Shri Sureshchandra Mohanlal Shah, Gandhinagar V. The ACIT.,GNR Circle, Gandhinagar

ITA 3164/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6270 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 26-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND
• Assessee Lawyers: S M SHAH
• Keywords: Commercial expediency
• Section: 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A BEFORE SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER I.T.A. NO.3164 / AHD/2009 (ASSESSMENT YEAR 2006-07) SURESHCHANDRA M. SHAH, 555/2, SECTOR 21, GANDHINAGAR - 382021 VS. ACIT, GANDHINAGAR PAN/GIR NO. :AFDPS5557E (APPELLANT) .. (RESPONDENT) APPELLANT BY: SHRI S M SHAH, ASSESSEE RESPONDENT BY: SHRI ROOP CHAND JCIT, DR O R D E R PER SHRI A. K. GARODIA, AM:- THIS APPEAL BY THE ASSESSEE HAS BEEN PREFERRED AGA INST THE ORDER OF LD. CIT(A), GANDHINAGAR DATED 15.09.2009 PASSED U/S 154 OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS RAISED T HE FOLLOWING GROUNDS: YOUR APPELLANT BEING DISSATISFIED WITH THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-, GAND HINAGAR PRESENTS THIS APPEAL AGAINST THE SAME ON THE FOLLOWING AMONGST OT HER GROUNDS WHICH ARE WITHOUT PREJUDICE TO EACH OTHER : THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INC OME TAX (APPEALS) IS ERRONEOUS AND IT REQUIRES TO BE MODIFIED. IT IS SUB MITTED THAT IT BE SO DONE NOW. 1. 2 I.T.A .NO.3164/AHD/2009. 2. THE LEARNED COMMISSIONER OF INCOME TAX(A ) HAS ERRED IN UPHOLDING THE ADDITIONS OF RS.86,953 U/S 40A(2) (A) OF THE INCOME TAX ACT. IT IS SUBMITTED THAT ON THE FACTS AND CIRCUMST ANCES OF THE APPELLANT'S CASE, THE CIT(A) OUGHT TO HAVE DELETED THE SAME. IT IS SUBMITTED IT BE SO HELD NOW. 3. ASSESSING OFFICER AND LEARNED COMMISSION ER OF INCOME TAX (A) HAVE FAILED TO APPRECIATE THE FACT THAT AMOUNT BORROWED ARE USED FOR THE PURPOSE OF BUSINESS AND THUS ALLOWABLE U/S 36(1) (III) AND WRONGLY INVOKED SECTION U/S 40A(2) (A) FOR DISALLOW ING THE INTEREST. 4. THE LEARNED COMMISSIONER OF INCOME TAX ( APPEALS) HAS ERRED IN NOT APPRECIATING THAT THE DIFFERENCE BETWEEN INT EREST PAID ON BORROWINGS AND INTEREST CHARGED ON ADVANCES CAN NOT BE DISALLOWED FOR THE PURPOSE OF THE BUSINESS. FOR THE PURPOSE, A PPELLANT RELY UPON THE DECISION OF THE HONOURABLE DELHI HIGH COURT IN THE 253 ITR 294 IN THE CASE OF MEENAKSHI SYNTHETICS (P) LTD. VS ASS ISTANT COMMISSIONER OF INCOME. APPELLANT'S CASE IS SQUAREL Y COVERED BY THE THIS DECISION. 4.1 APPELLANT ALSO RELY UPON THE DECISION OF THE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V.COMMISSIONER OF INCOME -TAX (APPEALS), CHANDIGARH 2007 158 TAXMANN 74 (SC) WHERE THEIR LOR DSHIP COMMENTING UPON THE BUSINESS EXPEDIENCY OF GRANTING INTEREST FREE ADVANCES TO SISTER CONCERN HAVE OBSERVED THAT ' REV ENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME T HE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. A/O BUSINESSMAN CAN BE C OMPELLED TO MAXIMIZE ITS PROFIT. THE INCOME TAX AUTHORITIES MUS T PUT THEMSELVES IN THE SHOES OF THE ASSESSES AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FR OM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PR OFITS.' 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT I T IS NOTED BY THE A.O. IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS PAID INT EREST OF RS.23,09,095/- @ 36% P.A. TO VARIOUS PERSONS COVERED U/S 40A(2)(B) O F THE ACT. THE A.O. HAS ALSO NOTED IN THE ASSESSMENT ORDER THAT THE ASSESSE E HAS RECEIVED INTEREST @ I.T.A.NO.3164/AHD/2009 3 30% P.A. FROM THE PROPRIETARY CONCERN OF HIS WIFE S MT. INDIRA S. SHAH. THE A.O. INVOKED THE PROVISIONS OF SECTION 40A(2)(B) AS WELL AS SECTION 40A(2)(A) AND HELD THAT ASSESSEE HAS MADE EXCESSIVE EXPENDITURE TO THE EXTENT OF 6% P.A. AND ACCORDINGLY MADE DISALLOWANCE OF 1/6 TH OF THE TOTAL INTEREST EXPENDITURE AND IN THIS MANNER, HE MADE DI SALLOWANCE OF RS.3,84,849/-. BEING AGGRIEVED, THE ASSESSEE CARRI ED THE MATTER IN APPEAL BEFORE LD. CIT(A). LD. CIT (A) HAS HELD THAT THE D ISALLOWANCE IS JUSTIFIED WITH REGARD TO INTEREST PAYMENT TO SMT. PUSHPAWATI R. SHAH, THE SISTER OF THE ASSESSEE AND TO M/S. MOHANLAL C. SHAH (HUF) I.E. HU F OF FATHER OF THE ASSESSEE. IN THIS MANNER, HE CONFIRMED THE DISALLO WANCE TO THE EXTENT OF RS.86,953/- AND DELETED THE BALANCE AMOUNT OF DISAL LOWANCE FOR WHICH THE REVENUE IS NOT IN APPEAL BEFORE US. THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE US REGARDING THE DISALLOWANCE CONFIRMED BY C IT (A) OF RS.86,953/-. 3. BEFORE US, THE ASSESSEE APPEARED IN PERSON AND M ADE ARGUMENTS. IT IS SUBMITTED BY HIM THAT FOR THE PURPOSE OF SECTION 40 A(2)(A), DISALLOWANCE HAS TO BE MADE IN RESPECT OF EXCESSIVE EXPENDITURE FOR WHICH PAYMENT HAS BEEN MADE TO ANY RELATIVE OF THE ASSESSEE WHERE THE ASSESSEE IS AN INDIVIDUAL. IT IS SUBMITTED THAT THE TERM RELATIVE IS DEFINED IN SECTION 2(41) OF THE INCOME TAX ACT, 1961, WHICH INCLUDES HUSBAND, WIFE, BROTHER OR SISTER OR ANY LINEAL ASCENDANT OR DESCENDANT OF THAT INDIVIDUAL. IT WAS SUBMITTED THAT HUF OF THE FATHER OF THE ASSESSEE CANNOT BE CONSIDERED AS LINEAL ASCENDANT OF THE ASSESSEE AND HENCE, NO DISALLOWANCE CAN BE MADE OUT OF THE PAYMENTS MADE TO THE SAID HUF. REGARDING THE PAYMENT MADE TO TH E SISTER OF THE ASSESSEE I.E. MRS. PUSHPAWATI R. SHAH AND ALSO FOR THE PAYME NT TO FATHERS HUF; IF IT IS HELD THAT HUF IS ALSO RELATIVE, IT IS SUBMITTED THAT NO DISALLOWANCE IS JUSTIFIED IN VIEW OF THE JUDGMENT OF HONBLE APEX C OURT RENDERED IN THE CASE I.T.A.NO.3164/AHD/2009 4 OF S.A. BUILDERS AS REPORTED IN 286 ITR 01. RELIAN CE WAS ALSO PLACED BY HIM ON ANOTHER JUDGMENT OF HONBLE APEX COURT RENDE RED IN THE CASE OF UPPER INDIA PUBLISHING HOUSE P. LTD. VS CIT AS REPO RTED IN 117 ITR 569 (S.C.). AS AGAINST THIS, LD. D.R. SUPPORTED THE OR DER OF LD. CIT(A). 4. WE HAVE CONSIDERED RIVAL SUBMISSIONS, PERUSED TH E MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDER OF LD. CIT(A) AND T HE JUDGMENTS CITED BY THE ASSESSEE. REGARDING THIS ASPECT OF THE MATTER AS TO WHETHER THE HUF OF THE FATHER OF THE ASSESSEE I.E. MOHANLAL C. SHAH (H UF) IS COVERED WITHIN THE DEFINITION OF RELATIVE OF CLAUSE (B) OF SUB-SECTION (2) OF SECTION 40A, WE FIND THAT CIT (A) HAS HELD THAT THE SAME IS COVERED BY C LAUSE (V) OF CLAUSE (B) OF SUB-SECTION (2) OF SECTION 40A. AS PER THIS SUB-CL AUSE, IF THE PAYMENT IS MADE TO A HUF AND ANY MEMBER OF SUCH HUF HAS A SUBS TANTIAL INTEREST IN THE BUSINESS OF THE ASSESSEE THEN THE PAYMENT TO SU CH HUF WILL BE HIT BY THE PROVISIONS OF SECTION 40A(2)(B) AND ALSO BY 40A(2)( A) OF THE ACT. THE ASSESSEE IS DEFINITELY A MEMBER OF HUF OF HIS FATHE R AND THE ASSESSEE HAS NOT ONLY SUBSTANTIAL INTEREST BUT IS THE OWNER OF HIS O WN BUSINESS AND THEREFORE, PAYMENT TO THAT HUF IS HIT BY THIS SUB-CLAUSE (V) O F CLAUSE (B) OF SECTION 40A(2) OF THE ACT. ON THIS ASPECT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A). 5. NOW, THE ONLY ARGUMENT OF THE ASSESSEE IS THAT N O DISALLOWANCE SHOULD BE MADE IN THE CASE OF BOTH THE PAYMENTS IN VIEW OF JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF S.A. BUILDERS (S UPRA). THE RATIO DECIDED OF THIS JUDGMENT OF HONBLE APEX COURT IS THIS THAT WHERE THE ASSESSEE CAN SHOW COMMERCIAL EXPEDIENCY FOR ADVANCING INTEREST F REE LOAN TO A SISTER CONCERN, OUT OF THE INTEREST BEARING BORROWED FUNDS , NO DISALLOWANCE IS JUSTIFIED. HENCE, THE ASSESSEE HAS TO ESTABLISH TH E BUSINESS EXPEDIENCY FOR I.T.A.NO.3164/AHD/2009 5 ADVANCING THE LOAN TO THE PROPRIETARY CONCERN OF HI S WIFE AT CONCESSIONAL RATE OF 30% P.A. WHEREAS THE ASSESSEE IS BORROWING FROM HIS RELATIVES @ 36% P.A. FOR THIS PURPOSE, THIS WAS THE ONLY ARGUMENT ADVANC ED BY THE ASSESSEE THAT AVERAGE COST OF FUNDS IS TO BE SEEN AND NOT THE COS T OF SPECIFIC FUND BORROWED BY THE ASSESSEE. IT WAS THE SUBMISSION OF THE ASSE SSEE BEFORE US THAT HIS AVERAGE COST OF FUNDS IS LESS THAN 30% BEING RATE O F INTEREST BEING REALIZED BY THE ASSESSEE. FOR THIS PURPOSE, THE ASSESSEE FU RNISHED A CHART AS PER WHICH THE ASSESSEE HAS BORROWED FUNDS FROM THE BANK TO THE EXTENT OF RS.98.86 LACS AT AN INTEREST RATE OF 7.5 TO 8.5% P. A. HIS OTHER ENTIRE BORROWING IS @ 36% P.A. ALTHOUGH, THE EXACT COST OF ENTIRE BORROWED FUNDS HAS NOT BEEN PROPERLY WORKED OUT BY HIM BUT STILL, THE SAME WILL BE LESS THAN 30% P.A. BECAUSE THE QUANTUM OF BORROWING FROM THE BANK @ 7.5% TO 8.5% P.A. IS QUITE HIGH I.E. 98.86 LACS WHEREAS INTEREST BEARING BORROWINGS @ 36% P.A. FORM OTHER PERSONS IS ROUGHLY OF EQUAL AMOUNT AND HENCE, AVERAGE COST WILL BE SOMEWHERE BETWEEN 22-23% P.A. THE TOTAL AM OUNT ADVANCED TO THE PROPRIETARY CONCERN OF HIS WIFE IS 143.15 LACS FROM WHOM INTEREST HAS BEEN REALIZED @ 30% P.A. IF WE REDUCE THE AMOUNT OF FU NDS BORROWED FROM BANK I.E. RS.98.86 LACS, FROM LOAN ADVANCED @ 30% TO THE PROPRIETARY CONCERN OF HIS WIFE, THE BALANCE REMAIN ONLY OF RS.44.30 LACS. BORROWINGS FORM NON RELATIVES IS MUCH MORE THAN THIS AMOUNT AND THERE I S NO DIRECT NEXUS BROUGHT ON RECORD BY THE A.O. THAT THE MONEY BORROWED FROM THESE TWO RELATIVES HAS BEEN ADVANCED TO THE PROPRIETARY CONCERN OF THE WIF E OF THE ASSESSEE AND IN THE ABSENCE OF THIS, WE HAVE TO SEE THE AVERAGE COS TING OF ENTIRE INTEREST BEARING BORROWED FUNDS AND IF WE DO THIS, WE FIND T HAT NO DISALLOWANCE IS JUSTIFIED BECAUSE THE ASSESSEE IS REALIZING 30% INT EREST FORM THE PROPRIETARY CONCERN OF THE ASSESSEE WHEREAS THE AVERAGE COST OF ENTIRE INTEREST BEARING I.T.A.NO.3164/AHD/2009 6 BORROWED FUNDS OF THE ASSESSEE IS IN THE RANGE OF 2 2-23% ROUGHLY. UNDER THIS FACTUAL POSITION, WE FEEL THAT NO DISALLOWANCE IS JUSTIFIED AND HENCE, WE DELETE THE SAME. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . 7. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE 2011. SD/- SD/- (MUKUL KR. SHRAWAT) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED : 30 /6/ 2011 SP COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) GADHINAGAR. 5. THE DR, AHMEDABAD 6. THE GUARD FILE 1. DATE OF DICTATION 17/6/11 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 17/6/11 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 30-6-2011 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.30-6-2011 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 30-6 -2011 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. ..