ACIT, Faridabad V. M/s Purshottam Lal Gupta, Faridabad

ITA 2656/DEL/2010

• Counselvise Citation: 265620114 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 20-04-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 03-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS BANITA DEVI NAURAM SENIOR
• Assessee Lawyers: K K AGGARWAL
• Keywords: Gross profit estimation; Loose papers; Proportionate interest; Assessment record
• Section: 133A

Judgement Text

BEFORE THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH F, NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.2656/DEL.2010 (ASSESSMENT YEAR : 2007-08) ACIT, CIRCLE II, VS. SHRI PURSHOTTAM LAL GUPTA, FARIDABAD. PROP. M/S. METAL TRADING CO., B 271, NEHRU GROUND, FARIDABAD. (PAN NO.AALPG3424H) (APELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.K. AGGARWAL, CA DEPARTMENT BY : MRS. BANITA DEVI NAURAM, SENIOR DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT (APPEALS), FARIDABAD DATED 26.03.2010 FOR THE ASSES SMENT YEAR 2007-08. THE GROUNDS OF APPEAL TAKEN BY THE REVENUE ARE AS UNDER :- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G THE ADDITION OF RS.40,81,638/ - MADE BY THE ASSESSING O FFICER ON ACCOUNT OF LOW GROSS PROFIT RATE ON THE GROUND OF V ARIOUS DEFICIENCIES IN THE BOOKS OF ACCOUNT AS POINTED OUT BY THE ASSESSING OFFICER WITHOUT SHOWING AS TO HOW THE ASS ESSEE WAS JUSTIFIED IN DECLARING A GROSS PROFIT RATE OF 1.88% AS AGAINST THE PRECEDING YEAR'S GROSS PROFIT RATE OF 2.49% AND WIT HOUT GIVING ANY REASONS AS TO HOW THE ARGUMENTS OF THE ASSESSEE 'S COUNSEL WERE MORE RELIABLE AND ACCEPTABLE VIS-A-VIS THE ARG UMENTS OF THE ASSESSING OFFICER.' ITA NO.2656/DEL/2010 2 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETIN G THE ADDITION OF RS.19,68,266/- MADE BY THE ASSESSING OF FICER ON ACCOUNT OF INTEREST PAID TO HIGHER RATES TO TWO CRE DITORS NAMELY M/ S ALLIED STRIPS LTD. & M/ S SURYA ROSHNI LTD. DI SREGARDING THE FACT THAT THE INTEREST PAID WAS MORE THAN THAT OF THE BUSINESS NEEDS AND THE ASSESSEE HAD FAILED TO JUSTIFY THE PA YMENT OF INTEREST @ 21% INSTEAD OF THE PREVALENT MARKET RATE OF INTEREST DURING THE RELEVANT PERIOD @ 12%.' 3. THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD, DELETE OR AMEND THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF APPEAL. 2. THE RETURN OF INCOME WAS FILED DECLARING INCOME AT RS.84,67,720/- ON 31.10.2007. A SURVEY OPERATION U/S 133A WAS CONDUC TED ON THE BUSINESS PREMISES OF THE ASSESSEE ON 18.01.2007. THE AO HAS RECORDED THAT DURING THE COURSE OF SURVEY, THE FOLLOWING DISCREPANCIES WERE NOTED:- I) ON PHYSICAL VERIFICATION ON 18.01.2007 AT THE T IME OF SURVEY, CASH AMOUNTING TO RS.9,03,422/- WAS FOUND, WHEREAS OPENING CASH BALANCE AS ON 18.01.2007 AS PER CASH B OOK OF THE ASSESSEE WAS RS.53,422.70. II) ON PHYSICAL VERIFICATION ON 18.01.2007 AT THE T IME OF SURVEY, STOCK WEIGHING 832.282 TONS WAS FOUND, WHEREAS STOCK AS ON 18.01.2007 AS PER BOOKS OF THE ACCOUNT OF THE ASSESSEE WAS 830.476 TONS. III) CARBON COPIES OF FOLLOWING FIVE CASH RECEIPTS PURPORTED TO HAVE BEEN ISSUED BY THE ASSESSEE WERE FOUND, SL.NO. DATE AMOUNT RECEIVED IN CASH AMOUNT FROM MILAN ENGG. WORKS ENTERED AMDEL PUR ROAD, JAGADARI. IN CASH BOOK 1. 01.01.2007 20000 NIL 2. 02.01.2007 20000 NIL 3. 03.01.2007 20000 NIL 4. 04.01.2007 20000 NIL ITA NO.2656/DEL/2010 3 5. 05.01.2007 20000 133623 NO CORRESPONDING ENTRY WAS FOUND TO HAVE BEEN MADE IN THE CASH BOOK OF THE ASSESSEE IN RESPECT OF RECEIP T OF CASH AMOUNTING TO RS.20,000/- ON THE DATES MENTION ED ABOVE. IV) BOGUS CASH CREDITS APPEARED IN THE BOOKS OF ACC OUNT, TOTALING TO RS.22,53,563/- WHICH AMOUNT HAS SUBSEQUENTLY BEEN OFFERED FOR TAXATION IN THE RETU RN OF INCOME FOR THE ASTT. YEAR 2007-08. FURTHER, DURING THE COURSE OF SURVEY ASSESSEES CA SH BOOK FROM THE PERIOD 01.04.2006 TO 17.01.2007 AND F IVE LOOSE PAPERS (IN THE SHAPE OF CASH RECEIPTS AS MENTIONED IN PARA 3(III) ABOVE) WERE IMPOUNDED U/S 133A(3)(IA) OF THE I.T. A CT. AS PER IMPOUNDED CASH BOOK, THE CLOSING CASH BALANCE AS ON 17.01.2007 WAS RS.53,422.70. THE GROSS PROFIT RATE OF THE ASSESSEE WAS 1.88% WHI CH AS COME DOWN FROM 2.49% IN THE IMMEDIATELY PRECEDING YEAR. THE AO AL SO NOTED THAT ANOTHER FIRM DOING THE SAME LINE OF BUSINESS, I.E., M/S. THAKKAR STEELS, B-570-71, NEHRU GROUND, FARIDABAD HAS DECLARED THE GROSS PROFIT @ 2 .1% AND THE TURNOVER OF RS.48.51 CRORES. THE ASSESSEES TURNOVER DURING TH E RELEVANT PERIOD WAS RS.64.52 CRORES. THE AO CALLED FOR THE EXPLANATION OF THE ASSESSEE ON THE DISCREPANCIES AND ASSESSEE FILED A REPLY. AFTER CO NSIDERING THE REPLY OF THE ASSESSEE, THE AO REJECTED THE BOOKS OF ACCOUNT OF T HE ASSESSEE AND ALSO THE QUANTUM OF SALES DISCLOSED. AFTER CONSIDERING THE FACTS OF THE CASE, RESULT OF ASSESSEE FOR PAST YEAR AND ALSO TAKING INTO CONSIDE RATION THE GROSS PROFIT DECLARED BY THE OTHER CONCERN OF THE SIMILAR TRADE, THE AO ESTIMATED THE GROSS PROFIT @ 2.49% WHICH THE ASSESSEE HAS SHOWN IN THE IMMEDIATELY PRECEDING YEAR AND MADE THE ADDITION ACCORDINGLY. ITA NO.2656/DEL/2010 4 3. THE ASSESSEE SUBMITTED HIS CONTENTIONS BEFORE TH E CIT (A) WHICH HAS BEEN REPRODUCED IN PARA 6 OF HIS ORDER RUNNING FROM PAGE 7 TO 41 OF CIT(A)S ORDER. THE CIT (A) DECIDED THE ISSUE BY HOLDING AS UNDER :- 7. I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE LD. A.R. AND PERUSED THE ORDER OF ASSESSMENT. I HAVE AL SO GONE THROUGH THE ASSESSMENT RECORDS AS WELL AS THE ORDER -SHEET MAINTAINED THEREIN. I FIND THAT THE APPELLANT WAS C OMPLYING REGULARLY THROUGH HIS COUNSEL AND THE ACCOUNTANT FR OM TIME TO TIME AND ALL THE QUERIES OF THE A.O. WERE DULY MET AND EXPLAINED BY THEM IN A VERY COGENT AND COMPLIANT MA NNER. THE SO-CALLED DISCREPANCIES POINTED OUT BY THE A.O. FRO M TIME TO TIME AND CONFRONTED WITH THE ASSESSEE, HAD BEEN FUL LY ELUCIDATED AND CLARIFIED BY THE ASSESSEE'S COUNSEL AND IN NO WAY THESE CAN BE CONSIDERED TO BE DEFECTS OR DEFICIENCI ES IN THE STRICT TREATMENT OF THE WORDS, WHICH MAY LEAD TO TH E REJECTION OF THE BOOKS OF ACCOUNT U/S 145(3) OF THE INCOME TAX A CT, 1961. AT THE MOST, SUCH DISCREPANCIES MAY BE CALLED MISTA KES OR DIFFERENCES WHICH HAVE THOROUGHLY BEEN THRASHED AND ELUCIDATED BY THE COUNSEL OF THE ASSESSEE DURING TH E COURSE OF ASSESSMENT PROCEEDINGS. THE LD. A.R. IN THE APPEAL PROCEEDINGS HAS REINFORCED THOSE CLARIFICATIONS BY THE SUBMISSION OF VARIOUS DOCUMENTS PRODUCED DURING THE HEARINGS BEFORE THE A.O., WHICH HAD BEEN DULY GONE THROUGH B Y HIM. I HAVE ALSO EXAMINED ALL THOSE REPLIES OF THE ASSESSE E SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ALONGW ITH THE DETAILS, VOUCHERS AND THE CASH BOOK AND OTHER LOOSE PAPERS AVAILABLE ON THE ASSESSMENT RECORDS, WHICH CLEARLY ESTABLISH THAT THE BOOKS OF ACCOUNT AS SUCH CANNOT BE DEEMED TO BE INCOMPLETE OR INCORRECT AS ENVISAGED IN THE PROVISI ONS OF SECTION 145(3) OF THE INCOME TAX ACT, 1961. MOREOVE R, THE BOOKS OF ACCOUNT, VOUCHERS AND OTHER DOCUMENTS HAVE BEEN DULY SUBJECTED TO THE TAX AUDIT BY THE APPELLANT AN D THE A.O. HAS NOT REJECTED THE AUDIT REPORTS IN FORM NO. 3CB AND 3CD DATED 27-08-2007 SUBMITTED U/S 44AB OF THE INCOME TAX AC T, 1961 AS PER RULE 6G OF THE INCOME TAX RULES, 1962 FROM T HE AUDITORS, SATISH C. & CO., C.AS.. I HAVE ALSO ANALY ZED ALL THE DOCUMENTS PERTAINING TO THE AUDITED BALANCE SHEET, P & L ACCOUNT WITH ENTRIES AS ON 31-03-2007 AND MY ANALYS IS TESTIFIES THE AUDITORS' CONCLUSION IN THE FORM NO. 3CB THAT THE BALANCE SHEET AND P & L ACCOUNT GIVE A FAIR AND TRU E STATE OF AFFAIRS OF THE APPELLANT PROPRIETOR. AS THE LD. A.R . HAS POINTED OUT, THE CASE-LAWS RELIED UPON BY THE A.G. IN REJEC TING THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE TOTALLY MISCON CEIVED, ITA NO.2656/DEL/2010 5 UNFOUNDED AND IRRELEVANT. THE A.O. HAS NOT BROUGH T OUT HOW THE BOOKS OF ACCOUNTS WERE UNRELIABLE SO AS TO BE P REJUDICIAL TO THE REVENUE. EVEN THE A.O. HIMSELF HAS RELIED UPON ALL THE FIGURES OF ACCOUNTS OF THE AUDITED VERSION OF THE B OOKS OF ACCOUNTS, EVIDENT FROM HIS EFFORT AT MERELY MAKING AN ESTIMATE OF TURNOVER AT ROUNDING OFF AT RS.65 CRORES WHILE T HE BOOKS OF ACCOUNT CLEARLY GAVE A SPECIFIC AND PARTICULAR AMOU NT OF RS.64,52,23,979/-, AND THUS THE ESTIMATE IS NOT ONL Y A POOR, MEAGER, BUT PURELY AD-HOC AMOUNT. FURTHER, THE A.G. WAS NOT JUSTIFIED TO COMPARE THE BOOK RESULTS OF THE ASSESS EE WITH THAT OF M/S THAKKAR STEELS, PURELY ON THE GROUND THAT THERE WERE LOW PROFITS THIS YEAR COMPARED TO THE EARLIER YEAR OR W ITH THE COMPARABLE GOODS. MOREOVER, AFTER MENTIONING THE RE SULTS OF M/S THAKKAR STEELS REGARDING THE TURNOVER AND THE G P, THE AO. HAS RATHER DEPENDED UPON THE GP RATE OF THE ASSESSE E ITSELF, IN RESORTING TO THE GP RATE OF THE PRECEDING YEAR WHIC H IS AT RS.2.49%. THUS WHEN THE TRADING RESULTS OF THE PREC EDING YEAR ARE ACCEPTED BY THE AO., IT MEANS THAT THE BOOK RES ULTS OF THE ASSESSEE HAVE BEEN ACCEPTED IN THE LAST YEAR AND TH E LAST YEAR'S GP HAS BEEN APPLIED TO THE DETAILS AND PARTICULARS OF SALE AND PURCHASE DECLARED IN THE BOOKS OF ACCOUNT OF THIS Y EAR. THESE FACTS AND HISTORY OF THE PRESENT CASE SUFFICIENTLY DEMONSTRATE THE TACIT APPROVAL OF THE AUTHENTICITY OF THE BOOKS OF ACCOUNT AND VOUCHERS MAINTAINED DURING THE YEAR UNDER CONSI DERATION. THEREFORE, THE AO.'S ACTION IN REJECTING THE BOOKS OF ACCOUNTS IS FOUND TO BE WHOLLY MISPLACED, MIS-APPROPRIATED AND MISCONSTRUED AND TOTALLY UNSUSTAINABLE IN INVOKING THE PROVISIONS OF SECTION 145(3) OF THE INCOME TAX ACT, 1961. 8. IN VIEW OF THE ABOVE DISCUSSION THEN, THE ESTIMA TION OF SALES AT RS.65 CRORES IS ENTIRELY UNJUSTIFIED AND H ENCE UNTENABLE. THE APPELLANT IS ALREADY DISCLOSING A HIGH TURNOVER , AND PROGRESSIVE RESULTS, AND THE AO.'S ESTIMATION OF TU RNOVER IS ONLY A PETTY AND REVENUE-BLIND APPROACH. FURTHER, SINCE THE G.P. RATE IS NEVER CONSTANT AND MINOR FLUCTUATIONS RATHER REF LECT THE GENUINENESS, NOT THE TAILOR-MADE RESULTS. THIS IS S UPPORTED BY THE FACT THAT THE G.P. RATE IN ASSESSMENT YEARS 200 4-05 AND 2003-04 WAS 1.02% AND 1.31% RESPECTIVELY AND COMPAR ED TO THESE YEARS, THIS YEAR'S G.P. RATE OF 1.80% IS HIGH LY IMPROVED AND COMPARABLE WITH HIS OWN PREVIOUS HISTORY. THUS THE AO.'S COMPARISON OF G.P RATE WITH THAT OF ASSESSMENT YEAR 2005-06 IS BUT FALLACIOUS AND UNAPPRECIABLE IN THE TRUE PERSPE CTIVE OF THINGS. THUS THE APPLICATION OF GP RATE AT 2.49% ON SUCH ESTIMATED TURNOVER IS WITHOUT ANY LEGAL AND FACTUAL SANCTION, BEING PURELY ARBITRARY AND CONJECTURAL. THEREFORE, THE ADDITION ITA NO.2656/DEL/2010 6 OF RS.40,81,638/- IN THE GROSS PROFIT HAVE NO LEGS TO STAND UPON AND HENCE IS MERCILESSLY CANCELLED. 4. AFTER GOING THROUGH THE ORDER AND FACTS RECORDED BY THE CIT (A), WE NOTE THAT HE HAS SIMPLY ACCEPTED THE CONTENTION OF THE ASSESSEE WITHOUT GIVING ANY INDEPENDENT FINDINGS OF FACTS AND FOR ANY COGEN T REASONS. CIT (A) HAS RECORDED A GENERAL OBSERVATION IN HIS ORDER THAT TH E ASSESSEE WAS COMPLYING REGULARLY THROUGH HIS COUNSEL/ACCOUNTANT AND ALL TH E QUERIES OF THE AO WERE DULY MET AND EXPLAINED BY THEM IN A VERY COGENT AND COMPLIANT MANNER. IN THIS REGARD, WE HOLD THAT THE CIT (A) HAS APPRECIAT ED THE COOPERATIVE BEHAVIOUR OF THE ASSESSEE DURING THE APPELLANT PROCEEDINGS. HOWEVER, HE HAS SIMPLY ACCEPTED THE REPLY OF THE ASSESSEE TREATING THE SAM E AS COGENT AND COMPLIANT WITHOUT ANY OBJECTIVE ANALYSIS OF THE FACTS. THE D IFFERENCE IN CASH, STOCK AND DISCREPANCY NOTED IN RECORDING THE CASH BOOK DETECT ED DURING THE ACTION U/S 133A MUST HAVE BEEN EXPLAINED BEYOND ANY SMALLEST D OUBT. THE FIVE RECEIPTS FOR CASH IN THE NAME OF MILAN ENGINEERING WORKS FOR WHICH ONLY THE CARBON COPIES WERE FOUND DURING THE SURVEY OPERATION CANNO T BE SIMPLY EXPLAINED BY STATING THAT THE ACCOUNTANT INADVERTENTLY MADE SUCH NORMAL MISTAKES WHILE PREPARING THE BOOKS OF ACCOUNT. THESE WERE FIVE RE CEIPTS OF WHICH ONLY THE CARBON COPIES WERE FOUND SHOWING THE CASH RECEIVED FROM MILAN ENGINEERING WORKS, JAGADHARI, HARYANA FOR FIVE CONSECUTIVE DAYS . WHILE IN THE CASH BOOK A SINGLE ENTRY OF RS.1,33,623/- HAS BEEN MADE ON 5. 1.2007. WHO WAS THE ACCOUNTANT AND UNDER WHOSE INSTRUCTIONS SUCH RECEIP TS WERE PREPARED. WHAT WAS THE PURPOSE FOR PREPARING SUCH RECEIPTS? HOW S UCH SPECIFIC AMOUNT WAS WRITTEN IN A SPECIFIC NAME ON FIVE CONSECUTIVE DAYS . WHETHER SUCH MISTAKES ITA NO.2656/DEL/2010 7 WERE ALSO MADE IN PAST. WHETHER ASSESSEE IS INTROD UCING THE CASH BY SPLITTING THE SAME. ALL THESE FACTS ARE REQUIRED TO BE EXPLA INED BY THE ASSESSEE BEYOND ANY DOUBT TO EXPLAIN THE GENUINENESS OF THE CASH BO OK. SIMILARLY, THE CASH FOUND DURING THE SURVEY OF RS.9,03,422/- WHILE THE OPENING CASH BALANCE WAS RS.53,422.70 ALSO SHOWS THAT THE BOOKS OF ACCOUNT W ERE NOT REFLECTING THE TRUE AFFAIRS OF THE ASSESSEES BUSINESS. THE CIT (A) HA S COMPLETELY PLACED RELIANCE ON THE AUDITORS REPORT FOR ACCURACY OF THE ACCOUNT S WHICH IS ALSO NOT DESIRABLE. MOST OF THE ACCOUNTS WHICH ARE INVESTIGATED BY THE REVENUE AUTHORITIES FOR TAX EVASION ARE AUDITED. IN MANY OF SUCH CASES, INVEST IGATIONS HAVE DETECTED TAX EVASION IN SUCH AUDITED ACCOUNTS. SIMILARLY, THE C IT (A)S OBSERVATIONS THAT AO HAS HIMSELF RELIED ON THE FIGURES OF THE AUDITED VERSION OF BOOKS OF ACCOUNT AND ESTIMATING THE TURNOVER IN THE ROUND UP FIGURE IS ALSO NOT A BASIS FOR ACCEPTING THE BOOK RESULTS OF ASSESSEE. CIT (A)S OBSERVATION THAT SUCH ESTIMATE IS AS A POOR, MEAGER AND PURELY ADHOC IS A LSO NOT JUSTIFIED. SIMILARLY, THE CIT (A)S OBSERVATION THAT THE COMPARISON WITH THE THAKKAR STEELS REGARDING LOW PROFIT IN THE YEAR AND THEN DEPENDING ON THE G.P. RATE OF THE ASSESSEE IN THE PAST YEAR IS ALSO NOT JUSTIFIED. C OMPARISON OF RESULTS OF SAME LINE OF TRADE AT THE SAME PLACE FOR SAME YEAR AND H AVING COMPARABLE TURNOVER IS A GOOD BASIS. CIT(A)S OBSERVATION THAT THE AO HAS ACCEPTED THE BOOK RESULTS OF THE ASSESSEE IN THE LAST YEAR AND THE HISTORY OF THE CASE SUFFICIENTLY DEMONSTRATE THE TACIT APPROVAL OF THE BOOKS OF ACCO UNTS AND VOUCHERS IS ALSO UNJUSTIFIED. THE AO IS WELL IN AUTHORITY TO LOOK I NTO THE BOOK RESULTS AND IN THIS YEAR, THE RESULTS HAVE BEEN POOR IN COMPARISON OF L AST YEAR. SINCE THE CIT (A) ITA NO.2656/DEL/2010 8 HAS NOT PASSED A SPEAKING ORDER FOR REASONS FOR FAL L IN G.P. RATE, THEREFORE, WE RESTORE THIS ISSUE TO THE FILE OF THE CIT (A) FOR P ASSING A SPEAKING ORDER. 5. IN THE GROUND NO.2, THE ISSUE INVOLVED IS DELETI NG THE ADDITION OF RS.19,68,266/- ON ACCOUNT OF INTEREST PAID TO M/S. ALLIED STRIPS LIMITED AND M/S. SURYA ROSHNI LIMITED. 6. THE RATE OF INTEREST CHARGED WAS 21%. THE AO RE STRICTED THE SAME TO 12% ON THE BASIS OF PREVALENT MARKET RATE DURING TH E PERIOD, THE CIT (A) HAS DELETED THE ADDITION BY HOLDING AS UNDER :- 11. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. AR. AND PERUSED THE ORDER OF ASSESSMENT. I HAVE ALS O GONE THROUGH THE BALANCE SHEET OF THE ASSESSEE AND THE A MOUNTS OF THE CREDITORS AND THE RATE OF INTEREST ALLOWED TO T HE CREDITORS. FIRST OF ALL, IT IS OBSERVED THAT THE AO CANNOT GO INTO THE FOOTSTEPS OF THE PRUDENT BUSINESSMAN IN ASCERTAININ G THE BUSINESS NEEDS OF THE ASSESSEE AND HIS RELIANCE UPO N THE CASE OF THE HON'BLE KERALA HIGH COURT IS, THEREFORE, WHOLLY MISPLACED, AS IN THIS CASE, THE GENERAL PRINCIPLE LAID WAS THA T IT WAS THE DUTY OF THE AO TO ASSESS EXPENDITURE BY BEST JUDGEM ENT ASSESSMENT. THE MUDDLED AND MISCONCEIVED MIND OF TH E AO IS FURTHER REVEALED BY HIS ATTEMPT AT APPLYING THE SO- CALLED PREVALENT MARKET RATE OF 12% P.A., WHICH HAS NO SUP PORTIVE MATERIAL ON RECORD AND THEN ARBITRARILY DISALLOWING THE PROPORTIONATE INTEREST AT THAT RATE. 12. THE LD. AR. HAS FULL-THROATEDLY EXPLAINED THE P ROVISIONS OF SECTION 36(1)(III) OF THE INCOME TAX ACT, 1961, WHICH RELATE TO THE BORROWED FUNDS/UNSECURED LOANS WHILE THE CRE DITORS ON WHICH THE AO HAS DISALLOWED THE INTEREST ARE THE PA RTIES INVOLVING BUSINESS TRANSACTIONS AND, THEREFORE, IN TREATING THESE LIABILITIES ON PARITY WITH THE LOANS OR BORROWED FU NDS, CLEARLY THEN THE AO IS ENTIRELY UNJUSTIFIED AND THE SUCH DI SALLOWANCE SO MADE IS FACTUALLY AND LEGALLY INVALID. THUS THE WH OLE DISALLOWANCE OF INTEREST OF RS.19,68,266/- BEING UN TENABLE ON FACTS AND LAW, STANDS DELETED. ITA NO.2656/DEL/2010 9 7. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. IT I S AN ADMITTED FACT THAT BOTH THE PARTIES TO WHOM THE INTEREST WAS PAID WERE NOT COVERED BY THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME-TAX A CT. THESE PAYMENTS OF INTEREST WERE MADE AGAINST THE DEBIT NOTE FOR LATE PAYMENTS AGAINST MATERIAL SUPPLIED TO THE ASSESSEE BY THESE PARTIES. THE GEN UINENESS OF PAYMENT IS NOT DOUBTED. THEREFORE, THE EXPENDITURE WAS FOR THE PU RPOSE OF BUSINESS. WITH REGARD TO THE EXCESSIVENESS OF THE PAYMENT, WE FIND THAT THESE PAYMENTS WERE NOT MADE TO THE PERSONS WHO ARE SPECIFIED IN SECTIO N 40A(2)(B). IN OUR CONSIDERED VIEW, THE ASSESSEE WAS COMPELLED TO PAY THE INTEREST WHICH WAS FOR GENUINE BUSINESS NEEDS, THEREFORE, WE SUSTAIN THE O RDER OF THE CIT (A) ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THE 26 TH DAY OF AUGUST, 2011. SD/- SD/- (R.P. TOLANI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : THE 26 TH DAY OF AUGUST, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A), FARIDABAD. 5.CIT(ITAT), NEW DELHI. AR/ITAT