The ACIT, Circle-6, Ahmedabad V. M/s. Budhalal & Co., Ahmedabad

ITA 47/AHD/2011

• Counselvise Citation: 4720514 RSA 2011
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 30-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P TALATI
• Assessee Lawyers: JIGAR M PATEL
• Keywords: Fair market value

Judgement Text

, , . .. . . .. . , , , , . .. . . .. .!'#$ !'#$ !'#$ !'#$ , % % % % & & & & IN THE INCOME TAX APPELLATE TRIBUNAL : A BENCH : AHMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA, J.M. & HONBLE SHRI A.K.GARODIA, A.M.) . ITA NO. 47/AHD./2011 : ' ()- 2006-07 A.C.I.T., CIRCLE-6, AHMEDABAD (,- /APPELLANT) -VS- M/S.BUDHALAL & CO., AHMEDABAD ( ./,- /RESPONDENT ) (PAN : AAAFB 8263A) ,- 0 1 / APPELLANT BY : SHRI S.P.TALATI, SR.D.R. ./,- 0 1 / RESPONDENT BY : SHRI JIGAR M. PATEL 2'3 0 4% / DATE OF HEARING : 30/09/2011 5'( 0 4% / DATE OF PRONOUNCEMENT : 30/09/2011 / ORDER PER SHRI T.K. SHARMA, JUDICIAL MEMBER : THIS APPEAL FILED BY THE REVENUE IS AGAINST THE OR DER DATED 25-10-2010 OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-XI, AHM EDABAD FOR DELETING THE ADDITION OF RS.8,26,856/- BEING EXCESS INTEREST PAI D BY THE ASSESSEE UNDER SECTION 40A(2)(B) OF THE ACT FOR THE ASSESSMENT YEAR 2006-2 007. 2. AT THE OUTSET, SHRI JIGAR M. PATEL, APPEARING FO R THE ASSESSEE, POINTED OUT THAT IN THE ASSESSMENT ORDER, THE AO MECHANICALLY, FOLLOWIN G HIS OWN DECISION FOR THE ASSESSMENT YEAR 2005-06 MADE THE FOLLOWING DISALLOW ANCES: (1) IN THE CASE OF PARTNERS RS.7,34,657/- (2) IN THE CASE OF SHRI RAMESCHANDRA B. PATEL HUF RS. 92,199/- RS.8,26,856/- 3. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. CIT(A) , FOLLOWING HIS ORDER FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. 2005-06 DATED 18.03.2008 IN APPEAL NO.CIT(A)-XI/472/07-08, DELETED THE ADDITION. AGAIN ST THE ORDER OF THE LD. CIT(A) FOR ITA NO. 47-AHD-11 2 THE ASSESSMENT YEAR 2005-06, AN APPEAL WAS FILED AN D THE TRIBUNAL VIDE ITS ORDER DATED 07.01.2011 IN ITA NO.2056/AHD/2008, DELETED THE ADD ITION OF RS.8,11,902/- MADE ON ACCOUNT OF INTEREST PAID TO PARTNERS UNDER SECTION 40A(2)(B) OF THE I.T. ACT, 1961. THE RELEVANT DISCUSSION IS CONTAINED IN PARA 9 OF THE D ECISION OF THE TRIBUNAL, WHICH READS AS UNDER: 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE ISSUE IN THE FIRST GROUND RAISED BY THE REVENUE IS AS TO WHETHER OR NOT THE QUESTION OF ALLOWING OR DISALLOWING INTEREST OR PAR T THEREOF TO A PARTNER IS COVERED BY THE PROVISIONS OF SECTION 40A(2)(A) OF T HE ACT? FOR THIS MATTER, WE MAY REFER TO THE PROVISIONS OF SECTION 40A(2) (A) O F THE ACT, THE RELEVANT PORTION OF WHICH READS AS FOLLOWS '40A(2)(A). WHERE THE ASSESSEE INCURS ANY EXPENDITU RE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REF ERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THEASSESSING OFFICER IS OF TH E OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING, TO HIM THEREFROM, SO MUCH O F THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE S HALL NOT BE ALLOWED AS A DEDUCTION.' A MERE GLANCE AT THE AFORESAID PROVISION REVEALS TH AT THE EXPENDITURE MENTIONED THEREIN IS IN RELATION TO ANY PERSON REFE RRED TO IN CLAUSE (B) OF THE SUB-SECTION AND THE EXPENDITURE HAS TO BE CONSIDERE D IN RELATION TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSI ON OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE THER EFROM. HONBLE JURISDICTIONAL HIGH COURT RECENTLY OBSERVED IN CORONATION FLOUR MI LLS VS. ACIT,188 TAXMAN 257 THAT IN RELATION TO THE DISALLOWANCE UNDER THE PROVISIONS OF SECTION 40A(2) OF THE ACT, A PLAIN READING OF THE PROVISION REVEAL S THAT WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE ( B) OF SECTION 40A(2) OF THE ACT AND THE ASSESSING OFFICER IS OF THE OPINION THA T SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO (A) FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E; OR (B) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE; OR (C) THE BENEFIT S DERIVED BY OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH GOODS, SERVICES OR FACI LITIES, THEN THE ASSESSING OFFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF T HE EXPENDITURE AS IS SO CONSIDERED BY THE ASSESSING OFFICER TO BE EXCESSIV E OR UNREASONABLE. THEREFORE, IT BECOMES APPARENT THAT THE ASSESSING O FFICER IS REQUIRED TO RECORD A FINDING AS TO WHETHER THE EXPENDITURE IS EXCESSIV E OR UNREASONABLE IN RELATION TO ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED, WH ICH ARE INDEPENDENT AND ITA NO. 47-AHD-11 3 ALTERNATIVE TO EACH OTHER. ALL THE THREE REQUIREMEN TS NEED NOT EXIST SIMULTANEOUSLY. IN A GIVEN CASE, IF ANY ONE CONDITI ON IS SHOWN TO BE SATISFIED THE PROVISION CAN BE INVOKED AND APPLIED, IF THE FA CTS SO WARRANT. THUS, ONLY SO MUCH OF THE EXPENSES, IF PAID TO A PERSON REFERRED TO IN CLAUSE (B), ARE ALLOWABLE WHICH ARE FOUND TO BE NOT EXCESSIVE AND U NREASONABLE AND THE EXCESSIVE OR UNREASONABLE PORTION HAS TO BE DISALLO WED. IT IS WELL SETTLED THAT THE PROVISIONS OF SECTION. 40A(2)(A) OF THE ACT CAN NOT HAVE ANY APPLICATION UNLESS IT IS FIRST CONCLUDED THAT THE EXPENDITURE W AS EXCESSIVE OR UNREASONABLE, AS HELD IN THE CASE OF UPPER INDIA STEEL MANUFACTUR ING AND ENGINEERING CO. PRIVATE LIMITED, 117 ITR 569(SC). THE PROVISIONS OF SECTION 40A(2)(A) CAME UP FOR CONSIDERATION BEFORE THE HONBLE KARNATAKA HIGH COURT IN T. T. PVT. LTD. V. ITO [1980] 121 ITR 551 , AND VENKATARAMAIAH J., AT PAGES 567 TO 570 OF THE REPORTED JUDGMENT, CONSIDERED THE SCOPE OF THE AFOR ESAID PROVISION IN THE LIGHT OF THE EXTANT PROVISIONS OF SECTION 40 AND OBSERVED THAT THE GOODS, SERVICES AND FACILITIES REFERRED TO IN SECTION 40A(2) (A) ARE TH OSE WHICH HAVE A MARKET VALUE AND WHICH ARE COMMERCIAL IN CHARACTER. IN THE CASE OF CHHAJED STEEL CORPORATION VS. ASSTT. CIT (2000) 69 TTJ (AHD) 232 : (2001) 77 ITD 419 (AHD) IT WAS HELD THAT THE PROVISIONS OF SS. 40(B) AND 40 A(2) OPERATE IN DIFFERENT FIELDS AND THE PROVISIONS OF S. 40A HAVE NO APPLICATION IN THE CASES WHERE S. 40(B) HAS BEEN APPLIED. LIKEWISE, HON'BLE KARNATAKA HIGH COUR T IN THE CASE OF N.M. ANNIAH & CO. VS. CIT 1975 CTR (KAR) 78 : (1975) 101 ITR 348 (KAR) HELD THAT S. 40A HAS NO APPLICATION TO THE MATTERS CONTAINED IN S. 40(B) AND THE OVERRIDING EFFECT GIVEN TO S. 40A IS ONLY IN RESPEC T OF MATTERS NOT COVERED BY S. 40(B). IN THE INSTANT CASE, THE AO CONCLUDED THAT I NTEREST PAID TO PARTNERS IS EXCESSIVE OR UNREASONABLE VIS--VIS INTEREST PAID O N TRADE DEPOSITS . LIKEWISE INTEREST PAID TO HUF OF ONE OF THE PARTNERS HAS BEE N FOUND TO BE EXCESSIVE VIS A-VIS INTEREST CHARGED ON LOANS AND ADVANCES TO WES TERN INDIA SEAS BRINS LTD.. BUT THERE IS NOTHING TO SUGGEST THAT THE AO FOUND T HE PAYMENT OF SUCH INTEREST EXCESSIVE HAVING REGARD TO EITHER (A) FAIR MARKET V ALUE OF THE SERVICES OR FACILITIES; OR (B) THE LEGITIMATE NEEDS OF THE BUSI NESS OF THE ASSESSEE; OR (C) THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH SERVICES OR FACILITIES. NOT A WHISPER HAS BEEN MADE BY THE AO I N RESPECT OF ANY OF THESE THREE INGREDIENTS IN HIS ASSESSMENT ORDER. THERE IS NOTHING TO SUGGEST THAT THE AO EVER BROUGHT ANY MATERIAL ON RECORD ON THIS ASPE CT IN RESPECT OF THE FAIR MARKET VALUE OF THE FACILITIES, FOR WHICH THE PAYME NT HAD BEEN MADE, BEFORE CONCLUDING THAT EXPENDITURE WAS EXCESSIVE OR UNREAS ONABLE. WE ARE OF THE OPINION THAT DISALLOWANCE UNDER S. 40A(2) IS TO BE CONSIDERED VIS-A-VIS THE MARKET VALUE OF THE SERVICES OR FACILITIES OR ON FU LFILLMENT OF ANY OF THE OTHER INGREDIENTS MENTIONED HEREINBEFORE AND NOT THE INDI VIDUAL ACTION OF THE ASSESSEE IN CHARGING OR PAYING INTEREST. IN VIEW TH EREOF, WE ARE NOT INCLINED TO INTERFERE WITH THE CONCLUSION DRAWN BY THE LD. CIT( A). THEREFORE, GROUND NOS. 1 & 2 IN THIS APPEAL ARE DISMISSED. 4. ON THE BASIS OF THE ABOVE, THE LD. COUNSEL OF TH E ASSESSEE SUBMITTED THAT THE MATTER IS SQUARELY COVERED BY THE DECISION OF THE T RIBUNAL IN ASSESSEES OWN CASE FOR ITA NO. 47-AHD-11 4 THE ASSESSMENT YEAR 2005-06 ( SUPRA ). THEREFORE, THE VIEW TAKEN BY THE LD. CIT(A) FOR THE ASSESSMENT YEAR 2006-07 BE UPHELD. 5. ON THE OTHER HAND, SHRI S.P.TALATI, SR.D.R., APP EARING ON BEHALF OF THE REVENUE, COULD NOT CONTROVERT THE AFORESAID SUBMISS IONS MADE BY THE LD. COUNSEL OF THE ASSESSEE. 6. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT THE LD. CIT(A) HAS DELETED THE DISALLOWANCE OF RS.8,26,856/- UNDER SECTION 40A(2)( B), FOLLOWING HIS ORDER FOR THE ASSESSMENT YEAR 2005-06. THE VIEW TAKEN BY THE LD. CIT(A) IN THE ASSESSMENT YEAR 2005-06 HAS BEEN UPHELD BY THE ITAT A BENCH, AHME DABAD IN ITA NO.2055&2056/AHD/2008 (SUPRA). WE, THEREFORE, FOLLO WING THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005 -06, CONFIRM THE ORDER OF THE LD. CIT(A) DELETING THE DISALLOWANCE OF RS.8,26,856/-, WHICH WAS MADE BY THE AO UNDER SECTION 40A(2)(B) IN THE ASSESSMENT YEAR UNDER APPE AL. 7. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 6 0 5'( #' ) 30/09 /2011 ' 7 0 !3 8 THIS ORDER PRONOUNCED IN THE OPEN COURT ON 30/09/2011. SD/- SD/- (A.K.GARODIA) (T.K. SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30/09/2011 0 00 0 .49 .49 .49 .49 :9(4) :9(4) :9(4) :9(4)- -- - 1. ,- 2. ./,- 3. 4 2> 4. 2>- - 5. 9A! .4' , , 8 6. !$ C6 , D/ F , 8 TALUKDAR/ SR. P.S. ITA NO. 47-AHD-11 5