Shree Laxmi Bidi Trading Co., Ahmedabad V. The ACIT.,Circle-11, Ahmedabad

ITA 524/AHD/2009

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67999 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-11-2013
• Assessment Year: 2001-2002
• Appeal Filed On: 18-02-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D S KALYAN CIT D R
• Keywords: Business expenditure; Opportunity of being heard; Maximum Marginal Rate; Diversion of income; Earning of tax free income; Fair market value; Reason to believe
• Section: 143(3); 14A; 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMADABAD , , , , BEFORE SHRI MUKUL KR. SHRAWAT , JUDICIAL MEMBER AND , SHRI T.R. MEENA, ACCOUNTANT MEMBER .. , ! ' # ' # ' # ' # ITA NOS. 414 TO 417 & 1952/AHD/2009 & 2461/AHD/2010 ASSESSMENT YEARS : 2001-02, 03-04, 04- 05, 05-06,06-07 & 07-08 RESP. ASSTT. COMMISSIONER OF INCOME-TAX, CIRCLE-11, AHMEDABAD V/S . SH. LAXMI BIDI TRADING CO. CEMENT CHAWL, GOMTIPUR ROAD, AHMEDABAD PAN NO. A AFFS5299C (APPELLANT) .. (RESPONDENT) ITA NOS. 524 TO 527 & 1923/AHD/2009 ASSESSMENT YEARS : 2001-02, 03-04, 04- 05, 05-06,06-07 RESP. SH. LAXMI BIDI TRADING CO. CEMENT CHAWL, GOMTIPUR ROAD, AHMEDABAD V/S . ASSTT. COMMISSIONER OF INCOME-TAX, CIRCLE-11, AHMEDABAD C.O. NO. 265/AHD/2010 (IN ITA NO. 2461/AHD/2010) ASSESSMENT YEAR :07-08. SH. LAXMI BIDI TRADING CO. CEMENT CHAWL, GOMTIPUR ROAD, AHMEDABAD V/S . ASSTT. COMMISSIONER OF INCOME-TAX, CIRCLE-11, AHMEDABAD $ % & BY REVENUE SHRI D. S. KALYAN, CIT. D.R. % & /BY ASSESSEE SHRI S. N. SOPARKAR, SR. ADV. '( % ! /DATE OF HEARING 21.11.2013 )*+ % ! /DATE OF PRONOUNCEMENT 29.11.2013 ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 2 O R D E R PER BENCH THESE APPEALS AND C.O. FILED BY REVENUE AND ASSESSE E WHICH HAVE EMANATED FROM THE ORDERS OF CIT(A)-XVI, AHMADABAD, DATED 15.12.2008 FOR A.Y. 2001-02, 03-04, 04-05 & 05-06, DATED 15.04.200 9 FOR A.Y. 06-07 IN REVENUES AND ASSESSEES APPEALS & DATED 21.06.2010 FOR A.Y. 07-08 IN REVENUES APPEAL AND ASSESSEES C.O. THESE APPEALS AND C.O. WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS C OMMON ORDER FOR THE SAKE OF CONVENIENCE. THE EFFECTIVE GROUNDS OF ALL APPEA LS AND C.O. ARE AS UNDER: GROUNDS OF ITA NO.524/AHD/2009 FOR A.Y. 2001-02 (AS SESSEES APPEAL) 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) XVI AHMADABAD CIT(A) HAS ERRED IN HOLDING THAT THE ASSESSING OFFICER WAS JUSTIFIED IN ISSUING NOTICE U/S.148. IT IS PRAYED THAT THE ASSESSMENT ORDER PASSED U/S 143( 3) RWS 147 IS BAD IN LAW ILLEGAL & INVALID AS ALL THE PRIM ARY FACTS WERE BEFORE ASSESSING OFFICER WHEN ORIGINAL ORDER U /S 143(3) DTD. 26/03/2004 WAS PASSED. 2. THE CIT(A) HAS ERRED IN HOLDING THAT THE PAYMENT OF INTEREST @ 18% TO RELATIVES IS EXCESSIVE AND UNREAS ONABLE IN TERMS OF PROVISIONS OF SECTION 40A(2)(B) HAVING REGARD TO THE FAIR MARKET VALUE. IT IS SUBMITTED THAT PAYMEN T OF INTEREST BY THE FIRM ON GOODS SECURITY DEPOSITS AND OTHER PERSONS AT 15% IS NOT COMPARABLE AND THEREFORE INTE REST PAID @ 18% IS REASONABLE AND NOT EXCESSIVE, IF COMP ARED WITH THE MARKET RATE AS PER BANKS LENDING RATES. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 3 GROUNDS OF ITA NO.525/AHD/2009 FOR A.Y. 2003-04 (AS SESSEES APPEAL) 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST 40A(2)(B) CONSIDERING THA T 18% WAS EXCESSIVE AND UNREASONABLE AND THEREBY CONFIRME D THE DISALLOWABLE OF INTEREST 3% OUT OF 18% IN SPITE OF THE FACTS THAT ASSESSMENT ORDER WAS PASSED AS PER THE DIRECTIONS ISSUED BY ADDL. COMMISSIONER OF INCOME T AX U/S 144A OF THE IT ACT. IT IS PRAYED THAT DISALLOWANCE BE DELETED AND IT SHOULD BE HELD THAT 18% INTEREST IS REASONABLE. GROUNDS OF ITA NOS .526, 527 & 1923/AHD/2009 FOR A. Y. 2004-05, 05-06 & 06-07 (ASSESSEES APPEALS) 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST 40A(2)(B) CONSIDERING THA T 18% WAS EXCESSIVE AND UNREASONABLE AND THEREBY CONFIRME D THE DISALLOWANCE OF INTEREST BY 4%. THE LEARNED CI T OUGHT TO HAVE HELD THAT 18% INTEREST IS REASONABLE NOT EXCESSIVE. GROUNDS OF ASSESSEES C.O. NO. 265/AHD/2010 FOR A.Y . 2007-08 1. THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS.78277 8/- WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE . 2. IT IS THEREFORE, PRAYED THAT, THE LEARNED CIT OU GHT TO HAVE DELETED THIS DISALLOWANCE OF INTEREST OF RS.782778/ - ALSO. 3. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE U/S 14A AMOUNTING TO RS.217377/-. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 4 GROUNDS OF ITA NOS.414 TO 417 & 1952/AHD/2009 FOR A .Y. 2001-02, 03-04, 04-05, 05-06 & 06-07 (REVENUES APPEAL) (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LD. CIT(A) HAS ERRED IN ANALYZING THE FACTS AND HOLDING THAT ASSESSEE DOES NOT HAVE SUFFICIENT FUND TO OPERATE ITS BUSINESS, NECESSITATING BORROWALS. (2) THE LD. CIT(A) ERRED ON THE FACTS IN NOT APPREC IATING THAT BY BORROWING MONEY AT HIGHER RATE FROM FAMILY MEMBE RS OF PARTNERS AND DEPOSITING SUCH MONEY IN BANK FDRS, ASSESSEE HAS HELPED THEM TO EARN MORE INCOME BY WAY OF INTEREST THAN WHAT THEY WOULD HAVE EARNED OTHERWISE . (3) THE LD. CIT(A) HAS ERRED IN HIS FINDINGS THAT F UNDS HAVE BEEN BORROWED FOR BUSINESS THOUGH FACTS SPEAK OTHER WISE AS HELD BY AO. GROUNDS OF ITA NO. 2461/AHD/2010 FOR A.Y. 2007-08 ( REVENUES APPEAL) (1) THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS R ESTRICTING THE DISALLOWANCE OF INTEREST U/S.36(1)(III) MADE BY THE A.O. OF RS.3,07,94,420/- TO RS.7,82,778/- ALLOWING RELIEF O F RS.3,00,11,642/-, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE A.O. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER. (3) IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD . CIT(A) MAY BE SET ASIDE AND THAT OF THE ORDER OF THE ASSESSING OFFICER BE RESTORED TO THE ABOVE EXTENT. 2. THE FIRST GROUND OF ASSESSEE IS AGAINST HOLDING THE REOPENING U/S. 148 VALID BY THE CIT(A) FOR A.Y. 01-02. IN THIS CASE, RETURN OF INCOME WAS FILED BY THE ASSESSEE ON 19.10.2001 DECLARING TOTAL INCOME O F RS.3,81,25,803/-. THE ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 5 ASSESSMENT ORDER WAS PASSED U/S. 143(3) BY THE THEN ASSESSING OFFICER ON 26.03.2004 ASSESSING TOTAL INCOME AT RS.3,82,78,735 /-. SUBSEQUENTLY, THE A.O. RECORDED REASONS U/S.147 OF IT ACT THAT THE AS SESSEE HAD BORROWED THE FUND FROM THE SPECIFIED PERSONS U/S.40A(2)(B) AT 18 % AND FUNDS WERE NOT UTILIZED FOR BUSINESS PURPOSES AND ALSO NOT ADDED B ACK INCOME TAX IN COMPUTATION OF INCOME. HE HAS REASONS TO BELIEVE T HAT SOME INCOME HAS ESCAPED ASSESSMENT. THEREFORE, NOTICE U/S.148 OF I T ACT WAS ISSUED ON 31.03.2006 AND SERVED UPON THE ASSESSEE ON THE SAME DAY. THE ASSESSEE HAS BEEN DERIVING INCOME FROM TRADING OF BIDIES. THE ASSESSEE CHALLENGED THE REOPENING U/S.148 BEFORE THE CIT(A). HE OBSERV ED THAT AT THE TIME OF ORIGINAL ASSESSMENT, THE A.OS. FOCUS WAS ON ALLOWA BILITY OF EXCESSIVE INTEREST UNDER SECTION 40A(2)(B) WHICH HAS HELD AS REASONABL E IN THE ORIGINAL ASSESSMENT. HOWEVER, THE ASSESSMENT HAS BEEN REOPE NED NOT ON THE GROUND OF EXCESSIVE PAYMENT OF INTEREST U/S.40A(2)( B) BUT ON THE GROUND THAT THE BORROWED FUNDS RECEIVED FROM THE FAMILY MEMBERS AND RELATED MEMBERS WAS UTILIZED BY THE APPELLANT FOR NON BUSINESS PURP OSES. THUS, IN THE ORIGINAL ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER DID N OT EXAMINE WHETHER THE BORROWED FUNDS WERE UTILIZED FOR ITS BUSINESS PURPO SES OR NOT WHAT HE HAS EXAMINED WAS THAT THERE WAS NO EXCESSIVE PAYMENT OF INTEREST UNDER SECTION 40A(2)(B). FURTHER, THE ASSESSMENT IS ALSO REOPENE D BY HIM ON THE GROUND THAT EXCESSIVE CLAIM OF RS.21,000/- IN THE COMPUTAT ION OF INCOME ON ACCOUNT OF INCOME TAX. THE APPELLANT HAD DEBITED INCOME TA X OF RS.1,50,94,185/- IN THE P&L ACCOUNT WHEREAS IN THE COMPUTATION OF INCOM E, HE HAD DISALLOWED A ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 6 SUM OF RS.1,50,73,185/-. AS PER CLAUSE (C) TO EXPL ANATION 2 OF SECTION 147, SINCE IN THIS CASE ORIGINAL ASSESSMENT HAD BEEN MAD E BUT INCOME CHARGEABLE TO TAX HAD BEEN UNDER ASSESSED OR SUCH INCOME HAD B EEN MADE THE SUBJECT OF EXCESSIVE RELIEF UNDER THIS ACT, THEN SUCH CASE WOULD BE DEEMED TO BE THE CASES WHERE INCOME CHARGEABLE TO TAX HAS ESCAPED AS SESSMENT. THIS GROUND ALONE IS SUFFICIENT TO RE-OPEN THE ORIGINAL ASSESSM ENT. THE HONBLE DELHI HIGH COURT IN 174 TAXMAN 444 (DELHI) IN THE CASE OF BATR A BHATTA CO. HAS HELD THAT IT DOES NOT MATTER WHETHER THE BELIEF OF THE ASSES SING OFFICER IS ULTIMATELY PROVED TO BE RIGHT OR WRONG, BUT THERE MUST BE SOME MATERIAL UPON WHICH SUCH A BELIEF CAN BE FOUNDED. HE FURTHER HELD THAT IN THIS CASE THE ASSESSING OFFICER HAD REASONABLE BELIEF THAT THE INCOME OF TH E APPELLANT HAS ESCAPED ASSESSMENT. FURTHER, ONCE AN ASSESSMENT IS REOPENE D ON SOME VALID REASONS, THE WHOLE ASSESSMENT IS REOPENED. IN OTHE R WORDS, THE ASSESSING OFFICER IS FREE TO EXAMINE ALL THE POINTS IN REASSE SSMENT PROCEEDINGS EVEN THOUGH THE ASSESSMENT WAS REOPENED ON ONLY ONE ISSU E AS HELD BY VARIOUS COURTS INCLUDING HONBLE SUPREME COURT IN 176 ITR 5 29 (SC) MEWALAL DWARKA PRASAD. THEREFORE, HE JUSTIFIED THE REOPENING FOR A.Y. 2001-02. 3. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT ARGUED THAT IN THIS CASE SCRUTINY ASSESSMENT U/S.143(3) WA S COMPLETED BY THE A.O. AND ALL THE INFORMATION HAD BEEN PROVIDED BY THE AP PELLANT. THE REOPENING IS WITHIN FOUR YEARS. THE A.OS. ISSUED DETAILED QUES TIONNAIRE ON 30 TH OCTOBER, 2003 AT THE TIME OF ORIGINAL SCRUTINY ASSESSMENT WH EREIN HE ASKED TO FILE DETAILS OF INTEREST PAID @ 18% TO PERSONS SPECIFIE D U/S.40A(2)(B) WITH ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 7 EXPLANATION WHICH WAS SUBMITTED BY THE ASSESSEE VID E LETTER DATED 10.11.2003. AGAIN IN QUERY LETTER DATED 19 TH MARCH 2004 HE SOUGHT CLARIFICATION IN QUERY NO.2 REGARDING EXCESSIVE/ UN REASONABLE PAYMENT OF INTEREST TO PERSONS SPECIFIED U/S. 40A(2)(B), WHICH WAS AGAIN REPLIED BY THE ASSESSEE VIDE LETTER DATED 22.03.2004. THE A.O. AL SO HAD ENDORSED THE SUBMISSIONS IN HIS ORIGINAL ASSESSMENT ORDER DATED 26.03.2004 AT PAGE NO.3 OF THE ASSESSMENT ORDER IN SERIAL NO.7 AND HAD ACCE PTED THE ASSESSEES REPLY AND NO DISALLOWANCE WAS MADE BY THE A.O. IN ORIGINA L ASSESSMENT. HE RELIED UPON THE DECISION OF HONBLE GUJARAT HIGH COURT IN CASE OF GENERAL MOTORS INDIA PVT. LTD. VS. DCIT IN SPECIAL CIVIL APPLICATION NO. 1773 OF 2012, ORDER DATED 23.08.2012, WHEREIN NOTICE WITHIN FOUR YEARS U/S. 148 HELD QUAS HED IN CASE OF RE-ASSESSMENT. HE FURTHER ARGUED THAT LD. CIT(A) HAD CONFIRMED THE REOPENING ON THE BASIS OF WRONG REASONING AND NO AD DITION ON ACCOUNT OF DIFFERENCE IN INCOME TAX DEBITED IN THE P&L ACCOUNT AND ADDED IN COMPUTATION INCOME WAS MADE BY THE A.O. 4. AT THE OUTSET, LD. CIT D.R. VEHEMENTLY ARGUED TH AT WITHIN FOUR YEARS THE A.O. CAN REOPEN THE CASE U/S. 148 EVEN ISSUE ALREAD Y CONSIDERED BY HIM. THE REOPENING WAS ON ACCOUNT OF WHETHER BORROWED FU NDS WERE FOR THE PURPOSE OF BUSINESS WHICH WAS NOT CONSIDERED BY THE A.O. IN ORIGINAL ASSESSMENT. FURTHER, THERE WAS A DIFFERENCE IN INC OME TAX DEBITED IN THE P&L ACCOUNT AND INCOME TAX ADDED BACK IN THE COMPUTATIO N OF INCOME BY RS.21,000/- WHEN CASE WAS REOPENED BY THE A.O. HE WAS HAVING REASON TO BELIEVE TO REOPEN THE CASE. IT IS NOT NECESSARY TH AT THERE HAS TO BE ANY ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 8 ADDITION ON GROUND OF REOPENING. THE A.O. CAN ALSO EXAMINE ANY ISSUE COME TO KNOWLEDGE OF THE A.O. DURING THE ASSESSMENT PROC EEDING AS PER EXPLANATION 3 OF SECTION 147. THEREFORE, HE REQUES TED TO CONFIRM THE ORDER OF THE CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD AND VERIFY THE REASONS RECORDED BY THE A.O. FOR REO PENING THE CASE AND BASIS OF REOPENING WAS WHETHER BORROWED FUNDS WERE UTILIZ ED FOR THE BUSINESS PURPOSES OR NOT AND DIFFERENCE IN INCOME TAX DEBITE D AND ADDED BACK. RECENTLY HONBLE GUJARAT HIGH COURT IN CASE OF INDUCTOTHERM (INDIA) P. LTD. V. CIT (GUJ) 356 ITR 481, HELD THAT NOTICE U/S. 148 IS VA LID, WHERE EXCESS CLAIM OF 80HCC. HONBLE BOMBAY HIGH COURT IN CASE OF RIB O INDIA VS. DCIT, WHERE REOPENING WITHIN FOUR YEARS ON THE BASIS OF TANGIBL E MATERIAL SHOWING ESCAPEMENT BY CONSIDERING THE HONBLE SUPREME COUR T DECISION IN KELVINATOR INDIA, CHAGANTI BACHI COMPANY LTD. AND RAJESH JHAVERI STOCK BROKERS PVT . . HOWEVER, THE HONBLE BOMBAY HIGH COURT DECISION IN CASE OF EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LTD. VS. ADD.CIT, HELD REOPENING WITHIN FOUR YEARS VALID ON THE GROUND THAT A.O. HAD NOT APPLIED HIS MIND, CHANGE OF ACCOUNTING POLICY. THE HONBLE PUNJAB AND HARYANA HIGH COURT DECISION IN CASE OF MAJINDER SINGH KANG V. COMMISSIONER OF INCOME-TAX A ND ANR, [2012] 344 ITR 358 (P &H), HAD CONFIRMED THE ADDITION WHERE ADDITIONS WERE MAD E OTHER THAN GROUNDS OF REOPENING RECORDED. HONBLE SUPREME COURT IN CASE OF CENTRAL PROVINCES MANGANESE ORE CO. LTD. VS. ITO (1 991) 191 ITR 662, WHEREIN IT WAS HELD THE CONDITIONS REQUIRED TO CONS IDER JURISDICTION ON THE ITO ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 9 U/S. 147 (1) OF THE ACT THAT THE INCOME TAX OFFICER MUST HAVE REASON TO BELIEVE THAT INCOME CHARGEABLE TO INCOME TAX HAD B EEN UNDER ASSESSED. THE A.O. HAD RECORDED REASONS AND FINAL OUT COME OF THE PROCEEDING IS NOT RELEVANT. WHAT IS RELEVANT IS THE EXISTENCE OF REA SONS TO MAKE THE INCOME TAX OFFICER BELIEVES THAT THERE HAS BEEN UNDER ASSE SSMENT OF THE ASSESSEES INCOME FOR A PARTICULAR YEAR. THEREFORE, THE A.O. WAS RIGHT IN ISSUING THE NOTICE U/S.148 WITHIN FOUR YEARS TO THE ASSESSEE. THE GROUND NO.1 OF APPEAL IS DISMISSED. 6. THE SECOND GROUND IN A.Y. 01-02, FIRST GROUND IN A.Y. 03-04, 04-05, 05- 06, 06-07 & GROUND NOS. 1 & 2 OF C.O. IN A.Y. 07-08 OF ASSESSEE AND ALL THREE GROUNDS OF REVENUE IN A.Y. 01-02, 03-04, 04-05, 05- 06, 06-07 & 07-08 ARE AGAINST PARTLY CONFIRMING THE ADDITION BY THE CIT(A ) ON ACCOUNT OF PAYMENT OF INTEREST @ 18% TO THE RELATIVES IS EXCESSIVE AND UN REASONABLE IN TERMS OF SECTION 40A(2)(B) AND DELETING THE ADDITION MADE BY THE A.O. THE A.O. OBSERVED THAT DURING THE COURSE OF ASSESSMENT PROCE EDING, THE ASSESSEE WAS ASKED TO FURNISH DETAILS OF INTEREST EXPENSES AND C OPY OF INTEREST ACCOUNT. THE SAID EXPENDITURE HAD BEEN DEBITED IN P&L ACCOUN T AND HAD BEEN CLAIMED AS BUSINESS EXPENDITURE. THE ASSESSEE HAS CLAIMED INTEREST EXPENSES OF RS.5.79 CRORE IN A.Y. 01-02, RS.3.3. CRORE IN A.Y. 03-04, RS.5.51 CRORE IN A.Y. 04-05, RS.5.74 CRORE IN A.Y. 05-06, RS. 5.15 CRORE IN A.Y. 06-07 & RS. 6.76 CRORE IN A.Y. 07-08. INTEREST PAID TO THE RELATIVE S OF THE PARTNER, PARTNERS AND OTHERS VARIES FROM 12% TO 18%. THE ASSESSEE HAD MA DE INVESTMENT IN FDS RS.17.55 CRORE IN A.Y. 01-02, RS. 29 CRORE IN A.Y. 03-04, RS. 35.7 CRORE IN ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 10 A.Y. 04-05, RS. 39.7 CRORE IN A.Y. 05-06, RS.55.7 C RORE IN A.Y. 06-07 & RS.58.7 CRORE IN A.Y. 07-08 IN VARIOUS BANKS AND IN TEREST HAD BEEN EARNED ON FDS. THE A.O. FOUND THAT ASSESSEE HAD BORROWED UNS ECURED LOAN RS.16.33 CRORE IN A.Y. 01-02, RS.24.07 CRORE IN A.Y. 03-04, RS.25.65 CRORE IN A.Y. 04- 05, RS.28.56 CRORE IN A.Y. 05-06, RS.33.93 CRORE IN A.Y. 06-07 & RS.34.57 CRORE IN A.Y. 07-08 AND STATED TO BE UTILIZED FOR B USINESS PURPOSES. IT WAS HELD THAT THE ASSESSEE HAD INVESTED HUGE AMOUNTS IN BANK AS FDS AT VERY LOWER RATE OF INTEREST VIS--VIS THE HIGHER INTERES T PAID ON UNSECURED LOAN. THE A.O. GAVE THE REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE IN ALL THE YEARS. THE ASSESSEE OBJECTED THE PROCEEDING U/S.14 7 IN A.Y. 01-02. IT IS SUBMITTED BEFORE A.O. THAT IT REQUIRED HUGE FUND FO R ITS BUSINESS PURPOSES. IT HAD BORROWED FUND AND UTILIZED ITS BUSINESS PURPOSE S AS WELL AS INVESTMENT IN VARIOUS BANKS AS FDS AS PER THEIR CONVENIENCE WHEN THEY HAD SURPLUS FUND. ALL THE INVESTMENTS MADE IN THE BANK FROM THEIR BUS INESS FUNDS DURING THE YEAR AS WELL AS FROM RENEWAL OF FDS. THE A.O. FURT HER OBSERVED THAT THE ASSESSEE HAD OPENING FDS WHICH WERE CARRY FORWARDED TO THE NEXT YEAR AND ALSO HAD CLOSING FD. THE A.O. HELD THAT ASSESSEE MADE EXCESSIVE PAYMENT OF INTEREST TO RELATIVES OF PARTNER. THE ASSESSEE DID NOT MAKE ANY ATTEMPT TO SAY THAT BORROWINGS WERE OBTAINED FROM THE MARKET A T LOWER RATE OF INTEREST. THE ASSESSEE COULD BORROW FUNDS FROM OUTSIDER ON LO WER RATE OF INTEREST. THEREFORE, ASSESSEES SUBMISSION IS INSUFFICIENT TO EXPLAIN THE INTEREST RATE @ 18%. THE A.O. FINALLY HELD THAT INTEREST PAID ON B ORROWED FUND WAS MORE THAN INTEREST RECEIVED OF FDS COULD NOT BE CONSIDERED AS INTEREST PAID FOR BUSINESS ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 11 PURPOSES AS WELL AS FOR THE EARNING OF THE INTEREST INCOME. AT THE END AVERAGE QUANTUM OF FUND INVESTED IN FD WAS HIGHER T HAN THE AMOUNT OF UNSECURED LOAN BY A FEW CRORES. THEREFORE, ALLOWIN G THE ASSESSEE, THE BENEFIT OF INTEREST PAID TO THE EXTENT OF INTEREST EARNED OF FDS AND THE EXCESS OF INTEREST PAID ON UNSECURED LOAN AND INTEREST PAI D TO OTHERS OVER INTEREST ON BANK FDS WERE DISALLOWED BY THE A.O. AS PER AUDIT REPORT AS WELL AS AS PER THE PARTNERSHIP DEED, THE MAIN BUSINESS OF THE ASSE SSEE IS TRADING IN BIDIES. THE ASSESSEE BORROWED THE FUND @18% IN ALL THE YEAR S FROM THE RELATIVES OF THE PARTNER AND PARTNERS AND RECEIVED INTEREST FROM ALL FDS VARY FROM 7% TO 9%. THE DIFFERENCE BETWEEN INTEREST PAID AND INTE REST RECEIVED IS ADDED BACK TO THE INCOME OF THE ASSESSEE. THE A.O. MADE FOLLOWING ADDITIONS: A.Y ADDITIONS 2001-02 RS.1.55 CRORE 2003-04 RS.1.11 CRORE 2004-05 RS.3.33 CRORE 2005-06 RS.2.58 CRORE 2006-07 RS.2.1 CRORE 2007-08 RS.3.07 CRORE 7. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD PARTLY ALLOWED THE APPEAL IN A.Y. 01-02, 03- 04, 04-05, 05-06 BY OBSERVING AS UNDER: 4.9 I AM OF CONSIDERED VIEW THAT TO KEEP THE FUNDS IN FIXED DEPOSITS IS PART AND PARCEL OF THE BUSINESS EXPEDIE NCY OF THE APPELLANT. THE HON'BTE SUPREME COURT IN 288 ITR PAG E 1 (SC) S.A. BUILDER HAS HELD THAT IF IT IS FOUND THAT A PARTICU LAR EXPENDITURE OR ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 12 PAYMENT IS MADE TOWARDS THE BUSINESS EXPEDIENCY (I. E. WHAT A PRUDENT BUSINESSMAN WOULD HAVE DONE) THEN THE SAME IS AN ALLOWABLE EXPENDITURE. 4.10 AS STATED EARLIER, ALL THE FIXED DEPOSITS HAV E BEEN USED BY THE APPELLANT ONLY FOR ITS BUSINESS PURPOSES. PERHAPS T HE ASSESSING OFFICER WANTS TO SAY THAT THE INCOME FROM FIXED DEP OSIT IS NOT DERIVED FROM THE BUSINESS OF THE APPELLANT AS THERE IS NO D IRECT NEXUS BETWEEN THE FIXED DEPOSIT INTEREST INCOME & THE BUS INESS OF TRADING IN BIDI. PROBABLY THIS ARGUMENT WOULD HOLD GOOD IN RESPECT OF THE DEDUCTION U/S.80IA, 80IB ETC WHERE THE WORD 'DERIVE D FROM' WAS HELD TO HAVE NARROW MEANING. HERE THE ISSUE IS NOT WHETHER THE INCOME FROM FIXED DEPOSIT IS DERIVED FROM THE BUSIN ESS OF BIDI BUT WHETHER PLACING OF BORROWED FUNDS IN FIXED DEPOSIT IS PART OF THE BUSINESS EXPEDIENCY OF THE APPELLANT. IN MY VIEW, I T IS A PART OF BUSINESS EXPEDIENCY & HENCE THE INTEREST THEREON IS ALLOWABLE AS PER THE. JUDGEMENT OF HON'BLE SUPREME COURT IN THE CASE OF S A BUILDERS. 4.11 AS REGARDS THE SECOND ISSUE OF EXCESSIVE PAYM ENT OF INTEREST U/S.40A(2)(B), THE APPELLANT HIMSELF ADMITTED RECEI PT OF THE BORROWED FUNDS FROM TRANSPORTERS @ 15% & FROM 'GOODS DEPOSIT S' @ 13% TO 15% AS AGAINST 18% FROM THE FAMILY MEMBERS. THE INT EREST ON BORROWINGS FROM PARTNERS IS AS PER PARTNER SHIP DEE D. IN A Y 2001- 02 THE RATE OF INTEREST PERMISSIBLE TO PARTNERS U/S .40A(2)(B) WAS 18% WHICH WAS REDUCED TO 12% FROM A Y 2002-03 ONWARDS. THUS THE INTEREST PAYMENT TO PARTNERS IS ALLOWABLE EXPENDITU RE AT THE RATES GIVEN BY THE APPELLANT. SINCE THE MARKET RATE OF BO RROWING IN THE CASE OF APPELLANT IS 15% IN A Y 2001-02 AND A Y 003 -04 AND THE RATE OF INTEREST PAYABLE TO FAMILY MEMBERS IS 18%, THE EXCESS PAYMENT @ 3% IS DISALLOWABLE U/S. 40A(2)(B). SIMILARLY IN A Y 2004- ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 13 05 & 2005-06 THE RATE OF INTEREST IN RESPECT OF LOA NS FROM 'GOODS DEPOSITS' WAS ONLY 13% AND THE RATE OF INTEREST TO TRANSPORTERS WAS 15%. THEREFORE THE MARKET RATE FOR THE PURPOSE OF D ISALLOWANCE U/S.40A(2)(B) WOULD BE CONSIDERED AS THE AVERAGE OF 13% AND 15% I.E. 14%. IN SHORT THE EXCESS INTEREST @ 3% ON THE BORROWINGS FROM FAMILY MEMBERS, OTHER THAN PARTNERS, IS TO BE DISAL LOWED U/S.40A(2}(B) FOR THE ASSESSMENT YEARS 2001-02, 200 3-04 8, @ 4% FOR A.Y. 2004-058,2005-06. 4.12 IN SHORT THE ASSESSING OFFICER IS DIRECTED TO REDUCE THE DISALLOWANCE OF INTEREST TO 3% IN AY 2001-02 & 2003 -04 & 4% IN AY 2004-05 & 2005-06 ON THE FUNDS BORROWED FROM FAMILY MEMBERS ONLY ON WHICH THE APPELLANT HAD TO PAY INTEREST IN THE RELEVANT ASSESSMENT YEAR. THIS GROUND IS THEREFORE, PARTLY ALLOWED. FOR A.Y. 06-07, THE LD. CIT(A) RELIED UPON THE ORDE R OF THE CIT(A) FOR A.Y. 04- 05 AND 05-06 SINCE THE FACTS OF A.Y. 06-07 ARE IDEN TICAL WITH RESPECT OF THE CASE FOR A.Y. 05-06. FOR A.Y. 07-08, THE LD. CIT(A) ANALYZED THE FUND BORROWED AND INVESTED IN FDS AND HELD THAT BORROWIN GS WERE USED FOR BUSINESS PURPOSE AND FDS MADE IN CORPORATION BANK A T RS.2 CRORE WAS NOT FROM BORROWED FUND AS DATE OF BORROWED FUND AND FD MADE IS ON DIFFERENT DATES. THE CIT(A) HELD THAT RS.1 CRORE FDS MADE WIT H SBI ON 27.03.2007 FORM THE BORROWED FUND OF RS.1.45 CRORE OF CORPORAT ION BANK, WHICH WAS TRANSFERRED TO THE FD ACCOUNT OF SBI, WERE TAKEN IN THE MONTH OF APRIL, JUNE AND AUGUST 2006 AND THERE WAS A MINIMUM BALANCE IN CORPORATION BANK WAS 25.99 LACS AS ON 26.09.2006. HE FURTHER ANALYZED T HAT ASSESSEE WAS IN NEED OF BORROWING AND AFTER CONSIDERING THE BORROWED FUN DS AND FD MADE HELD THAT ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 14 AT MOST RS.61.10 LACS BORROWING CAN BE HELD FOR NOT BUSINESS PURPOSES AND INTEREST ON IT AT RS.9.77 LACS CAN BE DISALLOWED BY THE A.O. HOWEVER, ASSESSEE HAS SHOWN INTEREST ON FDS AT RS.1.94 LACS IS TO BE REDUCED AND ONLY ADDITION IS CONFIRMED AT RS.7.82 LACS. HE GAV E DIFFERENT FINDINGS ON THE GROUND THAT EARLIER YEARS BORROWINGS WERE MADE FOR BUSINESS PURPOSES BUT FUND HAD DIVERTED FOR LOWER RATE OF INTEREST, NO DI SALLOWANCE OF INTEREST ON SUCH OLD LOAN CAN BE MADE IN THIS YEAR UNLESS IT IS PROVED THAT SUCH BORROWED FUNDS WERE NOT UTILIZED FOR BUSINESS PURPOSES. 8. NOW THE ASSESSEE AS WELL AS REVENUE ARE BEFORE U S. THE LD. COUNSEL FOR THE APPELLANT CONTENDED THAT ALL THE BORROWINGS WERE MADE FOR BUSINESS PURPOSES AND INTEREST @ 18% PAID ON THESE BORROWING S WHICH IS NOT EXCESSIVE. THE ASSESSEE REQUIRED TO MAKE FUND AVAI LABLE FOR FDS WHICH WERE USED FOR BUSINESS PURPOSES. THE ASSESSEES TURN OV ER IN A.Y. 01-02 RS.168 CRORE, IN A.Y. 03-04 RS. 170 CRORE, IN A.Y. 04-05 R S. 167 CRORE, IN A.Y. 05-06 RS.175 CRORE, IN A.Y. 06-07 RS.186 CRORE & IN A.Y. 07-08 RS. 195 CRORE AND ASSESSEE REQUIRED HUGE FUND FOR PURCHASE OF BIDIES . HE FURTHER ARGUED THAT IN A.Y. 03-04 THE LD. CIT U/S. 144A HAS HELD THAT 4 0A(2)(B) IS NOT APPLICABLE. IT WAS ARGUED THAT IF THE ASSESSEE AVAILS THIS MUCH HU GE AMOUNT FROM BANK ONLY, ARE REQUIRED TO UNDER GO THROUGH FORMALITIES, SUCH AS CERTAIN DOCUMENTS TO BE EXECUTED OVER AND ABOVE THE PARTNERS PERSONAL GUARANTEE, FURTHER COLLATERAL SECURITY ARE REQUIRED TO SANCTION THE LO AN. FURTHER PERIODICAL STATEMENT SUCH AS STOCK STATEMENT AND HUGE DATA FOR LOAN ARE REQUIRED BY THE BANK. NUMBERS OF FORMS ARE REQUIRED TO BE SUBMITTE D BEFORE THE BANK. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 15 THESE PROCEDURES ARE CUMBERSOME AND MANY TIMES PART NERS MAY NOT BE READY TO GIVE PERSONAL GUARANTEE. IN SUCH CASES, E VEN AFTER ALL THE FORMALITIES ARE COMPLETED, THE ASSESSEE MAY NOT BE IN POSITION TO AVAIL BANK FINANCE. FURTHER, BANKS ARE ALSO CHARGING INTEREST @ 16% TO 17%, WHICH HAS BEEN CERTIFIED BY THE SYNDICATE BANK. THE ASSESSEE HAD OPTED FOR UNSECURED LOAN FROM THE SPECIFIED PERSONS AND PAID THE INTEREST @ 18% TO THEM. IT IS FURTHER ARGUED THAT SPECIFIED PERSONS ARE IN THE MAXIMUM MA RGINAL RATE OF TAX. THEREFORE, THERE IS NO REVENUE LOSS TO THE DEPARTME NT TO ALLOW THE INTEREST @ 18%. THE LD. COUNSEL FURTHER RELIED IN CASE OF CORNERSTONE EXPORTS PVT. LTD. VS. DCIT, CENTRAL CIRCLE-1(1), ITAT, AHMEDABAD A BENCH, IN ITA NO. 859/AHD/1999 FOR A.Y. 1995-96, WHEREIN IDENTICAL ISSUE HAS BEEN CONSIDERED IN WHICH AMOUNT OF LOAN WAS BORROWED @ 21% AND LENT ON 15% AND HELD THAT THE ASSESSEE HAD BORROWED FUND FOR THE PURPOSE OF B USINESS. THE INTEREST PAID THERE ON IS ALLOWABLE U/S.36(1) (III) AND ACCO RDINGLY, ORDER OF CIT(A) WAS SET ASIDE. HE FURTHER RELIED UPON HONBLE GUJARAT HIGH COURT DECISION IN CASE OF CIT-III VS. PRABHUDAS KISHORDAS TOBACCO IN TAX APPE AL NO. 2488 OF 2010, ORDER DATED 18.01.2012, WHEREIN IDENTICAL ISSUE OF INTEREST DISALLOWANCE U/ S. 40A(2)(B) WAS CONSIDERED IN WHICH FUNDS WERE BORROW ED @ 22%. THE HONBLE HIGH COURT HAS CONFIRMED THE ORDER OF TRIBU NAL THAT RATE OF INTEREST ON UNSECURED LOAN IS ALMOST EQUAL TO RATE OF INTEREST PREVAILING OF SECURED LOAN. THEREFORE, THE ITAT CONFIRMED THE ORDER OF CIT(A), WHICH WAS UPHELD BY THE HONBLE GUJARAT HIGH COURT. HE FURTHER SUBMITTED F OLLOWING DECISIONS FOR RATE OF INTEREST U/S. 40A(2), FOR MAXIMUM MARGINAL RATE AND MONEY BORROWED IN ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 16 EARLIER YEAR. THE ORDERS OF THIS TRIBUNAL IN THE CA SE OF SISTER CONCERN (PRABHUDAS KISHOREDAS TOBACCO PRODUCTS LTD.) FOR RA TE OF INTEREST, 236 CTR 113 (SC), 310 ITR 306 (BOM.), CIT VS. ADVAITYA PROD UCTS P. LTD. (TAX APPEAL NO.1478/2008 OF GUJARAT HIGH COURT) FOR MAXIMUM MAR GINAL RATE & 229 CTR 93 (DEL), 310 ITR 306 (BOM.) & 316 ITR 426 (BOM.) F OR MONEY BORROWED FOR EARLIER YEAR. THE HONBLE GUJARAT HIGH COURT IN CA SE OF CIT VS. ADVAITYA PRODUCTS P. LTD (SUPRA), ORDER DATED FEBRUARY 15, 2 010 HAS DECIDED THE ISSUE ON SALE PRICE CHARGED FROM SISTER CONCERNS HELD NO DIVERSION OF INCOME TO AVOID PAYING TAX. THE HONBLE JABALPUR BENCH IN CA SE OF M/S. J. P. TOBACCO PRODUCTS (P.) LTD. VS. ACIT, CIR., SAGAR IN ITA NO. 124 (JAB.) 2008 FOR A.Y. 2005-06, HAS CONSIDERED IDENTICAL ISSUE AND OBSERVED AS UNDE R: 8.7 RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE HONBLE SUPREME COURT, HON'BLE CALCUTTA HIGH COURT AND HON' BLE GUJARAT HIGH COURT, WE ARE OF THE OPINION THAT THE LEGITIMA TE NEEDS OF THE BUSINESS HAS TO BE SEEN FROM THE VIEWPOINT OF THE B USINESSMAN AND NOT FROM THE VIEWPOINT OF THE REVENUE AUTHORITIES. 9. COMING TO THE PRESENT CASE, WHERE THE ASSESSEE HAS PAID INTEREST AT THE RATE OF 18% ON LOANS BORROWED FROM DIRECTORS AND SHAREHOLDERS, THE REVENUE'S CASE IS THAT PAYMENT OF INTEREST AT THE RATE OF 18% IRRESPECTIVE OF THE FACT AS TO WHETHER IT WAS FOR BUSINESS OR FOR MAKING INVESTMENT IN FDRS WAS EXCESSIVE BECA USE THE LOAN FROM BANK WAS AVAILABLE AT THE RATE OF 14.37%. THE OTHER PLANK OF ARGUMENT FROM THE REVENUE IS THAT THERE WERE NO BUS INESS EXIGENCIES FOR PROCURING THE LOANS FROM DIRECTORS A ND SHAREHOLDERS AND AT LEAST FOR BUSINESS PURPOSE. THE THIRD ARGUME NT OF THE REVENUE IS THAT PROCURING OF LOANS AT THE RATE-OF 1 8% FOR MAKING ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 17 INVESTMENT IN FDRS WHEREFROM THE ASSESSEE WAS TO EA RN INTEREST AT THE RATE OF 6% ALSO CANNOT BE SAID TO BE A BENEFICI AL DECISION TO THE ASSESSEE'S BUSINESS. THE ASSESSEE'S CASE, ON THE OT HER HAND, IS THAT (I) SO FAR AS QUESTION OF AVAILABILITY OF LOAN FROM THE BANK IS,CONCERNED, THE REVENUE HAS LOST SIGHT OF THE FAC T, SUCH AS (A) IT IS NOT EASY TO PROCURE THE LOAN FROM BANKS, (B) THE LO ANS PROCURED FROM THE BANKS ARE SECURED LOANS AND THE ASSESSEE HAS TO GIVE COLLATERAL SECURITY, (C) THE RATE COMPUTED BY THE CIT(A) AT 14.37% IS NOT CORRECT BECAUSE THE BANK INTEREST IS PAYABLE ON DAY TO DAY BASIS WHEREAS INTEREST TO DIRECTORS AND SHAREHOLDERS WAS TO BE PAID AT SIMPLE RATE ON YEARLY BASIS, AND (D) DECISION AS TO WHEREFROM THE LOAN IS TO BE PROCURED IS THE PREROGATIVE OF THE BU SINESSMAN AND NOT OF THE REVENUE AND THEREFORE, THERE AS NOTHING WRON G IN PROCURING THE LOAN @ 18%. 9.1 CORNING TO THE PRESENT CASE, WE ARE OF THE OPINION THAT SO FAR AS RATE OF INTEREST PAID BY THE ASSESSEE ON BORROWI NGS FROM DIRECTORS AND SHAREHOLDERS AT 18% IS CONCERNED, THE REVENUE HAS NOT BROUGHT ANY EVIDENCE AS TO THE PREVAILING RATE OF INTEREST IN THE MARKET, EXCEPT THE BANK RATE, WHICH IN OUR OPINION, CANNOT BE A REASON FOR INVOKING THE PROVISIONS OF SECTION 40(2) (A) OF THE ACT. COMPARISON HAS TO BE AMONG THE EQUALS. THE PROVISIO NS OF SECTION 40A(2)(A) COULD BE INVOKED ONLY BY BRINGING EVIDENC E ON RECORD BY WAY OF AVAILABILITY OF LOANS FROM PRIVATE MARKET AT A RATE LESSER THAN 18% AND NOT ON THE BASIS OF RATE OF INTEREST ON LOA NS FROM BANK. IT IS SO, BECAUSE LOANS FROM BANK CANNOT BE COMPARED TO T HE LOANS FROM OPEN MARKET. BANK LOANS ARE SECURED I.E. THE ASSESS EE HAS TO GIVE SUFFICIENT SECURITY AND HAVE FIRST CHARGE ON THE AS SETS OF THE PARTY, WHEREAS UNSECURED LOANS FROM PRIVATE PARTIES AND FR OM DIRECTORS AND SHAREHOLDERS HAVE NO CHARGE OVER THE ASSETS OF THE ASSESSEE. EVEN OTHERWISE, LOANS FROM DIRECTORS AND SHAREHOLDE RS AS WELL AS ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 18 FROM OPEN MARKET BEING EASILY AVAILABLE AND THERE B EING NO THREAT OF EARLY WITHDRAWAL, THE RATE OF INTEREST PAID ON SUCH LOANS CANNOT BE CONSIDERED EXCESSIVE BY COMPARING THE RATE OF INTER EST ON BANK LOANS. 9.2 IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT THE RATE OF INTEREST AT 18% PAID ON THE LOANS FROM DIRECTORS AND SHAREHOLDERS IRRESPECTIVE OF THE FACT AS TO WHETHER THE SAME WERE RAISED FOR BUSINESS PURPOSE OR FOR IN VESTING IN FDRS EARNING INTEREST FROM BANK, WAS QUITE NORMAL AND AP PLICABILITY OF PROVISIONS OF SECTION 40A(2)(A) WAS NOT JUSTIFIED. CONSEQUENTLY, THE ADDITION MADE BY INVOKING THE PROVISIONS OF SECTION 40A(2)(A) IS DIRECTED TO BE DELETED. THE LD. A.R. ALSO SUBMITTED THE ANALYSIS OF THE BOR ROWED FUND AND UTILIZATION OF FUND AND ARGUED THAT FDS WERE FOR SHORT TIME WHICH WERE ENCASHED BEFORE THE MATURITY TO PAY THE PURCHASES. THEREFORE, THESE BO RROWINGS WERE FOR BUSINESS PURPOSES AND THERE IS NO DIVERSION OF BORROWING FUN D TO AVOID THE TAX PAYMENT AS ALL THE SPECIFIED PERSONS ARE HIGHEST TAX SLAB. HE FURTHER SUBMITTED THAT S.A. BUILDERS CASE CITED BY THE LD. CIT(A) AND CIT D.R. IS NOT SQUARELY APPLICABLE IN CASE OF ASSESSEE BECAUSE IN CASE OF S .A. BUILDERS, THE APPELLANT ADVANCED MONEY TO SISTER CONCERN BUT IN CASE OF APP ELLANT THE FDS WERE MADE WITH NATIONALIZED BANK AND HAD NOT LENT MONEY TO THE OUTSIDER ON LOWER RATE. THEREFORE, HE REQUESTED TO DELETE THE ADDITI ON CONFIRMED BY THE LD. CIT(A). AT THE OUTSET, LD. CIT DR RELIED UPON THE ORDER OF THE LOWER AUTHORITIES AND ARGUED THAT THE ASSESSEE IS A CASH-RICH COMPANY . THERE ARE NO OUTSTANDING DEBTORS, IT PROVES THAT THE ASSESSEE HA S SUFFICIENT FUND TO MAKE ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 19 THE PURCHASE. FURTHER, HE GAVE THE CHART FOR FUND BORROWED AND INVESTED IN THE FDS AND ARGUED THAT APPELLANT HAD DIVERTED ITS INCOME TO THE SPECIFIED PERSONS TO PAY LESS TAX. HE FURTHER MADE WRITTEN S UBMISSION AS UNDER: 1. THE A.O. HAS CONSIDERED EXCESS OF INTEREST PAID OVER INTEREST ON FIXED DEPOSITS RECEIVED AS EXPENDITURE INCURRED FOR NON BUSINESS PURPOSE. 2. THE ASSESSEE IS CLAIMING THAT EXCESS SURPLUS FUN DS ARE KEPT IN FIXED DEPOSITS FOR LIMITED PERIOD, WHICH ARE BEING UTILIZED FOR BUSINESS PURPOSE. 3. THE ID. CIT(A) RELYING ON THE SUBMISSION OF THE ASSESSEE HAS CONSIDERED THAT 'KEEPING THE FUND IN FIXED DEPOSITS IS PART AND PARCEL OF THE BUSINESS EXPEDIENCY - HE HAS RELIED UPON S.A . BUILDERS CASE (288 ITR 1) (SC). 4. THE ID. CIT(A) HAS NOT EXAMINED AND APPRECIATED THE FACTS AS TO HOW FIXED DEPOSITS HAVE BEEN UTILIZED, I.E. (A) WHETHER ON MATURITY OF FIXED DEPOSITS, AMOUNTS HAVE BEEN UTILIZED FOR BUSINESS PAYMENTS OR HAVE BEEN REINVESTED. (B) HAS THE MATURED AMOUNT TRANSFERRED / CREDITED T O THE CURRENT ACCOUNT. (C) NEXUS OF FIXED DEPOSITS OUT OF BORROWED FUND FO R BUSINESS PURPOSE IS NOT PROVED. (D) WHAT IS RATIO OF DEBTORS AND CREDITORS. FURTHER , WHETHER THE ASSESSEE IS LIABLE TO PAY INTEREST TO CREDITORS. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 20 (E) IT IS EMPHASIZED THAT THE ASSESSEE IS TRADER / AGENT OF THE PRODUCTS OF GROUP COMPANY. THE ASSESSEE HAS ITS MARKETING NETWORK AND HAS APPOINTED DISTRIBUTORS AN D SUB DISTRIBUTORS. THE FACTS AND CIRCUMSTANCES OF THE CASE REVEALS THA T THE ASSESSEE IS PROMOTING FAMILY BUSINESS AND HAS MONOP OLY OF THE FAMILY PRODUCTS AND FUNDS OF THE FAMILY MEMBERS HAV E BEEN MAINLY UTILIZED FOR NON BUSINESS PURPOSES. THUS, IT IS EVIDENT THAT THE ASSESSEE IS ACCOMMODAT ING FAMILY MEMBERS COVERED U/S. 40A(2)(B) OF INCOME TAX ACT BY PAYING HIGHER INTEREST AND REDUCING ITS PROFIT TO THAT EXTENT. 5. A CHART ANALYZING THE ASSETS AND LIABILITIES OF THE ASSESSEE FROM A.Y. 2001-02 TO A.Y. 2008-09 HAS ALREADY BEEN SUBMITTED DURING THE PROCEEDINGS WHICH BRINGS OUT F OLLOWING INTERESTING FACTS: (I) SUNDRY DEBTORS OF THE ASSESSEE FIRM FOR ALL TH E ASSESSMENT YEARS IS SHOWN AT NIL, WHICH PROVES THAT THE ASSESS EE IS DOING CASH SALES. (II) THE QUANTUM OF ADVANCE AGAINST GOODS & SECUR ITY FOR DEPOSIT OF GOODS RECEIVED BY THE ASSESSEE FIRM PROVE THAT I T IS SELLING PREMIUM PRODUCT FOR WHICH ADVANCE PAYMENT IS RECEIV ED FROM THE CUSTOMERS. (III) THE ASSESSEE FIRM HAS ENOUGH CASH AND BANK B ALANCE FOR ALL THE ASSESSMENT YEARS WHICH IS ENOUGH TO SERVICE APP ROX ONE OR MORE THAN ONE MONTH PURCHASE. (IV) THERE IS NO CO-RELATION BETWEEN THE INCREA SE IN SALES AND PURCHASE OF THE ASSESSEE FIRM OVER 7 YEARS AND THE HUGE INCREASE IN UNSECURED LOAN RAISED AND FIXED DEPOSIT S MADE BY THE FIRM DURING THESE YEARS. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 21 (V) THE INCREASE IN DIFFERENT HEADS IS ALSO AN ALYZED AS FOLLOWS: A.Y. 2001-02 (IN CRORES) A.Y. 2007-08 (IN CRORES) INCREASE % (I) PURCHASES 152.4 77.24 11.63 % (II) SUNDRY CREDITORS FOR GOODS 7.89 25.57 224.08 % (III) SECURITY DEPOSIT FOR GOODS. 5.1 7.21 41.37 % (IV) CURRENT ACCOUNT AND CASH 10.12 13.04 28.85 % (V) UNSECURED LOANS 16.33 34.57 111.70 % (VI) FIXED DEPOSITS 17.55 58.7 234.47 % (VII) SUNDRY DEBTORS NIL NIL -- (VIII) SALES 168.23 195.3 15.5% HE FURTHER RELIED IN CASE OF CORONATION FLOUR MILLS VS. ACIT IN TAX APPEAL NO. 345/1999 , ORDER DATED MARCH 4, 2009, WHEREIN IT WAS HELD TH AT EXCESSIVE AND UNREASONABLE PAYMENTS TO SPECIFIED PERSONS U/S.40A( 2) ON THE BASIS OF MARKET VALUE. THEREFORE, LD. CIT D.R. REQUESTED TO CONFIRM THE ORDER OF THE A.O. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS HUGE TURN OVER DURING THE YEARS. IT IS TRUE THAT THERE IS A MARGINAL INCREASE IN THE BORROWING FROM THE SPECIFIED PERSONS EITHER BY WAY OF THE FRESH LOAN OR THE CREDIT OF INTEREST. THE ASSESSEE HAD DEDUCTED TDS AND PAID TO THE GOVERNMENT EXCHEQUER. THE RATE OF INTEREST PAID WAS 18% AND INTEREST RECEIVED ON TDS WAS AT LOWER RATE S, BUT MONEY WAS NOT ADVANCED TO THE OUTSIDER. THEREFORE, THIS IS NOT A CASE OF DIVERSION OF INCOME. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 22 IF RATE OF INTEREST PAID TO SPECIFIED PERSONS IN CO MPARED WITH RATE ON UNSECURED LOAN ARE MORE OR LESS ARE SAME. BESIDES THIS, VARIOUS FORMALITIES ARE REQUIRED TO AVAIL THE FINANCE FROM THE BANK. I T IS ALSO SETTLED LAW THAT HOW THE BUSINESS SHOULD BE CARRIED ON IS THE PREROGATIV E OF THE ASSESSEE AND THE ASSESSING OFFICER CANNOT DICTATE THE TERMS AS TO HO W THE BUSINESS SHOULD BE CARRIED ON. WHILE CONSIDERING THE CLAIM U/S. 36(1) (III) WHAT IS TO BE REQUIRED TO JUDGE IS WHETHER THE AMOUNT IS BORROWED FOR THE PUR POSE OF BUSINESS OR NOT. SINCE THE AMOUNT HAS BEEN BORROWED IN EARLIER YEARS AS WELL AS DURING THE YEAR AT A STIPULATED RATE OF INTEREST AND WHICH HAS BEEN STILL UTILIZED FOR THE PURPOSE OF BUSINESS, THE INTEREST RATE COULD NOT HA VE BEEN RE-NEGOTIATED FOR EARLIER YEAR. THEREFORE, RATE OF INTEREST, PAID BY THE ASSESSEE IS QUITE REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE O F SUCH SERVICES. THEREFORE, THE CIT(A) WAS INCORRECT IN RESTRICTING THE INTERES T PAYABLE TO THE EXTENT OF 15% OR 14% WHICH IS SUPPORTED BY VARIOUS DECISIONS MENTIONED IN THE ORDER IN PRECEDING PARAS. SINCE THE INTEREST RATE PAID BY T HE ASSESSEE IS REASONABLE, THE ORDER OF THE CIT(A) IS REVERSED AND ADDITION IS DELETED. THUS, ASSESSEES APPEALS ARE ALLOWED AND REVENUES APPEALS ARE DISMI SSED ON THIS GROUND. 10. GROUND NO.3 IN C.O. IN A.Y 07-08 IS AGAINST CON FIRMING THE ADDITION OF RS.2,17,377/- U/S.14A BY THE LD. CIT(A). THE A.O. OBSERVED THAT THE ASSESSEE HAD CLAIMED EXEMPTED DIVIDEND INCOME AT RS.1,97,664 /-. THE ASSESSEE HAD MADE INVESTMENT IN SHARES AND SECURITY AT RS.56 LAC S. THE A.O. GAVE REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE AND ASKED TO CALCULATE THE DISALLOWANCE U/S.14A R.W. RULE 8D. THE APPELLANT C LAIMED BEFORE THE A.O. ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 23 THAT IT HAS NOT INCURRED ANY EXPENDITURE FOR EARNIN G THE EXEMPT INCOME AS ASSESSEE HAS TAX FREE FUND OF RS.36 CRORE IN FORM O F CURRENT LIABILITY AND PROVISION AS PER SCHEDULE D OF BALANCE SHEET. HOWEV ER, IT COMPUTED THE DISALLOWANCE UNDER RULE 8D AT RS.2,17,377/-, WHICH WAS ADDED BACK BY THE A.O. IN THE INCOME OF THE ASSESSEE. 11. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE A SSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAD CONFIRMED THE ADDI TION BY OBSERVING AS UNDER: 4.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT. THE ONUS LIES ON THE APPELLANT TO PROVE THAT THE INVESTMENT IN SHARES (RESULTING INTO DIVIDEND INCOME) IS NOT MADE OUT OF THE INTERE ST BEARING FUNDS. MERELY SAYING THAT THE APPELLANT HAS ENOUGH NON INT EREST BEARING FUNDS IS NOT SUFFICIENT. SINCE IN THIS CASE NEITHE R BEFORE THE AO NOR BEFORE ME THE APPELLANT HAS BEEN ABLE TO PROVE THAT THE INVESTMENT IN SHARES/SECURITIES IS NOT MADE OUT OF BORROWED FU NDS, THE AO WAS JUSTIFIED IS MAKING DISALLOWANCE U/S.14A AS PER RUL E 8D OF THE IT RULES. 12. NOW THE ASSESSEE IS BEFORE US. LD. COUNSEL FOR THE APPELLANT SUBMITTED THAT THE ASSESSEE COMPANY IS A CASH-RICH COMPANY AN D INVESTMENT OF RS.56 LACS WERE MADE IN SHARES. THE ASSESSEE HAD TAX FRE E FUNDS. THEREFORE, NO DISALLOWANCE IS REQUIRED TO BE MADE BY THE A.O. TH E LD. A.O. HAD NOT ESTABLISHED ANY NEXUS BETWEEN BORROWED FUND AND INV ESTMENT MADE IN EXEMPTED INCOME. THUS, HE PRAYED TO DELETE THE ADD ITION CONFIRMED BY THE CIT(A). AT THE OUTSET, LD. CIT D.R. VEHEMENTLY REL IED UPON THE ORDER OF THE CIT(A). ITA NOS. 414 TO 417, 524 TO 527, 1923 & 1952/AHD/20 09, 2461/AHD/10 & C.O. NO.265/AHD/10 FOR A.YS. 2001-02, 03-04, 04-05, 05-06, 06-07 & 07-08. PAGE 24 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAS MIXED FUND IN BOOKS OF AC COUNT I.E. BORROWED AS WELL AS SELF GENERATED. THEREFORE, THE ASSESSEE HA D TO PROVE FUND INVESTED IN THE SHARES ARE FROM THE EXEMPTED OR SELF GENERATED FUND. NOW RULE 8D IS APPLICABLE. ACCORDINGLY, THE ASSESSEE HAS CALCULAT ED ITSELF DISALLOWANCE AS PER RUE WHICH IS VERY NOMINAL. THUS, WE CONFIRM TH E ORDER OF THE CIT(A). 14. IN THE COMBINED RESULTS, ASSESSEE'S APPEALS IN A.Y. 01-02 IS PARTLY ALLOWED AND IN A.Y. 03-04, 04-05, 05-06 & 06-07 ARE ALLOWED AND ASSESSEES C.O. IN A.Y. 07-08 IS PARTLY ALLOWED. REVENUES AP PEALS IN 01-02, 03-04, 04- 05, 05-06, 06-07 & 07-08 ARE DISMISSED. THESE ORDERS PRONOUNCED IN OPEN COURT ON 29.11.2013 SD/- SD/- (MUKUL KR. SHRAWAT ) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA , , , , % %% % -. -. -. -. / .+ / .+ / .+ / .+ / COPY OF ORDER FORWARDED TO:- 1. $/ REVENUE 2. / ASSESSEE 3. 4 / CONCERNED CIT 4. 4- / CIT (A) 5. .89 -' , , / DR, ITAT, AHMEDABAD 6. 9;< => / GUARD FILE. BY ORDER/ , , ?/ $ , #