NATHALAL SHIVLAL, MUMBAI V. DCIT 15(1), MUMBAI

ITA 854/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1772 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 08-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI BEFORE SHRI DINESH KUMAR AGARWAL, J. M. AND SHRI SANJAY ARORA, A. M. ITA NO. 854/MUM/2012 ASSESSMENT YEAR: 2007-08 NATHALAL SHIVLAL SHOP NO.5, RAMESH BHAVAN, 89, NAKHODA STREET, MUMBAI-400 063 [ PAN NO.: AAAFN 0757 F ] VS. DEPUTY COMMISSIONER OF INCOME- TAX 15(1), AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NEEL KHANDELWAL RESPONDENT BY : SHRI MOHIT JAIN DATE OF HEARING : 07.02.2013 DATE OF PRONOUNCEMENT : 22.02.2013 ORDER PER SANJAY ARORA, A.M.: THIS IS AN APPEAL BY THE ASSESSEE AGITATING THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)26, MUMBAI (CIT(A) FOR SHORT ) DATED 01.12.2011, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT FOR THE ASSESSMENT YEAR (A.Y.) 2007-08 VIDE ORDER U/S.143(3) OF THE INCOME TAX AC T, 1961 (THE ACT HEREINAFTER). THE APPEAL RAISES AS MANY AS THREE GROUNDS, RAISING SEP ARATE ISSUES, WHICH WE SHALL TAKE UP IN SERIATIM. 2. THE FIRST GROUND IMPUGNS THE CONFIRMATION OF D ISALLOWANCE OF INTEREST U/S.40A(2)(A) OF THE ACT IN THE SUM OF RS.1,12,490/-. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE WAS OBSERVED TO HAVE PAID INTEREST ON LOANS FROM RE LATIVES COVERED U/S.40A(2)(B) @ 15.21% P.A., AS AGAINST 12% P.A. ON LOANS FROM OUTS IDE PARTIES. THE ASSESSEE BEING UNABLE ITA NO.854/MUM/2012 (A.Y.2007-08) NATHALAL SHIVLAL VS. DY. CIT 2 TO ADVANCE ANY JUSTIFICATION FOR THE ENHANCED RATE OF INTEREST, THE ASSESSING OFFICER (A.O.) DISALLOWED THE SAME, INVOKING THE PROVISION OF SECT ION 40A(2)(A) OF THE ACT, WORKING OUT THE SAME WITH REFERENCE TO THE EXCESS RATE OF 3.21% P.A. THE SAME STOOD CONFIRMED IN FIRST APPEAL FOR THE SAME REASON. AGGRIEVED, THE A SSESSEE IS IN APPEAL BEFORE US. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. THE DISALLOWANCE U/S. 40A(2)(A), AS A READING OF THE PROVISION WOULD SHOW, IS WITH REFERENCE TO THE CLAIM FOR AN EXPENDITURE WHICH IS DEEMED EXCESSIVE OR UNR EASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS OR SERVICES OR FACILITIES FOR WHICH THE PAYMENT HAS BEEN MADE. IN THE PRESENT CASE, AS APPARENT, THE FAIR MARKET R ATE OF INTEREST HAS BEEN INFERRED BY THE REVENUE AUTHORITIES AT 12% P.A., I.E., THE INTEREST PAID ON UNSECURED LOANS AVAILED OF BY THE ASSESSEE FROM OUTSIDE PARTIES. THE SAME IS NO D OUBT RELEVANT, BUT CANNOT BE CONCLUSIVE OF THE MATTER. THE INTEREST RATE VARIES FROM TIME T O TIME, AND NO STANDARD IN ITS RESPECT COULD BE LAID DOWN. THERE COULD BE VARIOUS REASONS FOR PAYING INTEREST TO DIFFERENT PARTIES AT DIFFERENT RATES, SO THAT THE VARIATION BY ITSELF CANNOT LEAD TO THE INFERENCE OF THE HIGHER RATE AS BEING UNREASONABLE OR EXCESSIVE. NOTHING HA S BEEN BROUGHT ON RECORD TO SHOW; THE ONUS OF WHICH IS ON THE REVENUE, THAT THE PREVAILIN G MARKET RATE DURING THE RELEVANT YEAR WAS INDEED AT 12% P.A. IN FACT, THOUGH THE SAME CAN NOT BE ACCEPTED AS A FINAL FACT, THE INTEREST ON SECURED LOANS, WHICH STANDS ALSO INCURR ED BY THE ASSESSEE FOR THE RELEVANT YEAR (PB PGS. 6,10), WAS ON THE ENQUIRY BY THE BENCH CLA IMED TO BE AT 14% P.A. THE RATE FOR UNSECURED LOANS IS GENERALLY HIGHER THAN FOR SECURE D LOANS DUE TO A HIGHER RISK ELEMENT. IN THE INSTANT CASE, THE LOANS FROM FAMILY MEMBERS ARE STATED TO BE ON LONG-TERM BASIS, AND WHICH FACT MAY HAVE PREVAILED IN DECIDING ON THE IN TEREST RATE THEREON AT AN OSTENSIBLY HIGHER RATE; THOSE FROM OUTSIDE PARTIES BEING ON SH ORT-TERM BASIS. THOUGH, THERE BEING NO SUCH EXPLANATION BEFORE THE AUTHORITIES BELOW, AND THEREFORE NOT EXAMINED BY THEM, SO THAT NO CREDENCE TO THIS EXPLANATION COULD BE GIVEN BY US, WE YET STATE SO ONLY TO HIGHLIGHT THAT THERE COULD BE, AS AFORE-STATED, VALID REASON/ S FOR DIFFERENT INTEREST RATES. UNDER THE CIRCUMSTANCES, IN OUR VIEW, THE REVENUE HAS FAILED TO DISCHARGE THE ONUS CAST ON IT UNDER ITA NO.854/MUM/2012 (A.Y.2007-08) NATHALAL SHIVLAL VS. DY. CIT 3 THE PROVISION TO BRING THE IMPUGNED AMOUNT TO TAX F OR THE CURRENT YEAR. WE DECIDE ACCORDINGLY, ACCEPTING THE ASSESSEES FIRST GROUND OF APPEAL. 4. THE ASSESSEES SECOND GROUND IS IN RELATION TO T HE DISALLOWANCE OF INTEREST U/S.36(1)(III), WORKED OUT @ 12% P.A., I.E., THE IN TEREST PAID ON UNSECURED LOANS FROM OUTSIDE PARTIES, ON ACCOUNT OF LOANS TO TWO OF THE THREE PARTNERS OF THE ASSESSEE-FIRM, AT RS. 40 LAKHS EACH, WHICH WERE FOR A PERIOD OF ONE D AY AND THREE DAYS RESPECTIVELY. THE ASSESSEE HAVING NOT CHARGED ANY INTEREST ON THE SAM E, A DISALLOWANCE FOR A TOTAL OF FOUR DAYS, I.E., AT RS.1315/- PER DAY, WAS MADE BY THE A .O. THE SAME STOOD CONFIRMED IN APPEAL BY THE LD. CIT(A) AS THE SAID LOANS TO THE P ARTNERS WERE ONLY A DIVERSION OF THE ASSESSEES BORROWED CAPITAL FOR NON-BUSINESS PURPOS ES AND, THUS, NOT SATISFYING THE CONDITION OF SECTION 36(1)(III). AGGRIEVED, THE ASS ESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. NO DOUBT THE ASSESSEES ARGUMENT AS MADE BEFORE THE AUTHORITIES BELOW, THAT THE LOAN WAS FOR A MINIMAL PERIOD, IS TO NO CONSEQUENCE IN-AS-MUCH AS THE INTE REST DISALLOWED HAS, AGAIN, BEEN ONLY WITH REFERENCE TO THAT PERIOD. IN FACT, THE A.O. HA S WORKED OUT THE SAME WITH REFERENCE TO THE RATE OF 12% P.A., WHILE THE ASSESSEE HAS PAID A HIGHER RATE OF INTEREST, AND IT IS WELL KNOWN THAT THE DEMAND LOANS CARRY A DISPROPORTIONAT ELY HIGH RATE OF INTEREST, BEING REQUIRED IN LARGE SUMS, THOUGH FOR EXTREMELY SHORT PERIODS OF TIME. BEFORE US, HOWEVER, THE ASSESSEES CLAIM WAS THAT THE SAID AMOUNT/S COU LD NOT BE CONSTRUED AS LOANS TO PARTNERS IN-AS-MUCH AS THE SAME STOOD DEBITED TO TH E RESPECTIVE CAPITAL ACCOUNT OF THE TWO PARTNERS, FOR WHICH THE LD. AR WOULD TAKE US THROUG H SCHEDULE-I OF THE BALANCE-SHEET AS AT THE RELEVANT YEAR-END, CONTAINING THE MOVEMENT O F THE FUNDS IN THE SAID ACCOUNTS, STATING THAT THE SAID AMOUNTS STOOD INCLUDED UNDER THE SUB-HEADING WITHDRAWALS, WHICH WERE AT RS.88.86 LAKHS AND RS.65.74 LAKHS FOR THE T WO PARTNERS. THE AMOUNT/S HAVING BEEN WITHDRAWN BY THE PARTNERS FROM THEIR RESPECTIV E CAPITAL ACCOUNTS, WHICH WERE INTEREST BEARING, THE INTEREST STOOD WORKED OUT THE REON ONLY WITH REFERENCE TO THE BALANCE OBTAINING FROM DAY TO DAY, SO THAT NO FURTHER DISAL LOWANCE OF INTEREST OUGHT TO HAVE BEEN ITA NO.854/MUM/2012 (A.Y.2007-08) NATHALAL SHIVLAL VS. DY. CIT 4 MADE. THE ASSESSEE, IN OTHER WORDS, IS DENYING THE FACT OF INTEREST HAVING BEEN NOT RECOVERED FROM THE PARTNERS IN-AS-MUCH AS THEIR CAP ITAL BALANCE STANDS REDUCED, AND WHICH IS SURPRISING AS THE SAME OUGHT TO HAVE BEEN EXPLAINED BEFORE THE AUTHORITIES BELOW. IN FACT, THIS DOES NOT APPEAR TO BE CORRECT, AS THE CAPITAL OF THE TWO PARTNERS AS AT THE BEGINNING OF THE YEAR IS AT RS.36.22 LAKHS AND RS.0.19 LAKHS RESPECTIVELY. THE MATTER IS FACTUAL, AND IT CANNOT BE DENIED THAT IF THE CAP ITAL ACCOUNTS OF THE PARTNERS BECAME NEGATIVE FOR ANY PART OF THE YEAR, ON ACCOUNT OF WI THDRAWAL IN EXCESS OF THE BALANCE OUTSTANDING IN THE SAID ACCOUNT, INTEREST OUGHT TO HAVE BEEN CHARGED, AS THERE IS A DIRECT INFERENCE OF DIVERSION OF BORROWED FUNDS. UNDER THE CIRCUMSTANCES, IN OUR VIEW, THE REVENUE HAS CORRECTLY DISALLOWED THE INTEREST TO TH E PROPORTIONATE EXTENT. WE DECIDE ACCORDINGLY, DISMISSING THE ASSESSEES GROUND NO. 2 . 6. THE THIRD AND THE FINAL GROUND OF THE REVENUES APPEAL IS TOWARD DISALLOWANCE IN RESPECT OF TELEPHONE EXPENDITURE INCURRED AND CLAIM ED IN THE SUM OF RS.64,155/- BY THE ASSESSEE FOR THE RELEVANT YEAR. WHILE THE A.O. EFFE CTED THE SAME AT RS.24,000/-, IT STOOD RESTRICTED TO 15% OF THE TOTAL EXPENDITURE BY THE L D. CIT(A), HOLDING THE DISALLOWANCE BY THE A.O. AS EXCESSIVE. NO IMPROVEMENT IN ITS CASE H AS BEEN MADE BY THE ASSESSEE BEFORE US, WITH THE LD. CIT(A) HOLDING THAT IN THE ABSENCE OF EVIDENCE TO THE CONTRARY, THE USE OF THE MOBILE OR TELEPHONES BY THE PARTNERS FOR THEIR PERSONAL PURPOSES AND, THUS, NON- BUSINESS PURPOSES, COULD NOT BE RULED OUT. THE LD. AR, ALSO PRAYED BEFORE US FOR A CONSIDERATION IN RESPECT OF THE EXTENT OF DISALLOWA NCE, CONSIDERING THE TOTAL EXPENDITURE TO BE AT A NOMINAL AMOUNT, I.E., WITH REFERENCE TO THE VOLUME OF THE BUSINESS, BEING AT RS. 65.15 CRORES (PB PG. 6). UNDER THE CIRCUMSTANCES, W E ONLY CONSIDER IT FIT AND PROPER TO RESTRICT THE DISALLOWANCE TO 10% OF THE TOTAL EXPEN DITURE, I.E., AT RS.6,412/-. WE DECIDE ACCORDINGLY, PARTLY ACCEPTING THE ASSESSEES GROUND NO. 3. ITA NO.854/MUM/2012 (A.Y.2007-08) NATHALAL SHIVLAL VS. DY. CIT 5 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. ORDER PRONOUNCED ON THIS 22 ND DAY OF FEBRUARY, 2013 SD/- - SD/- ( DINESH KUMAR AGARWAL ) ( SANJAY ARORA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 22.02.2013 COPY FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE C.I.T. 4. CIT (A) 5. THE DR, B- BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ROSHANI