ACIT 13(2), MUMBAI V. METAL ORE, MUMBAI

ITA 8541/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3275 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R S SHAH
• Keywords: Gift; Opportunity of being heard; Fair market value; Commercial expediency
• Section: 143(3); 14A; 37

Judgement Text

B IN THE INCOME TAX APPELLATE TRIBUNAL B BENC H, MUMBAI !' , $ % BEFORE SHRI I.P. BANSAL, JM AND SHRI KARUNAKARA RAO , AM ./I.T.A. NO.8541/M/2010 (AY:2007-2008) ./I.T.A. NO.7185/M/2011 (AY:2008-2009) ADDL. C IT - 13(2) R.NO.421, AAYAKAR BHAVAN, MUMBAI 400 020. & / VS. M/S. METAL ORE, 308 GIRIRAJ, IRON MARKET, S.T. ROAD, MUMBAI 400 009. ' $ ./PAN : AAAFM 5338 D ( '( /APPELLANT) .. ( )*'( / RESPONDENT) '( + , / APPELLANT BY : SHRI MOHIT JAIN, DR )*'( + , / RESPONDENT BY : SHRI R.S.SHAH & + -$ /DATE OF HEARING : 26.6.2013 ./0 + -$ /DATE OF PRONOUNCEMENT : 3.7.2013 1 1 1 1 / O R D E R PER D. KARUNAKARA RAO, AM: THERE ARE TWO APPEALS UNDER CONSIDERATION AND BOTH THE APPEALS ARE FILED BY THE REVENUE AGAINST THE DIFFERENT ORDERS OF THE CIT (A)-22, MUMBAI FOR THE ASSESSMENT YEARS 2007-08 AND 2008-09 RESPECTIVELY. SINCE, THE IDENTICAL ISSUES ARE INVOLVED IN THE BOTH THE APPEALS, THEY ARE CLUBBED AND BEING DISPOSED OF IN THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. GR OUND WISE AND APPEAL WISE ADJUDICATION IS GIVEN IN THE FOLLOWING PARAGRAPHS. 2. FIRSTLY, WE SHALL TAKE UP ITA NO.8541/M/2010 IS FILED BY THE REVENUE ON 8.12.2010 AGAINST THE ORDER OF THE CIT (A)-24, MUMB AI DATED 30.9.2010 FOR THE AY 2007-2008. IN THIS APPEAL, REVENUE RAISED THE FOLLO WING GROUNDS WHICH READ AS UNDER 1.(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS. 4,56,000/- ON A CCOUNT OF PAYMENT OF INTEREST TO RELATIVES OF THE PARTNERS @ 15% AS AGAINST 12% PAID BY ASSESSEE TO OTHERS. (II) WHILE DOING SO, THE LD CIT (A) FAILED TO APPRE CIATE THAT THE ASSESSEE HAS DELIBERATELY PAID MORE INTEREST TO RELATIVES TO RED UCE THE TAXABLE INCOME. 2 2. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS. 2,88,000/- OUT OF SALES PROMOTION EXPENSES. (II) WHILE DOING SO, THE LD CIT (A) FAILED TO APPRE CIATE THAT EXCEPT FURNISHING THE BILLS FOR PURCHASE OF 657 GOLD COINS/BARS WORTH RS. 7,77,296/- FROM NARONDAS DHANALAXMI JEWELLERS, NO DETAILS OF THE PARTIES / P ERSONS TO WHOM THESE GOLD COINS / BARS WERE DISTRIBUTED AND NO EVIDENCE WHATSOEVER OF HAVING BUSINESS RELATIONS WITH THEM HAVE BEEN FURNISHED BY THE ASSESSEE BEFO RE THE ASSESSING OFFICER. 3. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE TH AT THE ASSESSEE IS A TRADER IN IRON AND STEEL ITEMS INCLUDING STEEL SHEETS ETC. D URING THE ASSESSMENT YEAR, ASSESSEE HAD TAKEN LOANS FROM VARIOUS PERSONS INCLU DING FROM THE RELATIVES OF THE PARTNERS FOR BUSINESS PURPOSES AND PAID INTEREST @ 12% TO 15% DEPENDING UPON THE PERIOD OF LOAN. CONSIDERING THE BUSINESS REQUIR EMENT AND PREVAILING MARKET CONDITION AND IN PARTICULAR, THE BANK RATE IN RESPECT OF THE LOAN, THE ASSESSEE PAID 15% OF INTEREST TO THE PERSONS FROM WHOM THE LOANS WERE TAKEN FOR A PERIOD MORE THAN TWO YEARS. DURING THE ASSESSMENT PROCEEDINGS, AO OBSERVED THAT THE ONLY RELATIVES OF THE ASSESSEE WERE PAID HIGHER RATE OF INTEREST. FURTHER, AO NOTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE EN HANCED INTEREST WAS FOR COMMERCIAL EXPEDIENCY AND WAS FOR WHOLLY AND EXCLUS IVELY FOR THE BUSINESS PURPOSES. THUS, AO RESTRICTED THE INTEREST TO 12% ON THE LOANS AND DISALLOWED RS. 4,56,000/-. AGGRIEVED, ASSESSEE FILED AN APPEAL B EFORE THE FIRST APPELLATE AUTHORITY. 4. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLAT E AUTHORITY, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, CIT (A) DELETED TH E ADDITION MADE BY THE AO BY HOLDING AS UNDER: 2.3. I HAVE CONSIDERED THE SUBMISSIONS OF THE LD CO UNSEL AND THE FACTS OF THE CASE AND IT IS SEEN THAT THE APPELLANT HAS BEEN ABLE TO PROVE COMMERCIAL EXPEDIENCY IN PAYMENT OF INTEREST TO BOTH THE RELATIVES AND OTHER PERSONS AT 15% BECAUSE AS SUBMITTED BY THE APPELLANT IF THE SAME LOANS WERE T O BE TAKEN FROM THE BANK, THE RATE OF INTEREST WOULD HAVE BEEN FROM 12% TO 15% DE PENDING UPON THE TYPE OF INDUSTRY AND THE PARTIES FOR WHICH THE LOAN WAS TAK EN. IN ADDITION TO THESE, THE APPELLANT WOULD HAVE PAID PROCESSING CHARGES DEBITE D EVERY QUARTER AND WHICH WOULD HAVE WORKED OUT TO MORE THAN 15%. FURTHER, THE BANK WOULD HAVE ALSO REQUIRED SECURITIES FOR THE LOAN AND THUS THE APPELLANT HAS ON GROUND OF COMMERCIAL EXPEDIENCY TAKEN THE DECISION TO PAY INTEREST@ 15% FOR LONGER PERIODS TO BOTH RELATIVES AND OTHER PERSONS AND THEREFORE AS PER TH E DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS 288 ITR 1 (SC) T HAT ONCE COMMERCIAL EXPEDIENCY IS ESTABLISHED THEN THE AO CANNOT STEP INTO THE SHOES OF THE ASSESSEE AND DECIDE THE NECESSITY AND REASONABLENESS OF THE RATE OF INTERES T. FOLLOWING THE ABOVE RATIO OF THE 3 JUDGMENT OF THE HONBLE SUPREME COURT IN S.A. BUILD ERS CASE AND THE FACTS BROUGHT ON RECORD BY THE APPELLANT, THE DISALLOWANCE OF RS. 4,56,000/- IS HEREBY DELETED. 5. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A) , REVENUE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL BY RAISING THE GROUND NO .1. 6. DURING THE PROCEEDINGS BEFORE US, LD DR DUTIFULL Y RELIED ON THE ORDER OF AO. 7. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE R EITERATED THE SUBMISSIONS AND MADE BEFORE THE FIRST APPELLATE AUTHORITY AND R ELIED ON THE ORDER OF THE CIT (A). 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE O RDERS OF THE REVENUE AUTHORITIES AND THE PAPERS FILED BEFORE US. AS PER THE JUDGMENT OF THE APEX COURT IN THE CASE OF S.A. BUILDERS (SURPA), IT IS A SETTLED PROPOSITION THAT ONCE COMMERCIAL EXPEDIENCY IS ESTABLISHED AO CANNOT DECIDE THE NECE SSITY AND REASONABLENESS OF THE RATE OF INTEREST. BY RELYING ON THE SAID JUDGMENT OF THE HONBLE SUPR EME COURT, CIT (A) CORRECTLY DECIDED THE ISSUE IN FAVOUR OF THE AS SESSEE BY DELETING THE ADDITION MADE BY THE AO. IN OUR CONSIDERED OPINION, THE ORDE R OF THE CIT (A) IN THIS REGARD IS FAIR AND REASONABLE AND IT DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED . 9. GROUND NO.2 RELATES TO THE DISALLOWANCE OF SALES PROMOTION OF RS. 2,88,000/-. BRIEFLY STATED, DURING THE ASSESSMENT PROCEEDINGS A O OBSERVED THAT THE ASSESSEE HAD PURCHASED 650 GOLD COINS OF RS. 11,000/- EACH A MOUNTING TO RS. 7,22,150/-. ASSESSEE SUBMITTED BEFORE THE AO THAT THE SAID GOLD COINS WERE DISTRIBUTED TO BUSINESS ASSOCIATES ON CUSTOMARY GIFTING AND IS FOR USE OF BUSINESS. NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE, AO MADE 40% OF THE DISALLOWANCE WHICH WORKS OUT TO RS. 2,88,000/-. AGGRIEVED, ASSE SSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 10. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLA TE AUTHORITY, CIT (A) CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AND GRATED RELIEF BY DELETING THE ADDITION. PARA 3.2 OF THE IMPUGNED ORDER IS RELEVAN T IN THIS REGARD, WHICH IS REPRODUCED HERE UNDER. 4 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD COUNSEL AND THE FACTS OF THE CASE AND IT IS CLEAR THAT THE APPELLANT HAS BROUGHT ON RECORD THE NAMES AND RELEVANT DETAILS OF THE PERSONS TO WHOM THE GOLD COINS HAS BEEN GIVE N AND AS STATED BY THE APPELLANT THAT IT IS CUSTOMARY TO GIVEN THESE GIFTS ON THE OCCASIO N OF DIWALI TO ALL PERSONS WITH WHOM THE APPELLANT IS DOING BUSINESS DURING THE YEAR IN ORDER TO KEEP GOOD RELATION AND THIS FACT THAT ALL THE PERSO NS TO WHOM THE COINS HAVE BEEN GIVEN ARE ONLY THOSE WITH WHOM THE APPELLANT HAS DO NE BUSINESS DURING THE YEAR HAS NOT BEEN DISPUTED CLEARLY SHOWS THAT THE ABOVE EXPE NSES HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THE REFORE, IS ALLOWABLE. HENCE, DISALLOWANCE OF RS. 2,88,000/- IS HEREBY DELETED. 10.1. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A), REVENUE FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL BY RAISING THE GROUND NO .2. 11. DURING THE PROCEEDINGS BEFORE US, LD DR RELIED ON THE ORDER OF THE AO. 12. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF CIT (A). 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE MATERIAL PLACED BEFORE U S. IT IS A FACT THAT THE ASSESSEE PURCHASED 650 GOLD COINS WORTH RS. 7,22,150/-. THER E IS NO ISSUE ABOUT THE GENUINENESS OF THE PURCHASE OF THE GOLD COINS. THE DISPUTED ISSUE IS ONLY WITH REGARD TO THE BUSINESS PURPOSES OF THE SAID EXPENDI TURE. IT IS THE CLAIM OF THE ASSESSEE THAT THE SAID GOLD COINS WERE PURCHASED FO R DISTRIBUTION AMONG THE VARIOUS PEOPLE CONNECTED TO THE BUSINESS. WHEN THE DETAILS REGARDING THE RECIPIENTS OF THE COINS WERE CALLED FOR, ASSESSEE FURNISHED A STATEME NT OF SALES PROMOTION, A COPY OF WHICH IS PLACED AT PAGES 17 TO 19 OF THE PAPER BOOK . ON PERUSAL OF THE SAID LIST, IT IS NOTICED THAT THE LIST CONTAINS THE ADDRESSES OF THE COMPANIES, WHERE THE ACTUAL RECIPIENTS OF THE GOLD COINS ARE WORKING. THUS, TH E NAMES AND ADDRESSES OF THE BENEFICIARIES AND THE BUSINESS CONNECTIONS OF THE S AID COMPANIES OR THE PERSONS ARE INVOLVED WERE NOT INDICATED. THE CIT (A) GENEROUSL Y HELD THAT IT IS CUSTOMARY TO OFFER GIFTS ON THE OCCASION OF DIWALI TO ALL THE PE RSONS WITH WHOM THE APPELLANT IS DOING BUSINESS. WHETHER THE ASSESSEE HAS DONE THE BUSINESS OR NOT WITH THE PARTIES MENTIONED IN PAGES 17 TO 19 IS NOT BROUGHT ON RECOR D. IN OUR OPINION, ACCEPTING THE CLAIM OF THE ASSESSEE IS PREMATURE. IT IS THE DUTY OF THE ASSESSEE TO DEMONSTRATE THAT THE EXPENDITURE UNDER QUESTION INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS AS PER SECTION 37 OF THE ACT. THER EFORE, IN OUR OPINION, THE CIT (A)S DECISION IN GRANTING RELIEF IS REQUIRED TO BE REVER SED. ACCORDINGLY, WE REMAND THE 5 MATTER TO THE FILES OF THE AO FOR ADJUDICATION OF T HE ISSUE AFRESH WITH A DIRECTION TO DISCHARGE THE ONUS FULLY DURING THE SET ASIDE PROCE EDINGS ON THIS ISSUE. AO SHALL GRANT REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, GROUND NO.2 RAISED BY THE REVENUE IS SET ASIDE. 14. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ITA NO.7185/M/2011 (AY 2008-2009) 15. THIS APPEAL FILED BY THE REVENUE ON 24.10.11 IS AGAINST THE ORDER OF THE CIT (A)24, MUMBAI DATED 4.8.2011 FOR THE AY 2008-2009 A ND THE GROUNDS RAISED BY THE REVENUE IN THIS APPEAL ARE READ AS UNDER: 1. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS. 7 ,22,868/- ON ACCOUNT OF PAYMENT OF INTEREST TO RELATIVES OF THE PARTNERS @ 15% AS AGAINST 12% PAID BY THE ASSESSEE TO OTHERS. (II) WHILE DOING SO, THE LD CIT (A) FAILED TO APPRE CIATE THAT THE ASSESSEE HAS ITSELF CONTENDED THAT IT GETS LOANS @ 12% AND P AYMENT OF INTEREST @ 15% ARE ONLY TO RELATIVES OF THE PARTNERS. (III) THE CIT (A) FURTHER FAILED TO APPRECIATE THAT THE LOANS FROM RELATIVES ARE IN THE NATURE OF DEPOSITS AND THUS THE ASSESSEE HAS DELIBERATELY PAID MORE INTEREST TO BENEFIT THE RELATIVES OF THE PARTN ERS AND TO REDUCE ITS TAXABLE INCOME. (IV) THE LD CIT (A) ALSO FAILED TO APPRECIATE THAT THE CONTENTION OF THE ASSESSEE THAT THE LOANS WERE OBTAINED FOR ITS BUSIN ESS DOES NOT HAVE MUCH SUBSTANCE WHEN IT HAS DEPOSITED AROUND RS. 8 CR IN MUTUAL FUNDS. 2. (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE DISALLOWANCE OF RS. 4 ,15,000/- U/S 14A OF THE ACT. (II) WHILE DOING SO, THE LD CIT (A) FAILED TO APPRE CIATE THAT THE PROVISIONS OF SECTION 14A ARE APPLICABLE IN THIS CASE SINCE TH E ASSESSEE HAS EARNED INCOME BY USING INTEREST BEARING FUNDS. 16. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE T HAT THE ASSESSEE IS A TRADER IN IRON AND STEEL ITEMS INCLUDING STEEL SHEETS ETC INC LUDING RESALE OF IMPORTED STEEL SHEETS. ASSESSEE FILED THE RETURN OF INCOME DECLAR ING THE TOTAL INCOME OF RS. 1,86,88,146/-. ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT AND THE ASSESSED INCOME OF THE ASSESSEE WAS DETERMINED AT RS. 1,98,2 6,100/- WHICH INCLUDES CERTAIN ADDITIONS IE (I) DISALLOWANCE OF INTEREST OF RS. 7, 22,868/-; (II) DISALLOWANCE U/S 14A OF RS. 4,15,000/-. THE FACTS RELATING TO THE ADDITION OF RS. 7,22,868/- ARE THAT THE 6 ASSESSEE HAD PAID INTEREST AT 12% TO 15% TO VARIOUS PARTIES INCLUDING RELATIVES TO THE PARTNER OF THE FIRM. DURING THE ASSESSMENT PRO CEEDINGS, AO NOTED THAT THE ASSESSEE HAD RECEIVED INTEREST @ 12% AND ASSESSEE W AS UNABLE TO PROVE THAT THE INTEREST WAS FOR COMMERCIAL EXPEDIENCY AND WAS INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. THEREFORE, AO DISALLO WED OF THE DIFFERENCE BETWEEN 12% AND 15% OF INTEREST RATE AND THE DISALLOWANCE W AS WORKED OUT AT RS. 7,22,868/-. AS WELL, AO APPLIED RULE-8D OF INCOME TAX RULES, 1962 AND DISALLOWED RS. 4,15,000/- U/S 14A OF THE ACT. AGGRIEVED WITH T HE ABOVE ADDITIONS MADE BY THE AO, ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 17. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLA TE PROCEEDINGS, REGARDING THE ADDITION OF RS.7,22,868/- MADE BY THE AO BY DISALLO WING INTEREST, CIT (A) CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AND DELETED TH E ADDITION AND RELIED ON THE DECISION OF CIT (A) FOR THE AY 2007-2008 IN THE ASS ESSEES OWN CASE, WHEREIN THE IDENTICAL ISSUE WAS ADJUDICATED IN FAVOUR OF THE AS SESSEE. PARA 3.2 OF THE IMPUGNED ORDER IS RELEVANT IN THIS REGARD AND THE SAME IS RE PRODUCED HERE UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISS IONS MADE BY THE ASSESSEE. IT IS CLEAR THAT THE DISALLOWANCE OF INTEREST HAS BEEN MA DE U/S 40A(2) OF THE IT ACT,1961, ALTHOUGH THE AO HAS NOT SPECIFICALLY STATED SO. TH E ASSESSING OFFICER HAS NOT FOUND THE EXPENDITURE TO BE NON-GENUINE. HE HAS DISALLOW ED THE EXPENDITURE TO THE EXTENT OF RS. 7,22,868/- ONLY ON THE GROUND THAT TH E EXPENDITURE WAS EXCLUSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT WAS MADE OR THE LE GITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED B Y OR ACCRUING TO HIM THERE FROM. HENCE, FOR AFFECTING ANY DISALLOWANCE UNDER THIS SE CTION, THE ONUS IS ON THE AO TO JUSTIFY THE DISALLOWANCE. THE ASSESSING OFFICER HA S DISALLOWED THE EXPENDITURE ONLY ON THE GROUND THAT WHILE THE ASSESSEE HAD RECEIVED INTEREST @ 12%, HE HAD PAID INTEREST @ 12% TO 15% TO VARIOUS PARTIES, INCLUDING RELATIVES OF THE PARTNERS OF THE FIRMS. HE HAS NOT BROUGHT ANYTHING ON RECORD WITH EVIDENCE TO SHOW AS TO THE MARKET VALUE OF THE INTEREST IN RELATION TO WHICH T HE INTEREST HAS BEEN HELD TO BE EXCESSIVE. I FIND THAT THE BENCHMARK PRIME LENDING RATE (BPLR) FROM 11.4.2007 WAS 13.25% AND RATE OF INTEREST FOR TRADERS WAS 1% MORE THAN THE BPLR. HENCE, EVEN IF ONE WERE TO TAKE THE BANK RATES FOR LOANS T O TRADERS; THIS WAS IN THE VICINITY OF 14.25%. I HAVE ALSO CONSIDERED THE SUBMISSIONS OF THE ASSESSEE, WHEREIN IT HAS JUSTIFIED THE PAYMENT OF INTEREST AND HAS MADE OUT ITS CASE THAT THE PAYMENT OF INTEREST WAS AT REASONABLE RATE. IDENTICAL ISSUE W AS INVOLVED IN THE APPEAL FILED BY THE ASSESSEE FOR THE AY 2007-08 WHEREIN THE SAME SU BMISSIONS WERE MADE BY THE ASSESSEE. LD CIT (A) HAD ALLOWED THE APPEAL OF THE ASSESSEE ON THIS ISSUE AND THE DISALLOWANCE OF INTEREST WAS DIRECTED TO BE DELETED BY HIM. I AGREE WITH THE REASONS GIVEN BY THE LD CIT (A) FOR HIS DECISION ON THIS IS SUE. IN VIEW OF THE AFORESAID REASONS, I HOLD THAT THE AO WAS NOT JUSTIFIED, IN T HE FACTS AND CIRCUMSTANCES OF THE CASE, IN DISALLOWING THE INTEREST OF RS. 7,22,868/- WHICH IS DIRECTED TO BE DELETED. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE ARE ALL OWED. 7 17.1. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A), REVENUE FILED THE PRESENT APPEAL BY RAISING THE GROUND NO.1. 18. DURING THE PROCEEDINGS BEFORE US, LD DR DUTIFUL LY RELIED ON THE ORDER OF THE AO. 19. ON THE OTHER HAND, SHRI R.S. SHAH, LD COUNSEL F OR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE FIRST APPELLATE AUTHORI TY AND RELIED ON THE ORDER OF THE CIT (A). 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES IN GENERAL AND PARA 3.2 OF THE IMPUGNED ORDER IN PARTICULAR. ON PERUSING THE ORDER OF THE CIT (A) RELATING TO THE ADDITION O F RS. 7,22,868/-, WE FIND THAT UNDISPUTEDLY THE DISALLOWANCE OF INTEREST WAS MADE BY THE AO U/S 40A(2) OF THE ACT. AS PER SECTION 40A(2), AO CAN DISALLOW SUCH EXPENDI TURE IF HE IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE 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 THEREFROM, SO MUCH OF THE EXPENDITU RE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED A S A DEDUCTION. IT IMPLIES THAT THE ONUS IS ON THE AO TO JUSTIFY THE DISALLOWANCE. IN THE PRESENT CASE, AO SIMPLY CAME TO A CONCLUSION ON THE GROUND THAT THE ASSESSE E PAID INTEREST @ 12% TO 15% TO VARIOUS PARTIES INCLUDING RELATIVES OF THE PARTN ERS OF THE FIRM, WHEREIN THE ASSESSEE RECEIVED ONLY 12%. BUT, THE AO HAS NOT BRO UGHT ANY SUPPORTIVE EVIDENCE TO RECORD TO SHOW THAT THE MARKET RATE OF THE INTER EST IN RELATION TO WHICH THE INTEREST HAS BEEN HELD TO BE EXCESSIVE. CONSIDERING ALL THE FACTS CIRCUMSTANCES OF THE CASE, CIT (A) HAS REASONABLY DELETED THE ADDITION M ADE BY THE AO AND WE FIND NO INFIRMITY IN THE ORDER OF THE CIT (A) ON THIS ISSUE . ACCORDINGLY, GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 21. GROUND NO.2 RELATES TO THE DISALLOWANCE OF RS. 4,15,000/- U/S 14A READ WITH RULE-8D. BRIEFLY STATED, DURING THE ASSESSMENT YEA R ASSESSEE FIRM HAS INVESTED SURPLUS FUNDS, WHENEVER THEY ARE AVAILABLE, IN UTI MUTUAL FUNDS ETC IN ORDER TO 8 INCREASE THE INCOME OF THE ASSESSEE. DURING THE ASS ESSMENT PROCEEDINGS, ASSESSEE SUBMITTED THAT AS THERE IS OPENING OR CLOSING BALAN CE OF INVESTMENTS IN THE BOOKS OF ACCOUNTS AND THE INVESTMENTS WERE MADE ONLY WITH TH E SURPLUS FUNDS AND NO DIRECT EXPENSES HAVE BEEN INCURRED TO EARN TAX FREE INCOME , HENCE, RULE-8D IS NOT APPLICABLE. NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE, AO WORKED OUT THE DISALLOWANCE @ 0.5% OF THE TOTAL INVESTMENTS MADE W HICH COMES TO RS. 4,15,000/-. AGGRIEVED ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 22. DURING THE PROCEEDINGS BEFORE THE FIRST APPELLA TE AUTHORITY, AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE CIT (A) DELETE D THE ADDITION MADE BY THE AO. PARA 4.2 OF THE IMPUGNED ORDER IS RELEVANT IN THIS REGARD AND THE SAME IS REPRODUCED HERE UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISS IONS MADE BY THE ASSESSEE. I FIND THAT THE ASSESSING OFFICER HAS SIMPLY WORKED O UT THE DISALLOWANCE @0.5% OF THE TOTAL INVESTMENTS MADE. THIS ACTION OF THE AO IS NO T AS PER LAW. RULE-8D(2)(III) PROVIDES THAT AN AMOUNT EQUAL TO ONE HALF PERCENT O F AVERAGE OF THE VALUE OF INVESTMENTS, INCOME FROM WHICH DOES NOT OR SHALL NO T FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR IS TO BE TAKEN FOR THE PURPOSE OF DISALLOWANCE. CLEARLY THE ASSESSING OFFICER HAS NOT TAKEN THE AMOUNT AS REQUI RED BY THE RULES FOR WORKING OUT THE DISALLOWANCE. THE AVERAGE VALUE OF THE INVESTM ENT ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR HAS TO BE TAKEN. THIS WOU LD MEAN THE 1 ST DAY OF APRIL AND 31 ST DAY OF MARCH OF THE PREVIOUS YEAR. SINCE, THERE IS NO SUCH INVESTMENTS ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, NO AMOUNT CAN BE HELD TO BE THE AMOUNT OF EXPENDITURE AS PER RULE-8D(1)(III) OF THE IT RULES, 1962. IN VIEW OF THE ABOVE, THE DISALLOWANCE OF RS. 4,15,000/- U/S 14A I S NOT JUSTIFIED AND IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 22.1. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A), REVENUE FILED THE PRESENT APPEAL BY RAISING THE GROUND NO.2. 23. DURING THE PROCEEDINGS BEFORE US, LD DR RELIED ON THE ORDER OF THE AO. 24. ON THE OTHER HAND, LD COUNSEL FOR THE ASSESSEE, RELIED ON THE ORDER OF THE CIT (A) AND REITERATED THE SUBMISSIONS MADE BEFORE THE FIRST APPELLATE AUTHORITY. 25. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES IN GENERAL AND PARA 4.2 OF THE CIT (A) S ORDER IN PARTICULAR AS WELL AS THE MATERIAL PLACED BEFORE US. IT IS A FACT THAT THE AV ERAGE VALUE OF THE INVESTMENT IS NIL AS PER BALANCE SHEET OF THE ASSESSEE AND IN ACCO RDANCE WITH THE PROVISIONS OF 9 RULE-8D(2)(III), THE AMOUNT DISALLOWABLE IN THIS RE GARD IS NIL. THEREFORE, THE ORDER OF THE CIT (A) IS STRICTLY IN ACCORDANCE WITH THE S AID RULE-8D AND DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. 26. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 3.7.2013 SD/- SD/- ( I.P. BANSAL) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER MUMBAI; 2& 3.7.2013 . & . ./ OKK , SR. PS 1 1 1 1 + ++ + )-34 )-34 )-34 )-34 540- 540- 540- 540- / COPY OF THE ORDER FORWARDED TO : 1. '( / THE APPELLANT 2. )*'( / THE RESPONDENT. 3. 6 ( ) / THE CIT(A)- 4. 6 / CIT 5. 4 78 )-& , , / DR, ITAT, MUMBAI 6. 8!9 : / GUARD FILE. *4- )- //TRUE COPY// 1& 1& 1& 1& / BY ORDER, ; ;; ; / < < < < = = = = (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI