The ACIT, Circle-3, JAMNAGAR V. Shri Shirish Maganlal Ravani, Kalawad- Shitla

ITA 342/RJT/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67257 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 27-05-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 28-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKUR GARG D R PAA
• Assessee Lawyers: G B PARIKH A B
• Keywords: Gross profit estimation; Business income; Fair market value; Difference of opinion; Commercial expediency

Judgement Text

B I , IN THE INCOME TAX APPELLATE TRIBULAL; RAJKOT BENCH, RAJKOT. 5 . . 3 KE . . V BEFORE SHRI T. K. SHARMA JM AND SHRI D. K. SRIVASTAVA AM ITA NO. 342/RJT/2012 P1 1 / ASSESSMENT YEAR 2008 - 09 ASSTT. COMMISSIONER OF INCOME - TAX, CIRCLE - 3, JAMNAGAR. ( / APPELLANT) SHRI SHIRISH MAGANLAL RAVANI PROP. OF RAVANI ESTATE, BAZAR, KALAWAD SHITLA, JAMNAGAR. PAN NO. ABXPR2552E. NR / RESPONDENT T A / REVENUE BY SHRI AKUR GARG, D. R. P1AA / ASSESSEE BY SHRI G. B. PARIKH, ADVOCATE. A B / DATE OF HEARING 27 - 05 - 2013 A B / DATE OF PRONOUNCEMENT 30 - 05 - 2013 ORDER UNDER SECTION 255(4) OF THE INCOME - TAX ACT, 1961. 5 . . 3 , KE / T. K. SHARMA, J. M. : ON ACCOUNT OF DIFFERENCE OF OPINION BETWEEN THE MEMBER CONSTITUTING THE REGULAR BENCH, FOLLOWING QUESTION WAS RE FE R RED FOR CONSIDERATION OF THIRD MEMBER : - WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.3,22,091/ - WHICH WAS PAID ON LOANS TAKE FROM FAMILY MEMBERS U/S.40A(2) OF THE I.T. ACT, 1961 ? 2. THE HONBLE ZONA L VICE PRESIDENT SITTING AS THIRD MEMBER VIDE HIS ORDER DATED 2 ND MAY, 2013 EXPRESSED HIS OPINION THAT THE LD. CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.3,22,091/ - WHICH WAS PAID ON LOANS TAKEN FROM FAMILY MEMBERS U/S.40A(2) OF THE INCOME TAX ACT, 1961. THEREFORE, AS PER MAJORITY VIEW, THE GROUND NO.1 OF R EVENUE IS DISMISSED. 3. IN RESPECT OF OTHER GROUND OF APPEAL , BOTH THE MEMBERS AGREED THAT LD. CIT (A) HAS RIGHTLY DELETED THE G. P. ADDITION OF RS.12,07,079/ - . THIS GROUND OF APPEAL IS AL SO DISMISSED. 4. IN THE RESULT, THE APPEAL OF THE R EVENUE IS DISMISSED. 5. THIS ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONED HEREINABOVE. SD/ - SD/ - ( . . T D. K. SRIVASTAVA ) ( B . . 1 / T. K. SHARMA) WAS / ACCOUNTANT MEMBER P T / JUDICIAL MEMBER / ORDER DATE 30 - 0 5 - 2013. /RAJKOT NVA/ - 0 EJO O / COPY OF ORDER FORWARDED TO: - 1 . / APPELLANT - ASSISTANT COMMISSIONER OF INCOME - TAX, CIR - 3, JAMNAGAR. 2 . NR / RESPONDENT - SHRI SHIRISH MAGANLAL RAVANI, PROP. OF RAVANI ESTATE, BAZAR, KALAWAD SHITLA, JAMNAGAR. 3 . I E / CONCERNED CIT , JAMNAGAR. 4 . E - / CIT (A) , JAMNAGAR. 5 . NPPI , B I , / DR, ITAT, RAJKOT 6 . 1 / GUARD FILE. / BY ORDER , TRUE COPY. A S STT. REGISTRAR B I , INCOME TAX APPELLATE TRIBUNAL, RAJKOT. 5 , K , IN THE INCOME TAX APPELLATE TRIBUNAL AT RAJKOT . . , V , BEFORE SHRI G.C. GUPTA, VICE - PRESIDENT (AZ) ( THIRD MEMBER ) ITA NO. 342 / R JT / 201 2 [ ASSTT. YEAR : 200 8 - 200 9 ] ACIT, CIR.3 JAMNAGAR. / VS. SHRI SHIRISH MAGANLAL RAVANI PROP: OF RAVANI ESTATE BAZAR, KALAWAD SHITLA JAMNAGAR. ( / APPELLANT) ( / RESPONDENT) T A / REVENUE BY : SHRI ANKUR GARG, CIT - DR P1A A / ASSESSEE BY : SHRI G.B. PARIKH DATE OF HEARING : 2 ND MAY, 201 3 . O R D E R ON ACCOUNT OF DIFFERENCE IN OPINION BETWEEN THE LEARNED JUDICIAL MEMBER AND LEARNED ACCOUNTANT MEMBER OF ITAT, RAJKOT BENCH, THIS MATTER HAS BEEN REFERRED TO ME BY THE HONBLE PRESIDENT , ITAT FOR CONSIDERATION AND DISPOSAL UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961. THE HONBLE PRESIDENT, ITAT HAS REFERRED THE FOLLOWING QUESTION: WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.3,22,091/ - WHICH WAS PAID ON LOANS TAKEN FR OM FAMILY MEMBERS UNDER SECTION 40A(2) OF THE INCOME TAX ACT, 1961 ? 2. I HAVE CAREFULLY CONSIDERED THE ABOVE QUESTION DRAWN BY THE LEARNED MEMBERS OF THE RAJKOT BENCH AND HAVE PERUSED THE PROPOSED ORDERS OF THE LEARNED JM AND THE LEARNED AM. I HAVE HEARD THE LEARNED CIT - DR AND THE LEARNED COUNSEL OF THE ASSESSEE. 3. THE CONTENTIONS OF LEARNED CIT - DR AND THE ASSESSEE WERE MAINLY SIMILAR, AS ADVANCED BY THEM BEFORE THE REGULAR BENCH AND RECORDED IN THE PROPOSED ORDERS OF THE LEARNED JM AND THE LEARNED AM. 4. THE LEARNED CIT - DR SUBMITTED THAT THE ONLY ISSUE IN DISPUTE IN THIS CASE IS REGARDING DISALLOWANCE OF INTEREST PAID ON LOANS TO RELATIVES OF THE ASSESSEE - PROPRIETOR UNDER SECTION 40A(2) OF TH E IT ACT . HE SUBMITTED THAT THE ASSESSEE HAS TAKEN LOAN OF RS. 57.92 LAKHS FROM HIS WIFE, SON AND HIS OWN HUF, AND THE ASSESSEE IS PAYING INTEREST AT THE RATE OF 18% ON THE SAME. HE SUBMITTED THAT THE AO HAS OBSERVED THAT PREVAILING DEPOSIT RATE WITH TH E BANK WERE IN THE RANGE OF 7 % TO 8%. THE AO CONCLUDED THAT THE ASSESSEE WAS MAKING EXCESSIVE PAYMENT IN RES PECT OF THE LOANS TAKEN BY HIM, AND WAS DIVERTING HIS INCOME TO HIS FAMILY MEMBERS, WHO WERE LIABLE TO TAX AT LOWER RATE. HE RELIED ON THE DECISIO N OF THE ITAT, RAJKOT BENCH IN THE CASE OF ACIT VS. SHRI GIRDHARISINGH RATHORE, IN ITA NO.1139/ RJT/2009 ORDER DATED 19 . 3 .2010 FOR THE ASSESSMENT YEAR 2006 - 2007 WHEREIN THE INTEREST PAID AT THE RATE OF 12% WAS HELD AS REASONABLE , AS PER THE PREVAILING MARK ET RATE , AND THE BALANCE AMOUNT OF INTEREST WAS DISALLOWED BY HOLDING THE SAME AS EXCESSIVE. HE SUBMITTED THAT THE AVERAGE RATE OF INTEREST PAID ON THE BANK LOANS COMES TO AROUND 10.73% IN THIS CASE, WHEREAS THE AVERAGE RATE OF INTER E ST ON UNSECURED LOANS IS AROUND 16.68%, AND THEREFORE THE INTEREST PAID ON LOAN WAS INDEED EXCESSIVE. HE SUBMITTED THAT THE RETURN ON ASSESSEE S CAPITAL WAS MERELY 15.80% WHEREAS THE ASSESSEE WAS PAYING INTEREST ON UNSECURED LOANS AT 16.68%. THE LEARNED CIT - DR SUBMITTED THAT THE ASSESSEE I S PAYING LESSER AMOUNT OF TAX BY GIVING INTEREST AT HIGHER RATE TO ITS FAMILY MEMBERS AND RELATIVES, AS ONLY INCOME OF THE FAMILY MEMBER S IS THE INTEREST PAID BY THE ASSESSEE, AND THEY ARE ASSESSED TO TAX AT THE RATE OF 0% TO 10%. HE SUBMIT TED THAT ON THE OTHER HAND, THE ASSESSEE WAS LIABLE TO TAX AT AN AVERAGE RATE OF NEARLY 20%, AND THEREFORE THE ASSESSEE HAS DIVERTED ITS TAXABLE INCOME IN THE HANDS OF ITS FAMILY MEMBERS. HE SUBMITTED THAT THE DECISION OF THE RAJKOT BENCH OF THE ITAT IN S HRI HAREN T DAVDA VS. ACIT, ITA NO.33 AND 34/RJT/2007 ORDER DATED 30.1 1 .2009 CITED BY THE LEARNED JM WAS DISTINGUISHABLE ON FACTS, SINCE PERTAINS TO THE ASSESSMENT YEAR 2001 - 2002, WHEREAS THE DECISION OF THE RAJKOT BENCH IN SHRI GIRDHARISINGH RATHORE (SUPR A) PERTAINS TO THE ASSESSMENT YEAR 2006 - 2007, WHICH IS MUCH CLOSURE TO THE PERIOD TO WHICH THE PRESENT CASE OF THE ASSESSEE RELATES. 5. THE LEARNED COUNSEL FOR THE ASSESSEE HAS OPPOSED THE SUBMISSIONS OF THE LEARNED CIT - DR. HE SUBMITTED THAT YIELD OF 15.80% ON THE CAPITAL OF THE ASSESSEE IS NO T RELEVANT TO THE ISSUE SINCE, IT HAS BEEN CALCULATED ON THE BALANCE CAPITAL AS ON THE LAST DATE OF THE ACCOUNTING PERIOD. HE SUBMITTED THAT THE ASSESSEE WAS PAYING MORE THAN 18% ON SECURED LOANS AND SUBMISSIONS OF THE LEARNED CIT - DR THAT THE AVERAGE RATE OF INTEREST PAID TO THE BANK LOANS WAS AROUND 10.73% WAS NOT CORRECT, SINCE HAS BEEN CALCULATED ON THE BALANCE AS ON THE LAST DATE OF ACCOUNTING PERIOD. HE SUBMITTED TH A T THE BANK WAS CHARGING 17.04% INTEREST ON THE MONTHLY BASIS, AND THEREFORE THE EFFECTIVE RATE OF INTEREST COMES TO MORE THAN 18% PER ANNUM. HE REFERRED TO THE STATEMENT OF ACCOUNTS OF THE ICICI BANK AT PAGE NO.20 AND 21 OF THE COMPILATION FILED BEFORE THE TRIBUNAL IN SUPPORT OF THE SUBMISSION T HAT THE EFFECTIVE RATE OF BANK INTEREST WAS 18.44%PER ANNUM. HE SUBMITTED THAT NO SIMILAR ADDITION W AS MADE IN THE EARLIER YEARS, AND THE LOANS FROM THE RELATIVES OF TH E ASSESS EE WERE UNSECURED LOANS AND THEREFORE CARRIES HIGHER R ATE OF INTEREST. HE SUBMITTED THAT UNDER THE PROVISIONS OF THE INCOME TAX ACT, THE GOVERNMENT ITSELF IS CHARGING 18% INTEREST PER ANNUM UNDER SECTION 201(1A) OF THE ACT. 6. THE LEARNED CIT - DR IN HIS REJOINDER SUBMITTED THAT CHARGING OF INTEREST AT 18% UNDER THE PROVISIONS OF THE I.T.ACT, BEING PENAL IN NATURE, IS NOT COMPARABLE WITH THE PREVAILING MARKET RATE OF INTEREST. HE SUBMITTED THAT THE ICICI BANK IS FINANCING THE VEHICLE LOANS, WHICH ALWAYS CARRIES HIGHER RATE OF INTEREST DUE TO HIGHER RISK FAC TOR OF THE BANK. 7. I HAVE CONSIDERED RIVAL SUBMISSIONS AND HAVE PERUSED THE PROPOSED ORDERS OF THE LEARNED JM AND THE LEARNED AM ON THIS ISSUE , AND ALSO WRITTEN NOTE FILED BY THE REVENUE. I FIND THAT BASIC FACTS OF THE CASE ARE NOT IN DISPUTE. THE ONL Y ISSUE IN DISPUTE BEFORE ME IN THIS CASE IS REGARDING THE DISALLOWANCE OF INTEREST PAID ON LOANS TO FAMILY MEMBERS OF THE ASSESSEE - PROPRIETOR UNDER SECTION 40A(2) OF THE IT.ACT, 1961. THE ASSESSEE HAS TAKEN THE LOANS AMOUNTING TO RS.57.92 LAKHS FROM HIS WIFE, SONS AND FROM HIS OWN HUF AND IS PAYING INTEREST AT THE RATE OF 18% ON THE SAME. T HE LOAN S W ERE TAKEN IN THE EARLIER YEARS AND NO SIMILAR DISALLOWANCE WAS MADE BY THE DEPARTMENT. THE OBSERVATION OF THE AO THAT THE PREVAILING DEPOSIT RAT E S WITH THE BANK DURING THE RELEVANT PERIOD WERE IN THE RANGE OF 7% TO 8% , IN MY VIEW , IS NOT A RELEVANT FACTOR TO DECIDE THE ALLOWABILITY OF RATE OF INTEREST ON THE AMOUNT OF LOANS TO THE RELATIVES OF THE ASSESSEE UNDER THE PROVI SIONS OF SECTION 40A(2) OF THE ACT. I FIND THAT THE SUBMISSION OF THE REVENUE THAT ON BANK LOANS, THE AVERAGE RATE OF INTEREST PAID BY THE ASSESSEE COMES TO 10.73% IS UNSUSTAINABLE, SINCE THIS AVERAGE RATE OF INTEREST HAS BEEN CALCULATED ON THE AMOUNT OF LOAN AS ON THE LAST DATE OF ACCOUNTING PERIOD, AND NOT ON DAY - TO - DAY BASIS. THE ARGUMENT OF THE LEARNED CIT - DR THAT THE RETURN ON CAPITAL OF THE ASSESSEE COMES TO 15.80%, AND THE INTEREST PAID TO UNSECURED CREDITORS BEING MORE THAN THE RETURN ON CAPITAL OF THE ASSESSEE, AND THEREFORE EXCESSIVE, IS DEVOID OF ANY MERIT . THE RETURN ON CAPITAL OF THE ASSESSEE - PROPRIETOR DEPENDS ON VARIETY OF FACTORS AND IN BUSINESS THERE MAY EVEN BE LOSS TO THE ASSESSEE, BUT STILL THE ASSESSEE IS OBLIGED TO PAY THE INTEREST AT AGREED RATE OF INTEREST TO ITS DEPOSITORS. THE OTHER ARGUMENT OF THE LEARNED CIT - DR THAT THE ASSESSEE IS PAYING LESSER AMOUNT OF TAX BY GIVING INTEREST TO ITS FAMILY MEMBERS AT HIGHER RATE OF INTEREST, AND FAMILY MEMBERS OF THE ASSESSEE BEING ASSESSED TO TAX AT THE RATE OF 0% TO 10%, WHEREAS THE ASSESSEE IS LIABLE TO PAY TAX AT AN AVERAGE RATE OF NEARLY 20%, AND THEREFORE THERE IS A DIVERSION OF TAXABLE INCOME BY THE ASSESSEE IN THE HA NDS OF THE FAMILY MEMBERS, IS ALSO , IN MY VIEW, WITHOUT ANY MERIT . F OR THE DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT, THE GUIDING FACTOR AS PER THE SCHEME OF THE ACT IS THAT WHETHER SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE FAI R MARKET VALUE OF THE GOODS , SERVICES OR FACILITY FOR WHICH THE PAYMENT HAS BEEN MADE ETC. I FIND THAT MERELY BECAUSE THE ASSESSEE BY INCURRING LEGITIMATE AND REASONABLE EXPENSE, IS LIABLE TO PAY A LESSER AMOUNT OF INCOME - TAX, IT CANNOT BE SAID THAT THE P ROVISION OF THE SECTION 40A(2) OF THE ACT CAN BE INVOKED IN ORDER TO MAXIMUM THE COFFERS OF THE REVENUE. I FIND THAT THE ASSESSEE HAS FILED COPY OF THE BANK STATEMENT FROM ICICI BANK TO ESTABLISH THAT IT HAS PAID INTEREST AT THE EFFECTIVE RATE OF 18.44% P ER ANNUM DURING THE PERIOD FOR THE SECURED LOAN. THE BANK RATE SUGGESTED BY THE LEARNED CIT - DR AT THE RATE OF 10.73% IS PATENTLY WRONG SINCE HAS BEEN WORKED OUT ON THE BASIS OF THE BALANCE IN THE ACCOUNT AS ON THE LAST DATE OF ACCOUNTING PERIOD. IT IS A MATTER OF COMMON KNOWLEDGE THAT THE INTEREST S ON UNSECURED LOANS ARE NORMALLY HIGHER THAN THE INTEREST PAYABLE ON THE SECURED LOANS . IN ORDER TO GET A SECURED LOAN FROM THE BANK, ASSESSEE HAS TO UNDERGO A NUMBER OF FORMALITIES AND TO GIVE SECURITY AND COL LATERAL SECURITIES TO THE SATISFACTION OF THE BANK, WHEREAS THIS IMPEDIMENT DO NOT NORMALLY EXISTS IN THE CASE OF UNSECURED LOANS OBTAINED BY THE ASSESSEE. THE LEARNED CIT - DR S SUB MISSION THAT THE INTEREST CHARGED UNDER SECTION 201( A) OF THE ACT AT 18% BY THE GOVERNMENT IS NOT RELEVANT , SINCE IS OF PENAL IN NATURE, IS ALSO NOT RELEVANT TO THE ISSUE BEFORE THE TRIBUNAL. THE DECISIVE FACTOR FOR THE APPLICABILITY OF SECTION 40A(2) OF THE ACT IS WHETHER THE PAYMENT MADE BY THE ASSESSEE IS EXCESSIVE OR UNREASO NABLE CONSIDERING THE PREVAILING MARKET CONDITIONS DURING THE RELEVANT PERIOD. IN MY CONSIDERED VIEW, INTEREST PAID AT THE RATE OF 18% PER ANNUM ON UNSECURED LOANS DURING THE RELEVANT PERIOD CANNOT BE SAID TO BE EXCESSIVE OR UNREASONABLE. THE ITAT, RAJKO T BENCH IN SHRI HAREN T. DAVDA VS. ACIT (SUPRA) HAS HELD THAT THE INTEREST RATE PAID AT 18% WAS REASONABLE . THE DECISION OF THE RAJKOT BENCH OF THE ITAT IN ACIT VS. GIRDHARISINGH RATHORE VS. ACIT (SUPRA) DATED 19.3.2010 CITED BY THE LEARNED CIT - DR IS DISTINGUISHABLE ON FACTS, SINCE THE ASSESSEE HAS MADE THE PAYMENT OF INTEREST IN THAT CASE RANGING BETWEEN 9% TO 13.50%, AND T HEREFORE IN FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNAL HAS HELD THAT THE INTEREST RATE OF 12% IS FAIR AND REASONABLE. IN THE CASE BEFORE ME, THE REVENUE COULD NOT CITE ANY INSTANCE WHEREIN THE ASS ESSEE ON UNSECURED LOAN ACCOUNT, OTHER THAN HIS RELA TIVES ACCOUNT , HAS PAID INTEREST AT LESS THAN 18% PER ANNUM. IN THESE FACTS OF THE CASE, I HAVE NO HESITATION IN AGREEING WITH THE VIEW OF THE LEARNED JM THAT THE LEARNED CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.3,22,091/ - WHICH WAS PAID ON LOANS TAKEN FROM FAMILY MEMBERS UNDER SECTION 40A(2) OF THE ACT, 1961, AND THE P OINT OF DIFFERENCE IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 7 . THE MATTER WILL NOW GO BACK TO THE DIVISION BENCH FOR PASSING ORDER IN ACCORDANCE WITH MAJORITY VIEW. SD/ - ( G.C. GUPTA ) VICE - PRESIDENT (TH I RD - MEMBER ) PLACE : AHMEDABAD DATE : 13 - 0 5 - 201 3 B I : : IN THE INCOME TAX APPELLATE TRIBULAL: RAJKOT BENCH: RAJKOT IT A NO . 342 /RJT/2012 P1 1 / ASSESSMENT YEAR 2008 - 09 A CIT V. SHI R ISH MAGANLAL RAVANI CIRCLE - 3 , JAMNAGAR PRO P . OF RAVANI ESTATE BAZAR, KA LAWAD SHITLA , JAMNAGAR PAN: A B XPR2552E N OTE OF DISSENT D K SRIVASTAVA: THE ISSUE UNDER CONSIDERATION, IN BRIEF, IS WHETHER THE AO IS JUSTIFIED IN RESTRICTING THE RATE OF INTEREST TO 12% AS AGAINST 18% CLAIMED TO HAVE BEEN PAID BY THE ASSESSEE ON THE AMOUNTS DEPOSITED BY THE ASSESSEES OWN HUF, SON AND WIFE OR, TO PUT IT ALTERNATIVELY, ON THE AMOUNTS CLAIMED BY THE ASSESSEE TO HAVE BEEN LENT BY THEM. T OTAL AMOUNT OF DISALLOWANCE MADE BY THE AO AND DELETED BY THE CIT(A), WHICH IS PROPOSED TO BE UPHELD B Y MY LEARNED BROTHER IS RS. 3,22,091/ - . THOUGH THE AMOUNT OF TAX INVOLVED IN THE MATTER IS NOT SUBSTANTIAL YET THE VIEW TAKEN IN THIS ORDER IS BOUND TO BE CITED AS PRECEDENT IN OTHER CASES AND THEREFORE WOULD HAVE CASCADING EFFECT IN SEVERAL OTHER CASES. AS HELD BY THE HONBLE SUPREME COURT IN ITS JUDGMENT DATED 29.8.2011 IN CIT V. SURYA HERBAL LTD., CC 13694/2011, TAX IMPLICATION IN ONE CASE SHOULD NOT BE CONSIDERED IN ISOLATION WHEN THE PRINCIPLE INVOLVED THEREIN WOULD HAVE CASCADING EFFECT ON A LARGE NUMB ER OF CASES. IT IS THEREFORE NECESSARY THAT THE ISSUE INVOLVED IN THE MATTER UNDER CONSIDERATION RECEIVES CAREFUL CONSIDERATION BEFORE IT IS CITED IN OTHER CASES AS PRECEDENT. KEEPING THIS ASPECT IN VIEW, THE MATTER WAS DISCUSSED WITH MY LEARNED BROTHER. W E HAVE HOWEVER NOT BEEN ABLE TO REACH A CONSENSUS. I THEREFORE PROCEED TO RECORD MY NOTE OF DISSENT. 2. I HAVE CAREFULLY GONE THROUGH THE ORDER PROPOSED BY MY LEARNED BROTHER CONFIRMING THE ORDER OF CIT(A) DELETING THE ADDITION OF RS.12,07,079/ - MADE BY THE AO ON ACCOUNT OF LOW RATE OF GROSS PROFIT AND ALSO DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF EXCESSIVE RATE OF INTEREST PAID BY THE ASSESSEE ON DEPOSITS/ LOANS ACCEPTED BY THE ASSESSEE FROM HIS OWN HUF, SON AND WIFE. WHILE I CON CUR WITH TH E ORDER PROPOSED BY MY LEARNED BROTHER CONFIRMING THE ORDER OF THE CIT(A) DELETING THE ADDITION OF RS.12.07,079/ - , I AM UNABLE TO AGREE WITH HIS ORDER ENDORSING THE DECISION OF THE CIT(A) DELETING THE DISALLOWANCE OF PART OF INTEREST MADE BY THE AO. 3 . PE RUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSEE CLAIMED TO HAVE TAKEN DEPOSITS/ LOANS FROM HIS OWN HUF, WIFE AND SON FOR WHICH HE CLAIMS TO HAVE PAID INTEREST TO THEM @18%. IT IS FURTHER SEEN FROM THE ASSESSMENT ORDER THAT THE SAID AMOUNTS HAVE BEEN A PPEARING IN THE BOOKS OF THE ASSESSEE FOR LAST SEVERAL YEARS. KEEPING IN VIEW THE PREVALENT RATE OF INTEREST IN THE MARKET, THE ASSESSING OFFICER HELD THAT PAYMENT OF INTEREST @ 18% WAS EXCESSIVE, UNREASONABLE AND NOT GUIDED BY BUSINESS CONSIDERATION S . AC CORDING TO HIM, THE ASSESSEES OWN HUF, WIFE AND SON WOULD NOT HAVE BEEN ABLE TO GET INTEREST @ 18% FROM ANY SOURCE IF THEY HAD DEPOSITED/LENT THE IMPUGNED SUMS ELSEWHERE. RELYING UPON THE ORDER DATED 19 - 03 - 2010 PASS ED BY THIS TRIBUNAL IN ACIT V. GIRDHARIS ING RATHORE ITA NO.1139/RJT/2009, THE ASSESSING OFFICER CONSIDERED THE RATE OF INTEREST AT 12% AS REASONABLE AND ACCORDINGLY DISALLOWED 6% OF THE REMAINING INTEREST. 4 . ON APPEAL, THE LD. CIT (A) DELETED THE DISALLOWANCE MADE BY THE AO. 5 . ON CAREFUL CON SIDERATION OF THE FACTS PLACED ON RECORD, I AM UNABLE TO AGREE WITH THE VIEW TAKEN BY THE LD. CIT(A). INTEREST ON CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS IS ADMISSIBLE DEDUCTION U/S 36(1)(III). AS HELD BY THE HONBLE SUPREME COURT IN SA BUILDERS V. C IT, 288 ITR 1 (SC), THE EXPRESSION FOR THE PURPOSE OF BUSINESS IN SECTION 36(1)(III) MEANS EXPENDITURE INCURRED VOLUNTARILY FOR COMMERCIAL EXPEDIENCY. ANY INTEREST PAID ON ACCOUNT OF PERSONAL RELATIONSHIP OF THE ASSESSEE WITH THE DEPOSITORS/LENDERS CANNO T BE SAID TO BE GUIDED BY COMMERCIAL CONSIDERATION. THIS VIEW IS FURTHER SUPPORTED FROM THE PROVISIONS OF SECTION 40A(2) WHICH ENABLES THE AO TO DISALLOW EXPENDITURE TO THE EXTENT IT IS UNREASONABLE OR EXCESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF TH E GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE TO A RELATIVE DEFINED U/S 40A(2)(B) . THE ASSESSEE HAS RECEIVED THE IMPUGNED SUMS FROM HIS OWN HUF, SON AND WIFE. THEY WOULD NOT HAVE RECEIVED INTEREST @ 18% IF THEY HAD GIVEN THIS SUM TO ANY OTH ER PERSON. EVEN THE RATE OF INTEREST BEING PAID BY THE BANKS ON LONG TERM DEPOSITS WAS NOT MORE THAN 10%. THESE AMOUNTS ARE BEING CARRIED BY THE ASSESSEES HUF, HIS WIFE AND SON FROM YEAR TO YEAR AS THE RATE OF INTEREST BEING RECEIVED BY THE M FROM THE ASSE SSEE IS SIGNIFICANTLY HIGHER THAN WHAT IS PREVAILING IN THE MARKET. THE ENTIRE TRANSACTION IS BASICALLY IN THE NATURE OF AN ARRANGEMENT BY WHICH THE FUNDS OF THE FAMILY REMAIN IN THE FAMILY FETCHING A SIGNIFICANTLY HIGHER RATE OF INTEREST THAN WHAT THESE F UNDS WOULD FETCH IF DEPOSITED IN BANKS OR ELSEWHERE. APART FROM THE AFORESAID FACTUAL ASPECTS OF THE CASE, T HE AO ALSO TOOK NOTE OF THE ORDER DATED 19 TH MARCH 2010 PASSED BY THIS BENCH IN ACIT V. GIRDHARISINGH RATHORE, ITA NO.1139/RJT./2009 IN WHICH IT HAS BEEN HELD THAT THE AO WAS JUSTIFIED IN DISALLOWING INTEREST PAID BY THE ASSESSEE OVER AND 12% U/S 40A(2). FOLLOWING THE AFORESAID ORDER OF THIS TRIBUNAL, THE AO DISALLOWED INTEREST PAID OVER AND ABOVE 12%. IN MY CONSIDERED VIEW, THE AO HAS COMMITTED NO ER ROR ON THE FACTS OF THE CASE IN FOLLOWING THE AFORESAID ORDER OF THIS TRIBUNAL. 6 . THE LD. CIT(A), HOWEVER, RELIED UPON AN EARLIER ORDER PASSED BY THIS TRIBUNAL ON 30.10.2009 RELATING TO AN EARLIER ASSESSMENT YEAR IN HAREN T DAVDA V. ACIT, ITA NO.33 - 34/R JT./2007 FOR AY 2002 - 03 IN WHICH THIS TRIBUNAL HAS HELD AS UNDER: 37. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE HOLD THAT THE ASSESSING OFFICER HAS NOT BROUGHT OUT HOW RATE OF INTEREST AT 18% IS EXCESSIVE OR UNREASONABLE. SECTION 40A(2)(B) CANNOT BE I NVOKED TO MAKE DISALLOWANCE WITHOUT ESTABLISHING THAT THE RATE AT WHICH INTEREST IS PAID IS EXCESSIVE OR UNREASONABLE. THE ASSESSEE HAS BROUGHT OUT FACTORS WHICH INFLUENCE THE RATE OF INTEREST IN UNSECURED LOANS ARRANGED FROM RELATIVES. FURTHER CONSIDERING THE FACT THAT NO DISALLOWANCE WAS MADE IN EARLIER YEAR, WE DO NOT FIND ANY JUSTIFICATION FOR THE DISALLOWANCE 7 . IN A LATER ORDER INVOLVING LATER ASSESSMENT YEAR, THE SAME BENCH WITH SAME QUORUM HAS HELD IN ITS ORDER DATED 19.3.2010 IN ACIT V. GIRDHARI SINGH RATHORE, ITA NO.1139/RJT./2009 FOR AY 2006 - 07 AS UNDER: 5. WE HAVE CAREFULLY CONSIDERED THE FINDING GIVEN BY THE ASSESSING OFFICER AND THE SUBMISSION OF THE AR OF THE APPELLANT. WE FIND THAT THE ASSESSEE HAS MADE PAYMENT OF INTEREST RANGING BETWEEN 9% TO 13.50%. AS PER THE PROVISIONS OF SECTION 40A(2)(B) THE EXCESSIVE OR UNREASONABLE INTERST RATE AS PER THE MARKET PREVAILING VALUE OF THE GOODS AND SERVICES FOR WHICH THE PAYMENT IS MADE. IN THIS CASE, THE ASSESSING OFFICER HAS CONSIDERED 13.50% RATE OF INTEREST AS BEING EXCESSIVE. THE BANK INTEREST RATE IS VARYING UP TO 12%. THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE REVERSE THE FINDINGS OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO CHARGE PAID AT THE RATE OF 12%, WHICH IS FAIR AND RE ASONABLE AS PER THE PREVAILING MARKET RATE . THEREFORE, WE REVERSE THE FINDINGS OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO CONSIDER THE INTEREST RATE AT 12% AND IT IS TO BE DISALLOWED THE BALANCE AMOUNT OF INTEREST BEING EXCESSIVE. 8 . DECISION OF THIS TRIBUNAL IN GIRDHARISINGH RATHORE IS LATER IN POINT OF TIME AND ALSO RELATES TO A LATER ASSESSMENT YEAR. BOTH THE ORDERS HAVE BEEN PASSED BY THE SAME BENCH AND THE SAME QUORUM. IT IS OBVIOUSLY THE LATER JUDGMENT THAT WILL PREVAIL AND THE EARLIER ONE WILL STAND IMPLIEDLY MODIFIED TO THAT EXTENT. IN ITS LATER DECISION RELATING TO A LATER ASSESSMENT YEAR, THIS TRIBUNAL HAS HELD THAT RATE OF INTEREST OF 12% WAS REASONABLE AND ANY INTEREST PAID OVER AND ABOVE 12% WAS UNREASONABLE AND EXCESSIVE HAVING REGAR D TO THE PREVAILING MARKET RATE AND THEREFORE LIABLE TO BE DISALLOWED U/S 40A(2)(B). THE AO HAS RIGHTLY FOLLOWED THE LATER ORDER OF THIS TRIBUNAL IN MAKING THE IMPUGNED DISALLOWANCE. THE LD. CIT (A) OUGHT TO HAVE FOLLOWED THE LATER ORDER OF THIS TRIBUNAL R ELATING TO A LATER ASSESSMENT YEAR. KEEPING IN VIEW THE MATERIALS BROUGHT ON RECORD BY THE AO AND THE LATEST ORDER OF THIS TRIBUNAL DATED 19 - 03 - 2010 IN ACIT V. GIRDHARISING RATHORE ITA NO.1139/RJT/2009, I WOULD CONSIDER APPROPRIATE TO CONFIRM THE ORDER OF THE AO RESTRICTING THE REASONABLENESS OF PAYMENT OF INTEREST TO 12%. IN THIS VIEW OF THE MATTER, THE ORDER PASSED BY THE CIT (A) IN THIS BEHALF DESERVES TO BE REVERSED. I HOLD ACCORDINGLY. SD/ - RAJKOT: 04.02.2013 (D K SRIVASTAVA) ACCOUNTANT MEMBER B I , IN THE INCOME TAX APPELLATE TRIBULAL; RAJKOT BENCH, RAJKOT. 5 . . 3 , KE . . , V BEFORE SHRI T. K. SHARMA, JM AND SHRI D. K. SRIVASTAVA AM IT A NO. 342/RJT/2012 P1 1 / ASSESSMENT YEAR 2008 - 09 A SSTT. COMMISSIONER OF INCOME - TAX, CIR CLE - 3 , JAMNAGAR. ( / APPELLANT) SHRI SHI RISH MAGANLAL RAVANI PROP. OF RAVANI ESTATE, BAZAR, KALAWAD SHITLA, JAMNAGAR. PAN NO. A BXPR2552E. NR / RESPONDENT T A / REVENUE BY SHRI AVINASH KUMAR, D. R. P1AA / ASSESSEE BY SHRI G. B. PARIKH, ADVOCATE. A B / DATE OF HEARING 21 - 12 - 2012 A B / DATE OF PRONOUNCEMENT - 01 - 201 3 / ORDER 5 . . 3 , KE / T. K. SHARMA, J. M. : THIS APPEAL BY THE REVENUE IS A GAINST THE ORDER DATED 26 - 03 - 2012 OF CIT (A), JAMNAGAR FOR THE ASSES SMENT YEAR 2008 - 09. 2. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE IS AN INDIVIDUAL DERIVES INCOME AS A MANUFACTURER AND TRADING IN ENGINE VALVES AND ENGINEERING AUTOMOBILES ITEMS AS A PROPRIETOR IN THE FIRM NAME OF M/S. SUZUKI ENGINEERS. FOR THE ASS ESSMENT YEAR UNDER APPEAL, HE FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.7,07,743/ - ON 27 - 10 - 2008. THE ACCOUNTS OF THE ASSESSEE ARE AUDITED AS REQUIRED U/S.44AB OF THE ACT. COMPLETE QUANTITATIVE DETAILS ARE MAINTAINED. THE AO OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS CREDITED INTEREST @ 18% ON THE LOANS TAKEN FROM FAMILY MEMBERS. THE AO ISSUED NOTICE TO THE ASSESSEE CALLING UPON HIM TO SHOW CAUSE AS TO WHY THE INTEREST CREDITED AT THE RATE OF 18% ON THE BORROWING S FROM THE FAMILY BE NOT RESTRICTED TO 12%. IN REPLY, THE ASSESSEE CONTENDED THAT THESE ARE UNSECURED LOANS WITHOUT ANY GUARANTEE AND TAKEN FOR LONG PERIOD AND EARLIER THIS TYPE OF INTEREST HAVE BEEN ALLOWED BY THE DEPARTMENT AND HENCE THE RATE OF 18% IS ALLOWABLE EXPENDITURE. IN SUPPORT OF HIS CLAIM, HE PLACED RELIANCE ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF VOLTAMP TRANSFORMERS P. LTD V/S CIT (1981) 129 ITR105 (GUJ) AND SUBMITTED THAT INTEREST RATE @18% HAS ALREADY BEEN ALL OWED EVEN ON THE BANK LOANS. IN ADDITION TO THIS THE ASSESSEE ALSO RELIED UPON THE ORDER OF THE RAJKOT BENCH OF THE TRIBUNAL IN THE CASE OF SHRI HAREN T DAVDA V/S ACIT, CIRCLE - 3, JAMNAGAR IN ITA NO.33 AND 34/RAJ/207, DATED 30.11.2009. THE CONTENTIONS OF THE ASSESSEE DID NOT FIND FAVOUR OF THE AO AND HE FRAMED THE ASSESSMENT U/S.143 (3) OF THE I. T. ACT, WHEREIN HE DISALLOWED INTEREST OF RS.3,22,091/ - @ 6% U/S.40A(2) (B) OF THE I.T. ACT AS EXCESSIVE AS UNDER: - NO. NAME RELATION INTEREST PAID AT 18% IN RS. INTEREST DISALLOWED AT 6% IN RS. 1 BHAVIK SHIRISH RAVANI SON 3,95,413 1,31,804 / - 2 MITABEN SHIRISH RAVANI WIFE 3,64,131 1,21,377 / - 3 SHIRISH MAGANLAL RAVANI (HUF) HUF STATUS OF APPELLANT 2,06,608 68,869 / - TOTAL 9,66,152 3,22, 091/ - 3. ON APP EAL BEFORE THE LD. CIT (A), ASSESSEE EXPLAINED THAT INTEREST PAID @ 18% IS NOT EXCESSIVE. THESE LOANS ARE UNSECURED AND OBTAINED WITHOUT ANY SECURITIES. IT WAS ALSO SUBMITTED THAT IN THE ASSESSMENT YEAR UNDER APPEAL, ON SECURED LOAN, BANK CHARGED INTERES T 17.04% ON MONTHLY RESTS I.E. EFFECTIVE RATE OF INTEREST COMES TO 18.44% ON YEARLY BASIS. APART FROM THIS, ASSESSEE HAS TAKEN A BANK LOAN ON CAR FROM ICICI BANK ON 05 - 07 - 2006. ON THIS LOAN, ICICI BANK CHARGED INTEREST AT A RATE OF 17.04% WHICH ASSESSEE IS PAYING ON MONTHLY BASIS. FURTHER, ON PURCHASES, IF THERE IS A LATE PAYMENT THEN SUPPLIERS ARE CHARGING INTEREST @ 24% ON LATE PAYMENT OF PURCHASE PRICE. IN SUPPORT OF THIS, PHOTO - COPIES OF PURCHASE BILL WERE PRODUCED BEFORE THE LD. CIT (A). AFTER CON SIDERING THE VARIOUS SUBMISSIONS, IN THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE DISALLOWANCE OF INTEREST OF RS.3,22,091/ - U/S.40A(2)(B) OF THE ACT FOR THE DETAILED REASON GIVEN IN PARA - 4.2 WHICH READS AS UNDER: - 4.2. I HAVE DULY CONSIDERED THE SUBMISS ION OF THE APPELLANT AND THE DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORDER. IT WAS EXPLAINED BY THE APPELLANT THAT THE INTEREST PAID @ 18% IS NOT EXCESSIVE AND THESE LOANS ARE UNSECURED AND OBTAINED WITHOUT ANY SECURITIES. ALSO VARIOUS EVIDENCES HAVE BEEN SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. APPELLANT FURTHER SUBMITTED THAT IN THE CASE OF SHRI HAREN T. DAVDA THE HONBLE ITAT, RANKOT BENCH IN ITA NO.33 AND 34/RJT/2007 VIDE ORDER DTD. 30 - 10 - 2009 HELD THAT INTEREST PAID TO RELATIVES AT THE RATE OF 18% IS REASONABLE AND HAS FILED A COPY OF THE SAID ORDER ALONGWITH THE WRITTEN SUBMISSION. I HAVE ALSO GONE THROUGH THE SAID ORDER OF THE HONBLE ITAT, RAJKOT BENCH. I FIND THAT THERE IS NO CASE OF DISALLOWANCE U/S.40A(2)(B) OF THE ACT. PAY MENT OF INTEREST @ 18% IS NOT HIGH COMPARING TO THE MARKET RATE WHICH IS AROUND 18%. AO HAS MECHANICALLY MADE THIS DISALLOWANCE WITHOUT BRINGING ANY ADVERSE THING ON RECORD OR ANY COMPARABLE CASE TO INDICATE EXCESSIVENESS. IN VIEW OF THE ABOVE AND ALSO F OLLOWING THE ABOVE ORDER OF HONBLE ITAT, RAJKOT BENCH IN THE CASE OF SHRI HAREN T. DAVE FOR A.YS. 2002 - 03 & 2003 - 04, THE DISALLOWANCE OF RS.3,22,091 MADE BY THE AO OUT OF INTEREST PAYMENT IS DELETED. 4. IN RESPECT OF FALL IN GP, THE AO OBSERVED THAT I N THE PREVIOUS TWO ASSESSMENT YEARS I.E. AY 2006 - 07 AND 2007 - 08, THE ASSESSEE HAS DECLARED GP AT THE RATE OF 25.20% AND 40.23% RESPECTIVELY. BUT FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE DECLARED GP AT THE RATE OF 20.81%. THE AO ISSUED SHOW CAUSE NOT ICE TO THE ASSESSEE FOR SUCH DECLINE IN THE GP RATE. IN REPLY, THE ASSESSEE CONTENDED THAT FALL IN GP IS DUE TO INCREASE IN DIRECT EXPORT EXPENSES AND TRADE COMMISSION IN ADDITION TO THIS THE ASSESSEE ALSO CONTENDED THAT COST FOR LOCAL SALES AND EXP ORT SALES HAVE BEEN INCREASED COMPARABLE TO THE LAST TWO YEARS SALES AND TURNOVER. THE AO REJECTED THE EXPLANATION OF THE ASSESSEE AND MADE ADDITION OF RS.12,07,079/ - BEING 5% OF TOTAL TURNOVER MONTHLY ON THE GROUND THAT G.P. DECLARED IN THE ASSESSMENT YE AR UNDER APPEAL IS LOWER BY 7.93% OF AVERAGE PROFIT OF LAST THREE YEARS. 5. IN RESPECT OF G.P. ADDITION BEFORE LD. CIT(A), ASSESSEE CONTENDED THAT DETAILS OF TURNOVER FOR THE YEAR UNDER CONSIDERATION AND EARLIER THREE YEARS ARE AS UNDER: - A. Y. TOTAL TU RNOVER GROSS PROFIT IN PERCENTAGE 2005 - 06 13753921 2911937 21.17% 2006 - 07 13307207 3353657 25.20% 2007 - 08 14130445 5685229 40.23% 2008 - 09 24141592 5022984 20.81% 6. IT WAS ALSO SUBMITTED THAT BOOKS OF ACCOUNT WERE AUDITED, FULL QUANTITATIVE DETAILS A RE MAINTAINED. NO DEFECT IN THE BOOKS OF ACCOUNTS HAS BEEN POINTED OUT BY THE AO. BOOKS OF ACCOUNT ARE AUDITED. AFTER CONSIDERING THESE SUBMISSIONS, IN THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE ADDITION OF RS.12,07,079/ - WHICH WAS MADE BY AO ON ACC OUNT OF LOW G.P. FOR THE DETAILED REASON GIVEN IN PARA - 5.2 WHICH READS AS UNDER: - 5.2 I HAVE DULY CONSIDERED THE SUBMISSION OF THE APPELLANT AND THE DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORDER. I FIND THAT THE AO HAS NOT REJECTED THE BOOKS OF THE APPELLANT AND HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNT. AO HAS MADE ADDITION MERELY ON THE GROUND OF LOW GROSS PROFIT, WITHOUT REJECTING BOOKS. AO HAS NOT BROUGHT ON RECORD ANYTHING TO SHOW THAT THE GP RATE OF THE APPELLANT WAS LOW. APPEL LANT HAS GIVEN ELABORATE CHARTS TO SHOW THAT SALES REALIZATION IS LESS THIS YEAR WHEREAS THE COST HAS INCREASED TO A GREAT EXTENT. THUS IN MY OPINION THE APPELLANT HAS BEEN ABLE TO SATISFACTORILY EXPLAIN THE REASONS FOR FALL IN GP DURING THE YEAR. THERE ARE NO CONTRARY EVIDENCES TO SHOW ANY SALES OUTSIDE BOOKS OR SUPPRESSION OF PROFIT ETC. THEREFORE, I HOLD THAT THE AO WAS NOT JUSTIFIED IN MAKING ADDITION BY TAKING THE GP RATE AT 5% OF TOTAL TURNOVER AND THE SAME IS HEREBY ORDERED TO BE DELETED. AGGRIE VED WITH THE ORDER OF LD. CIT(A) DELETING BOTH ADDITIONS, THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL ON THE FOLLOWING GROUNDS: - 1. THE CIT(A) ERRED IN LAW AND IN FACTS IN HOLDING THAT DISALLOWANCE OF INTEREST OF RS.3,22,091/ - PAID ON LOANS TAKEN FR OM FAMILY MEMBERS U/S.40A(2) OF THE IT ACT IS WRONG. 2. THE CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE ADDITION OF RS.12,07,079/ - BY TAKING THE GP RATE AT 5% OF TOTAL TURNOVER. 7. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF REVENUE, SHRI AVINA SH KUMAR, D. R. APPEARED AND WITH REGARD TO DISALLOWANCE OF INTEREST U/S.40A(2)(B) OF THE ACT CONTENDED THAT AS PER THE PROVISIONS OF SEC.40A(2) OF THE ACT, F THE AO IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FA IR MARKET VALUE OF GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. HE SUBMITTED THAT COST OF LOAN FROM THE BANK IS FROM THE HIGHER SIDE WHEREAS, LOANS FROM THE PRIVATE PARTIES IS AVAILABLE AT LOWER RATE OF INTEREST. THE ASSESSEE TOOK THE LOAN AT H IGHER RATE OF INTEREST FROM FAMILY MEMBERS THEREFORE, AO RIGHTLY INVOKED THE PROVISION CONTAINED IN SECTION 40A(2) OF THE I.T. ACT, 1961 AND DISALLOWED EXCESSIVE INTEREST @6%. 8. WITH REGARD TO G.P. ADDITION, THE LD. D.R. POINTED OUT THAT THERE IS A SHARP FALL IN G.P. RATIO FROM THE PREVIOUS YEAR. AO ASKED THE ASSESSEE TO JUSTIFY THE FALL IN G.P. RATIO. INITIALLY, ASSESSEE SUBMITTED THAT FALL IN G.P. RATIO WAS DUE TO INCREASE IN DIRECT EXPORT WHERE PACKING EXPENSES AND TRADE COMMISSION HAD INCREASED. WH EN THE ASSESSEE WAS CONFRONTED THAT EXPENDITURE ON THESE TWO FACTORS IS VERY COMPARABLE TO LAST YEAR FIGURES, THEN THE ASSESSEE CHANGED HIS LINE OF ARGUMENT AND PRESENTED A BREAK - UP OF TOTAL SALES BETWEEN EXPORTS AND LOCAL SALES AND CONTENDED THAT THERE HA S BEEN INCREASE IN THE COST PRICE WHILE SALES PRICE WITH RESPECT TO EXPORTS HAS BEEN DECLINED. BEFORE THE AO, ASSESSEE HAS ALSO STATED THAT THERE WAS GLOBAL SLOWDOWN AND DURING THE PERIOD, THE ASSESSEE FOCUSED ON INCREASING EXPORTS THROUGH COMPETITIVE PRI CING AND SUBMITTED SEVERAL CHARTS TO PROVE HIS POINT. HOWEVER, THE INCREASE IN COST PRICE AND DECREASE IN SALES PRICE WERE NOT SUBSTANTIAL. FOR THESE REASONS, THE AO WAS OF THE VIEW THAT THERE WAS MINOR INCREASE AND DECREASE IN COST PRICE AND SALES PRICE S AS PER NORMAL BUSINESS CYCLE, THE AVERAGE METHOD HAS TO BE TAKEN. ACCORDINGLY, THE CONTENTION OF THE ASSESSEE WAS RIGHTLY REJECTED AND ADDITION @ 5% OF TOTAL SALES WAS RIGHTLY MADE WHICH COMES TO RS.12,07,079/ - . 9. ON THE OTHER HAND, SHRI G. B. PARIKH , ADVOCATE APPEARED ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE ORDER OF LD. CIT (A). THE COUNSEL OF THE ASSESSEE FILED A PAPER - BOOK WHICH WAS SUBMITTED BEFORE THE LD. CIT (A) AND CONTENDED THAT INTEREST PAID @ 18% WAS FAIR AND REASONABLE THEREFORE , THE LD. CIT (A) RIGHTLY DELETED THE ADDITION OF RS.3,22,091/ - MADE BY AO U/S.40A(2) OF THE I. T. ACT, 1961. HE ALSO CONTENDED THAT TO GET FUNDS FOR THE BUSINESS PURPOSE FROM THE BANKS AND FINANCIAL INSTITUTIONS AT LOWER RATES ARE VERY DIFFICULT AND EVE N IF IT GETS IT TAKES LONG TIME WHICH DEFEAT THE PURPOSE. ON THE CONTRARY, FUNDS FROM THE LOCAL PERSONS, FAMILY MEMBERS IS EASILY AVAILABLE FOR WHICH RATE OF INTEREST IS TO BE PAID LITTLE BIT MORE AND HENCE RATE OF INTEREST AT THE RATE OF 18% IS REASONA BLE IN FAVOUR OF BUSINESS WHICH IS NORMAL PRACTICE IN THE COMMERCIAL PREMISES AND HENCE THE LD. CIT(A) IS CORRECT IN ALLOWING THE SAME. 10. WITH REGARD TO G.P. ADDITION, THE COUNSEL OF THE ASSESSEE POINTED OUT THAT FULL QUANTITATIVE DETAILS ARE MAINTA INED, BOOKS OF ACCOUNT ARE AUDITED, NOWHERE IN THE ASSESSMENT ORDER AO REJECTED THE BOOKS OF ACCOUNT, NO SINGLE DEFECT FOR MAINTAINING BOOKS OF ACCOUNT WAS FOUND, THEREFORE, LD. CIT (A) IS LEGALLY AND FACTUALLY CORRECT IN DELETING THE G.P. ADDITION OF RS.1 2,07,079/ - MADE BY AO IN THE ASSESSMENT ORDER. 11. HAVING HEARD BOTH SIDES, WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS WELL SETTLED LAW THAT SECTION 40A(2)(A) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST HELD THAT EXPENDITURE WAS EXCESSIVE AND UNREASONABLE LOOKING TO THE INTEREST PAID BY THE ASSESSEE TO BANK AND TO SUPPLIER, INTEREST @18% PAID BY THE ASSESSEE ON UNSECURED LOAN IS NEITHER EXCESSIVE NOR UNREASONABLE. WE ALSO FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IT IS EASY TO GET FUNDS FROM THE MARKET THAN FROM THE BANKS OR FINANCIAL INSTITUTIONS FOR WHICH IF SOME RATE OF INTEREST IS PAID IS NOTHING WRONG TO SATISFY THE EXPEDIENCY OF FUNDS. IN VIEW OF THE ABOVE DISCUSSION, W E ARE THEREFORE OF THE VIEW THAT LD. CIT (A) IS LEGALLY AND FACTUALLY CORRECT IN DELETING THE DISALLOWANCE OF INTEREST WHICH WAS MADE BY AO BY INVOKING THE PROVISIONS CONTAINED IN SEC.40A(2)(A) OF THE I.T. ACT. WE THEREFORE, DECLINED TO INTERFERE IN THE W ELL - REASONED ORDER OF THE LD. CIT(A). THE GROUND NO.1 IS REJECTED. 12. WITH REGARD TO G.P. ADDITION, FROM THE PERUSAL OF PARA - 4 OF THE ASSESSMENT ORDER, IT CAN BE SEEN THAT AO MADE COMPARISON TO FIGURES OF LAST THREE ASSESSMENT YEARS AND MADE ADDITION BY TAKING THE G.P. RATE AT 5% OF TOTAL TURNOVER. THE BOOKS OF ACCOUNT ARE AUDITED. NO DEFECT IN THE BOOKS OF ACCOUNT IS POINTED OUT BY THE AO IN THE ASSESSMENT ORDER. IT IS WELL SETTLED LAW THAT NO ADDITION CAN BE MADE MERELY ON THE GROUND OF LOW G.P. UN LESS THE BOOKS OF ACCOUNT ARE REJECTED. FURTHER, THERE IS NO EVIDENCE TO SHOW THAT THE ASSESSEE HAS MADE ANY SALE OUTSIDE THE BOOKS OR SUPPRESSED THE PROFIT ETC. THE AO HAS MADE THE ADDITION ON THE BASIS OF SURMISES AND CONJECTURE WHICH CANNOT BE UP HELD UNDER THE GARB OF LAW. KEEPING IN VIEW ALL THESE FACTORS INTO CONSIDERATION, WE ARE OF THE CONSIDERED OPINION, THAT THE LD. CIT (A) IS LEGALLY AND FACTUALLY CORRECT IN DELETING G.P. ADDITION OF RS.12,07,079/ - WHICH WAS MADE BY AO WITHOUT REJECTING THE BOOKS OF ACCOUNT. WE THEREFORE, DECLINED TO INTERFERE IN THE ORDER OF THE LD.CIT(A) ON THIS COUNT. THE GROUND NO.2 IS ALSO REJECTED. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTION ED HEREINABOVE. XXX SD/ - ( . . T D. K. SRIVASTAVA ) ( B . . 1 / T. K. SHARMA) ,M, / ACCOUNTANT MEMBER P T / JUDICIAL MEMBER / ORDER DATE - 01 - 2013. /RAJKOT SRL 0 EJO O / COPY OF ORDER FORWARDED TO: - 1 . / APPELLANT - ASSISTANT COMMISSIONER OF INCOME - TAX, CIR - 3, JAMNAGAR. 2 . NR / RESPONDENT - SHRI SHIRISH MAGANLAL RAVANI, PROP. OF RAVANI ESTATE, BAZAR, KA LAWAD SHITLA, JAMNAGAR. 3 . I E / CONCERNED CIT , JAMNAGAR. 4 . E - / CIT (A) , JAMNAGAR. 5 . NPPI , B I , / DR, ITAT, RAJKOT 6 . 1 / GUARD FILE. / BY ORDER , SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, RAJKOT.