Date of Pronouncement :14/06/2023 vkns'k@ ORDER PER: RATHOD KAMLESH JAYANTBHAI, AM This appeal is filed by assessee and is arising out of the order of the National Faceless Appeal Centre, Delhi dated 06/02/2023 [here in after (NFAC)] for assessment year 2016-17, which in turn arise from the order passed u/s 143(3) of the Income Tax Act by ITO Ward, Baran dated 26.11.2016. 2. In this appeal, the assessee has raised following grounds: - “1. That the Ld. AO and the Ld. CIT Appeals have both erred in baselessly ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 2 disallowing Rs. 152850 out of interest paid without considering the facts and circumstances of the case.” 3. Succinctly, the fact as culled out from the records is that return declaring an income of Rs. 3,58,970/- was filed by the assessee on 03.10.2016 and also claimed exempt income from agriculture amounting to Rs. 2,36,733/-. This case was picked up for complete scrutiny under CASS. Notice u/s 143(2) was issued on 22.06.2017 fixing the case for 06/07/2017, which was duly served upon the assessee and the same was complied with by the asssessee by furnishing copy of ITR-V along with Audit report u/s 44AB of the I.T. Act., 1961 in Form No. 3CB and 3CD and its enclosures, which placed on file. In compliance the notices ld. A/R of the assessee appeared and produced Books of accounts, supporting bills and vouchers. Written replies filed on the points raised during assessment proceedings along with details / clarifications sought are placed on record. 3.1 During the assessment proceeding on verification of books of accounts and vouchers the ld. AO noticed that the assessee has paid interest to the related partly as per provision of section 40A(2)(b) paid interest at the rate of 18 % which is higher then the ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 3 prevailing market rate. The ld. AO considered that the assessee has paid the interest at higher rate and therefore, disallowed 6 % of the interest amounting to Rs. 1,52,850/-. The relevant finding of the ld. AO is reiterated here in below:- “1. During the course of verification of books & vouchers, it is noticed that the assessee has been paid interest to the following persons whom were shown as sundry creditors in Balance Sheet and close relative of the assessee covered u/s 40A(2)(b). S. No. Name of the person Amount of Loan Amount of Intt. Rate of Intt. Relation with the assessee 1 2 3 4 4 4 1 Naveen Kumar Khatri 1178507 212131 18% Son of Brother in law 2 Praveen Kumar Khatri 1369013 246422 18% Son of the assessee On perusal of the above chart, it is perused that the assessee had given interest @18% P.A. to the person covered u/s 40A(2)(b) of the Income Tax Act, 1961, which is more higher than the prevailing market rate i.e. maximum 12% P.A. Further, the assessee had made FDR's of Rs. 1.45.59.170/- (more than the capital of the assessee i.e. of Rs. 1,17,30,505.67 as shown in the balance sheet as on 31/03/2016 )with the Banks from where the assessee had received interest @ 7-8% only. Therefore, the assessee was asked as to why the interest @ 18% was given to the above mentioned two persons. The assessee furnished her reply on this issue. I have carefully considered the reply of the assessee but not found the same acceptable. Considering overall facts of the case, interest paid to above mentioned both the relatives, is restricted to 12% P.A.. Total of such interest paid to relatives @18% is Rs.4,58,553/-. The excess interest paid to relatives by 6% amounting to Rs.1,52,850/-( 458553-305703) is disallowed U/s 40A(2)(a) and added to total income of the assessee.” ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 4 4. Aggrieved from the order of the assessing officer u/s 143(3) of IT. Act, assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds of the appeal so raised the relevant finding of the ld. CIT(A) is reiterated here in below : “5.1 I have carefully perused the impugned order of assessment and the ground wise submission made by the assessee. 5.2 Ground no. 1: 5.2.1 Para 1 (Page no. 2) of the impugned order concerns itself with the ground no. 1. The AO has observed that loan of Rs. 11,78,5071- taken from Naveen Kumar Khatri and loan of Rs. 13,69,013/- are loans taken from close relative as per the meaning assigned to a related person under section 40A (2)(b). He further observes that these loans were taken at 18% rate of interest which is more than fare market rate for the loan. However, the AO has not disallowed the excessive interest paid to these two persons u/s 40A (2)(b). It is pertinent to note that AO has highlighted that during the year under consideration the capital of the assessee was Rs. 1,17,30,505/- and as against the said amount of capital the assessee had term deposit (FDR) of Rs. 1,45,59,170/- meaning there by that part of the investment in FDR had its source in borrowed capital. In other words it cannot be said that borrowing from these two persons was for the purpose of Business and Profession of the assessee. Such expenditure are not allowable u/s 36(1)(iii). Careful perusal of the assessment order clearly indicates that AO has highlighted both the propositions for disallowance but has not specifically mentioned under which section the disallowance of interest has been made. In his submission the assessee has presumed that this disallowance has been made u/s 40A (2)(b). It is reiterated that assessee had completely ignored the observation of the AO in respect of investment of the assessee in FDR which is much above the capital of the assessee. The excess of fixed deposit over the capital is Rs. 28,28,665/-. While the total borrowing from these two persons is only Rs. 25,47,520/ if we merely considered income under head business and profession the entire interest paid to these two persons amounting to Rs. 4.58,553/- will not qualify to be eligible for deduction u/s 36(1)(ii). However, to be fair the AO has allowed so much expenditure on interest which has been earned by the assessee on the FDR. In other words so much of expenditure which is 6% of the interest paid to these two persons is allowable expenditure u/s 57 of Income Tax Act. 5.2.2 In the terms of the above discussion it is observed that though the impugned order suffers from not being speaking about the rationale for the disallowance, the amount disallowed is just and proper. With these remarks addition of Rs. 1,52,850/- is confirmed. The ground no. 1 is therefore confirmed.” ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 5 5. As the assessee not received any favour from the appeal filed before ld. NFAC/ CIT(A). The present appeal filed against the said order of the ld. NFAC dated 06.02.2023 before this tribunal on the grounds as reiterated in para 2 above. To support the grounds so raised the ld. AR appearing on behalf of the assessee has placed their written submission which is extracted in below; “ With utmost regards your honour, this is an appeal filed by the assessee against the order of the CIT(Appeals), NFAC dated 06.02.2023 for AY 2016- 17 sustaining the disallowance of interest expense of Rs.152850 done by the Ld. AO. Copies of both the orders, i.e. order of the Ld. CIT (Appeals) and the Ld. AO form part of paper book at page 18 to 27 and 28 to 31 respectively. The assessee seeks justice on the following ground of appeal: 1.) That the Ld. AO and the Ld. CIT Appeals have both erred in baselessly disallowing Rs.152850 out of interest paid without considering the facts and circumstances of the case. BRIEF FACTS OF THE CASE 1.) As mentioned in the Assessment Order, as attached at paper book page no.29, the ld AO observed that the assessee has paid interest @ 18% to the following: S.No. Name of the person Amount of Interest Relation with the assessee 1 Naveen Kumar Khatri 212131 Son of brother in law 2 Praveen Kumar Khatri 246422 Son of the assessee Total 458553 2.) The ld. AO also observed that these persons were close relatives of the assessee covered u/s 40A(2)(b). However, such observation was made without referring to the definition of “relative” as per section 2(41) as per which a son of brother-in-law is not a relative. 3.) The AO further observed that the assessee had given interest @ 18% P.A. to the person covered u/s 40A(2)(b) of the Income Tax Act, 1961, which is more higher than the prevailing market rate i.e. maximum 12% ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 6 P.A. but did not provide any basis for this rate of interest to be the maximum. The assessee though provided the bases of 18% market rate in her submission to the CIT (Appeals) which was totally ignored in the appellate order. 4.) The ld AO mentioned clearly that: a. interest paid to above mentioned both the relatives, is restricted to 12% P.A.. b. Total of such interest paid to relatives @18% is Rs.4,58,553/-. c. The excess interest paid to relatives by 6% amounting to Rs.1,52,850/- (458553 - 305703) is disallowed U/s 40A(2)(a) and added to total income of the assessee. (The fact of such disallowance being made u/s 40A(2)(a) is mentioned at paper book pg.no.29 - pg no. 2 of the assessment order in the second last line below the table at para number 1.) d. The AO also mentioned a fact, which though not made basis of addition, as understood by the assessee, but highlighted in the assessment order, which was that the assessee had made FDR’s of Rs. 1,45,59,170/- (more than the capital of the assessee i.e. of Rs. 1,17,30,505.67 as shown in the balance sheet as on 31/03/2016)with the Banks from where the assessee had received interest @ 7-8% only. This observation of the ld. AOas elaborated by the Ld. CIT (Appeals) as below: i.) It is pertinent to note that AO has highlighted that during the year under consideration the capital of the assessee was Rs. 1,17,30,505/- and as against the said amount of capital the assessee had term deposit (FDR) of Rs. 1,45,59,170/- meaning there by that part of the investment in FDR had its source in borrowed capital. ii.) Though the impugned order suffers from not being speaking about the rationale for the disallowance, the amount disallowed is just and proper. With these remarks addition of Rs.1,52,850/- is confirmed. (However, while making such observation the ld. AO as well as the ld CIT (Appeals) misread the Balance Sheet by not referring to the other interest- free funds available with the assessee the calculation of which is provided at paper book pg no. 5 at para 1.1.1.) Aggrieved by the above order of the ld CIT (Appeals), the assessee is in appeal before your honour against the unjust addition to income by way of disallowance of the genuine interest expense. Written Submissions before your honour: ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 7 Ground No.1 That the Ld. AO and the Ld. CIT Appeals have both erred in baselessly disallowing Rs.152850 out of interest paid without considering the facts and circumstances of the case. Submissions before your honour: 1.1) Interest-free fundsexceeded the amount of balance in FDs as on 31.03.2016, thus interest disallowance is not justified 1.1.1) Calculation of Interest-Free funds: Particulars Amount in Rs. Capital 1,17,30,505.67 Loan Liability 1,63,29,715.51 Sundry Creditors 41,44,093.56 Payable to Farmers 1,68,20,490.00 Total Funds available [A] 4,90,24,804.74 Less: Interest Bearing Funds [B] a.) Bank ODs 1,28,71,091.51 b.) Due to Naveen Kumar Khatri 14,25,638.00 c.) Due to Praveen Kumar Khatri 16,15,435.00 (-) 1,59,12,164.51 Interest Free Funds available with the assessee [A] – [B] 3,31,12,640.23 The amount of investment in FD as on 31.03.2016 of Rs.1,45,59,170.00 was way below the amount of interest-free funds of Rs.3,31,12,640.23 as calculated above. Values in the table as above are verifiable from the relevant parts of Balance Sheet, Profit and Loss A/c & Schedules annexed at pg no. 32-36 of the paper book. Thus, no amount was required to be invested from the interest bearing funds. 1.1.2) Excess of interest income over interest expenditure is a clear indicator of the fact that there were more of interest-free funds than interest-bearing funds. ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 8 There is net interest income of Rs.607088.92 credited to Profit and Loss Account and Interest Account annexed herewith at page no. 33 & 36 of the paper book. The detail of the interest account is as below: Interest Expense Amount Interest Income Amount SBBJ OD 39325.08 IT Refund 30027.00 BOB OD 104206.00 FD SBBJ 356829.00 ICICI OD 2364.00 FD ICICI 371692.00 Praveen Kr Khatri 246422.00 FD BOB 452989.00 Naveen Kr Khatri 212131.00 Total Interest Exp 604448.08 Total Interest Inc. 1211537.00 Excess of Interest Expense over Interest Income 607088.92 If there is more of income than expense in the interest accountit shows that the assessee has more interest free funds (interest-free funds > interest-bearing funds) because if the position would have been the inverse then there would have been more of interest expense over income. In general, except for a case where rate of interest charged by someone is more than the rate of interest paid: If Then Interest Income > Interest Expense Interest-free funds > Interest-bearing funds Interest Income < Interest Expense Interest-free funds < Interest-bearing funds In the instant case, the interest rate on income is only 7-8% as mentioned by the ld.AO while that paid as expense is as high as 18% and then too the net figure is excess of income over expenditure. Thus, it is amply clear that the Interest-free funds are more than the Interest-bearing funds. ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 9 1.1.3) FDs made out of funds (interest free) of business were again used to avail overdraft facility from banks which are used for business purpose As on 31.03.2016: Names of Banks FDs Overdraft on FDs Percentage of ODs over FDs SBBJ 44,28,680.00 37,87,040.51 85.51% ICICI 45,49,338.00 42,00,000.00 92.32% BOB 55,81,152.00 48,84,051.00 87.51% Total 1,45,59,170.00 1,28,71,091.51 88.41% Net funds (1,45,59,170.00 less 1,28,71,091.51) = Rs.16,88,078.49 effectively employed in FDs. Values in the table as above are verifiable from Balance Sheet & Schedule annexed at pg no. 32 & 34 of the paper book. The excess funds are used to earn extra interest by the assessee- appellant and whenever needed overdraft facility is taken and funds again used for business. The income from investments/FDs is also consistently declared under the head - Income from Business/Profession which proves that intention of the assessee to use the said funds as business investment only. Thus, commercial expediency is clear from the fact that the funds are treated as business investments and are used for business of the assessee. Thus, the following may be understood from the above: - FDs were made out of interest free funds available with the assessee. - There was only 1,45,59,170.00 less 1,28,71,091.51 = Rs.16,88,078.49 fund effectively employed in FDs as on 31.03.2016 while the capital was Rs.1,17,30,505.67. - FDs were made out of the funds generated from business and then re-used for generating funds for business, thus FDs are a business investment and not personal investment as also the income from them is included under the head Income from Business/Profession. Also the ld.AO has nowhere found to the effect that there was any nexus between the interest bearing funds with the investment made in FDs, nor there was any finding in respect of the interest bearing-funds being not used for the purposes of business. Thus, quoting section 57 (applicable to Income from Other Sources) is not lawful as done by the ld. CIT (Appeals) in para ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 10 5.2.1 at page number 9 of the appeal order in the last sentence, when the whole of the interest from FDs after deducting interest expenses been declared as business income (more so when the funds were utilized for business). - When the funds relate to business, the interest earned and paid relates to business, then baseslessly disallowing some part of interest lacks legal footing. 1.1.4) Assessee-appellant places reliance on the following decided cases: A.] CIT vs Jugal Kishore Dangayach (pronounced by Rajasthan High Court in IT Appeal No.101 of 2011) reported at [2014] 265 CTR 215 (RAJ) (text of the judgement annexed at paper book pg no. 37-42) At para12 of the judgement, while referring to the capital, trade credits/creditors and advances, mentioned that when the interest free funds of high magnitude were available the AO was not justified in disallowing interest. “12. We have considered the arguments advanced by the learned counsel for the Revenue and in our view this is also a finding of fact as recorded by the Tribunal as well as CIT(A). It is not disputed that the assessee had an opening capital of Rs. 1.42 crores at the beginning of the year and Rs. 1.88 crores at the end of the year. It is also an admitted fact that the assessee had trade credits to the extent of Rs. 1.57 crores on which no interest was being paid. It is also an admitted fact that the assessee had received more than Rs. 60 lacs as advance from the customers on which no interest was paid. Therefore, when to this magnitude on which no interest was payable, the AO was not justified in disallowing interest.” In the instant case also, before your honour, there is sufficient interest-free fund available with the assessee amounting to Rs.3,31,12,640.23 (against balance in FDs amounting to Rs.1,45,59,170.00) as per Computation of interest-free funds submitted at para - 1.1.1 in the current submission before your honour. The honourable judges, in Jugal Kishore Dangayach (supra), have also referred to some of the authorities on the subject in the following paragraphs of their judgement, some of which are herewith submitted as below: ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 11 “14. We may only refer to some of the authorities on this subject, which have come to the conclusion that once the assessee proved that it was for business consideration and as a measure of commercial expediency then interest need not be charged or cannot be disallowed. 15. The Hon'ble apex Court in the case of S.A. Builder's Ltd. us. CIT(A) & Anr. (supra) after considering what is commercial expediency observed as under: "The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." 15.1 The Hon'ble apex Court further observed in the above judgment as under: "To consider whether one should allow deduction under s. 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the Courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest-free loan to its sister-concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits." 16. The Delhi High Court in the case of CIT us. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) has held that once it is established that there was nexus between the expenditure and the purpose of the business, Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 12 assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.” B.] CIT vs. HDFC Bank LTD. (pronounced by Bombay High Court in IT Appeal No.330 of 2012) reported at (2016) 284 CTR 0409 (Bom) (text of the judgement annexed at paper book pg no. 43-45) The aforesaid Bombay High Court judgement stated at para 5 referring to its own judgement in the case of Reliance Utilities and Power Ltd., reported at (2009) 313 ITR 340 (Bom) as below: “5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non- interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee.” C.] ACIT v/s Ram KishanVerma (2012) 143 TTJ 1 (Jp) (text of the judgement annexed at paper book pg no. 46-57) “10.4 ... There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest bearing funds are more. Reliance is placed on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon’ble Delhi High Court in the case of CIT vs. BhartiTeleventure Ltd. (2011) 51 DTR (Del) 98.” 1.2) Market rate applied by the ld.AO without any guiding factor while the ld. CIT (Appeals) ignored the market rate chart even when the assessee submitted the list of finance companies/banks that are providing loans at interest rate equal to or more than 18% ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 13 The assessee submitted before the ld. CIT(Appeals) annexed at paper book pg no.58-66 (which may please be considered as part of submission before your honour as well) various advertisements of finance companies providing personal loans at rate of interest 18% or more from the websites – www.bankbazaar.com, www.pasabazaar.com. These finance providers included Yes Bank Personal Loan, Bajaj Finserv, IIFL Finance, Tata Capital Finance, IDFC First Bank Business Loan, RBL Bank, HDB Financial Services Ltd., etc. (paper book page no.59-61) Thus, the ld. AO mentioning that the assessee paid more higher than the prevailing market rate i.e. maximum 12% P.A is baseless while the assessee has provided a long list of finance providers in the open market who even charge processing fees over and above the rate of 18%. Thus, the rate of interest paid by the assessee is genuine as per prevailing market rate and well supported by evidences. 1.3) Disallowance u/s 40A(2)(a) Without prejudice to the above submissions, the assessee herewith submits that the disallowance u/s 40A(2)(a) is not applicable to persons not covered u/s 40A(2)(b). The persons covered,when the assessee is an individual as in the present case, under section 40A(2)(b) of Income Tax Act, 1961 are as follows: i. where the assessee is an individual any relative of the assessee. Section 2(41) of the Income Tax Act, 1961 defines the term relative as follows:- “relative”, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual; Thus, the son of brother-in-law is not a relative as per section 2(41). Therefore, the disallowance u/s 40A(2)(a) made by the ld. AO is clearly not on legal footing and needs to be deleted. As far as the observation of the CIT (Appeals) is concerned that – ‘Careful perusal of the assessment order clearly indicates that AO has highlighted both the propositions for disallowance but has not specifically mentioned under which section the disallowance of interest has been made.’ - we would like to state that is is clearly ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 14 mentioned by the ld AO – ‘The excess interest paid to relatives by 6% amounting to Rs.1,52,850/- (458553 - 305703) is disallowed U/s 40A(2)(a) and added to total income of the assessee.’ on paper book pg.no.29 - pg no. 2 of the assessment order in the second last line below the table at para number 1. Thus, it is clear that the disallowance was made u/s 40A(2)(a) and due to the discussion as above the same needs to be deleted to the extent it is not applicable. Thus, on the basis of above submissions, it is clear that the assessee had sufficient funds for investment in FDs, the market rate of interest on personal loans was not less than what is paid by the assessee and without prejudice to what is stated above, interest paid to at least one of the payees is without legal force of section 40A(2)(a). Prayer: On the basis of the above discussions, it is prayed that following reliefs to the assessee may please be granted: - quashing the orders of ld. AO and the ld. CIT (Appeals) being not on legal footing, - deleting, or without prejudice reducing, the disallowance of interest as considered fit by your honour in the facts and circumstances of the case and the legal precedents, - any other relief as your honour may deem fit. The assessee shall remain obliged for the same. ” 5.1 In addition the ld. AR of the assessee has also relied upon the following judicial decision to support the contentions so raised:- • CIT vs. Jugal Kishore Dangayach (2014)265 CTR 215 ( Raj. H.C.) • CIT vs. HDFC Bank Ltd. (2016) 284 CTR 0409 ( Mom H.C.) • ACIT vs. Shri Ram Kishan Verma (2012) 143 TTJ 1 (Jaipur Trib.) ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 15 6. The ld DR is heard who relied on the findings of the lower authorities and more particularly advanced the similar contentions as stated in the order of the ld. AO & NFAC. 7. We have heard the rival contentions and perused the material placed on record. The bench noted from the order of the ld. CIT(A)/NFAC in para 5.2.1 “that during the year under consideration the AO observed that loan of Rs.11,78,507/- taken from Naveen Kumar Khatri and loan of Rs. 13,69,013/- are loans taken from close relative as per the meaning assigned to a related person under section 40A(2)(b). He further observed that these loans were taken at 18% rate of interest which is more than faire market rate for the loan. However, the AO has disallowed the excessive interest paid to these two persons u/s 40A(2)(b). We note that out of two payee one is not related party as per provision of section 40A(2)(b) of the Act. We also note from the records that both the payees have been paid interest after deducting the TDS as per provision of the Act. The bench also noted from the order of the lower authority that the funds so borrowed by the assessee are not used for the purpose other than the business of the assessee. ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 16 The condition as prescribed under the law is reiterated here in below: Other deductions. 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— xxxxxxx (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Thus, the condition precedent to allow the interest is that the money so paid as interest has been used for the purpose of the business of the assessee and we see no finding in the order of the lower authorities that the assessee’s borrowing were used for the purpose other than business of the assessee. We also note that out of the two payee one is not relative of the assessee. We also note that both the payees have been paid interest after making the statutory deduction at source and the funds so borrowed were not proved to be for the purpose of non-business and therefore, disallowance so made by the ld. AO and confirmed by the ld. CIT(A) is vacated based on the above observations and provision of the law. This view taken by the bench is supported from the ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 17 order of the jurisdictional high court in the case of Jugal Kishore Dangayach 265 CTR 215 (Raj) wherein the court held that once it is established that there was nexus between the expenditure and purpose of the business(which need not necessarily be the business of the assessee itself) the revenue cannot justify claim to put in the arm chair of the businessmen and no businessmen can be compelled to maximize his profit. The bench also noted that the observations of the lower authorities without referring to the definition of ‘relative’ as per section 2(41) as per which a son of brother-in’ law is not a relative. It is clear that the disallowance was made u/s 40A(2)(a) and based on the discussion that interest has been paid out of the business requirement of the assessee the disallowance made needs to be deleted. Based on these stated facts we see no reason to confirm the disallowance and therefore, vacate the same. In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 14/06/2023 Sd/- Sd/- ¼ Mk0 ,l- lhrky{eh ½ ¼ jkBksM deys'k t;UrHkkbZ ½ (Dr. S. Seethalakshmi) (Rathod Kamlesh Jayantbhai) U;kf;d lnL;@Judcial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 14/06/2023 *Ganesh Kr. ITA No. 217/JP/2023 Lalita Kumari vs. CIT(A) 18 vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. vihykFkhZ@The Appellant- Lalita Kumari, Anta 2. izR;FkhZ@ The Respondent- CIT Appeals, NFAC, Delhi 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur. 6. xkMZ QkbZy@ Guard File { ITA No. 217/JP/2023} vkns'kkuqlkj@ By order lgk;d iathdkj@Asst. Registrar