M/s. Excel Engineers, Ahmedabad V. The Income tax Officer,Ward-3(1), Ahmedabad

ITA 932/AHD/2010

• Counselvise Citation: 93220514 RSA 2010
• Duration Of Justice: 2 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 03-12-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 30-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAHUL KUMAR
• Assessee Lawyers: S N DIVEATIA
• Keywords: Search and seizure
• Section: 43B; 143(3); 148; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE SHRI G. C. GUPTA, VP AND SHRI A. MOHAN ALAN KAMONY, AM) ITA NO. 932/AHD/2010 A. Y.: 2007-08 M/S. EXCESS ENGINEERS, PLOT NO.350, OPP. GIDC STAFF QUARTERS, ODHAV, AHMEDABAD P. A. NO. AAAFE 4633 K VS THE INCOME TAX OFFICER, WARD 3 (1), AHMEDABAD (APPELLANT) (RESPONDENT) ITA NO. 2975/AHD/2010 A.Y.: 2006-07 THE INCOME TAX OFFICER, WARD 3 (1), AHMEDABAD VS M/S. EXCESS ENGINEERS, PLOT NO.350, OPP. GIDC STAFF QUARTERS, ODHAV, AHMEDABAD P. A. NO. AAAFE 4633 K (APPELLANT) (RESPONDENT) C.O. NO.331/AHD/2010 (IN ITA NO. 2975/AHD/2010 : A.Y.: 2006-07 ) M/S. EXCESS ENGINEERS, PLOT NO.350, OPP. GIDC STAFF QUARTERS, ODHAV, AHMEDABAD P. A. NO. AAAFE 4633 K VS THE INCOME TAX OFFICER, WARD 3 (1), AHMEDABAD (CROSS OBJECTOR) (RESPONDENT) ASSESSEE BY SHRI S. N. DIVEATIA, AR DEPARTMENT BY SHRI RAHUL KUMAR, SR. DR DATE OF HEARING: 03-12- 2012 DATE OF PRONOUNCEMENT: 14-12-2012 O R D E R PER A. MOHAN ALANKAMONY: THE ASSESSEE IS IN APPEAL IN ITA NO.932/AHD/2010 AGGRIEVED BY THE ORDER OF THE L EARNED CIT(A), ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 2 GANDHINAGAR, AHMEDABAD DATED 22-02-2010 IN APPEAL N O. CIT(A)/GNR/82/2009-10, FOR THE ASSESSMENT YEAR 2007 -08 PASSED U/S 250 READ WITH SECTION 143(3) OF THE ACT AND THE REVENUE IS IN APPEAL IN ITA NO.2975/AHD/2010 AGGRIEVED BY THE ORDER OF THE LEAR NED CIT()A), GANDHINAGAR, AHMEDABAD DATED 08-09-2010 IN APPEAL NO. CIT(A)/GNR/79/2009-10 FOR THE ASSESSMENT YEAR 2006- 07 PASSED U/S 250 READ WITH SECTION 144 OF THE IT ACT. THE ASSESSEE HAS ALSO FILED ITS CROSS OBJECTION NO.331/AHD/2010 AGAINST THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2006-07. THESE CROSS APPEALS AND TH E CROSS OBJECTION WERE HEARD TOGETHER AND THE SAME ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.932/AHD/2010 (ASSESSEES APPEAL FOR AY 2007-08) 2. THOUGH THE ASSESSEE HAS RAISED THREE ELABORATE G ROUNDS IN ITS APPEAL, THE CRUX OF THE ISSUE INVOLVED THEREIN RELA TES TO CONFIRMATION OF DISALLOWANCE OF INTEREST OF RS.8,56,285/- U/S 40A(2 ) (B) OF THE ACT BY THE LEARNED CIT(A) BY HOLDING THAT THE INTEREST PAID BY THE ASSESSEE @ 20% TO ITS CONSTITUENT PARTNERS FRIENDS AND RELATIVE WAS EXCESSIVE OR UNREASONABLE. 3. THE ASSESSEE, A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING OF MACHINERY PARTS AS PER THE SPECIFI CATION GIVEN BY ITS CUSTOMERS FILED HIS RETURN OF INCOME FOR THE ASSESS MENT YEAR 2007-08 ON 30-10-2007 DECLARING INCOME AT RS.8,65,510/- THE R ETURN WAS SELECTED FOR SCRUTINY AND PROCESSED U/S 143 (1) OF THE ACT. SUBS EQUENTLY, THE ASSESSMENT WAS FINALIZED BY THE LEARNED AO U/S 143( 3) ON 01-05-2009 BY DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 20,88,730/-, WHEREIN THE LEARNED AO HAD MADE CERTAIN ADDITIONS BY DISALL OWING THE ASSESSEES ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 3 CLAIM U/S 43B OF THE ACT FOR RS.50,448/- AND RS.8,5 6,285/- U/S 40A(2) (B) OF THE ACT. HOWEVER, THE LEARNED CIT(A) AFTER CONSIDER ING THE OBSERVATION MADE BY THE LEARNED AO AND THE SUBMISSIONS OF THE L EARNED AR BEFORE HIM, DIRECTED THE LEARNED AO TO DELETE THE ADDITION OF RS.50,448/- MADE BY HIM U/S 43B OF THE ACT AND CONFIRMED THE ADDITION O F RS.8,56,285/- MADE BY THE LEARNED AO U/S 40A (2) (B) OF THE ACT. THE R ELEVANT PORTION OF THE FINDINGS OF THE LEARNED CIT(A) IS REPRODUCED HEREIN UNDER FOR REFERENCE: 3.4 THE MATTER HAS BEEN CONSIDERED AND I AM AFRAID I CANNOT AGREE WITH THE AUTHORIZED REPRESENTATIVE. FIRSTLY T HERE IS A PRECEDING YEARS HISTORY WHEN THE DEPARTMENTAL AUTH ORITIES HAVE FOUND THAT THE INTEREST PAID @ 18% IS EXCESSIVE AND ITS BENCHMARK HAS TO BE DONE WITH RESPECT TO INTEREST ON LOAN FRO M BANK @12%. SINCE THE FACTS OF THE CASE ARE SAME AND WE DO NOT HAVE AN ADVERSE APPELLATE ORDER, THOSE FINDINGS BECOME VERY IMPORTA NT. 3.5 SECONDLY, THE ARGUMENTS GIVEN BY THE AUTHORIZED REPRESENTATIVE ARE THEORETICAL ARGUMENT BUT THEY NE ED TO BE PROVED WITH FACTS. WHILE IT IS THE FACT THAT UNSECURED LOA NS SHOULD NOT NORMALLY BE COMPARED WITH THE SECURED LOANS FOR INT EREST PURPOSE, YET THE APPELLANT HAD O MATERIAL TO SHOW THAT IT WA S COMPELLED TO PAY ALMOST TWICE THE PREVAILING BANK RATES BECAUSE THE LOANS IN QUESTION WERE UNSECURED. SIMILARLY, THERE IS NOTHING ON RECO RD TO SUGGEST THAT THE HUGE BORROWING OF MONEY FROM PERSONS COVERED U/ S. 40A (2) (B) LED TO ANY KIND OF INCREASE IN THE RATE OF INTEREST BEING CHARGED BY THOSE PERSONS COMPARED TO A MORE MODEST BORROWING. IN FACT, ALL THESE NEGATIVE THEORETICAL FACTORS, IN MY VIEW, WOU LD TURN IN APPELLANTS FAVOUR FOR THE FACT THAT THE BORROWING RESORTED TO IS FROM FRIENDS AND RELATIVES WHICH HAD AN INBUILT RISK INS URANCE FACTOR. DURING THE YEAR, THE APPELLANT HAS RECEIVED AT PEAK A SUM OF RS.2.14 CR. THE PROFIT & LOSS ACCOUNT SHOWS A TURNO VER OF ONLY RS.1,06 CR. AS LABOUR CHARGES. THE INTEREST TO DEPO SITORS, ALL ARE HAPPENED TO BE PAID TO FRIENDS AND RELATIVES IS AT RS.21,31,634/-. THEREFORE, THE DATA DOES NOT SUGGEST ANY KIND OF UR GENCY AND LIMITATION TO THE WORKING OF THE APPELLANT TO BORRO W SO HEAVILY AND PAY A RATE OF INTEREST HIGHER MORE THAN THE MARKET RATE. THEREFORE, CONSIDERING ALL THE FACTS, I THINK THE ACTION OF TH E ASSESSING OFFICER IN RESTRICTING THE INTEREST TO 12% AS REASONABLE AND T HE ADDITION IS CONFIRMED. ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 4 AGAINST THE FINDINGS OF THE LEARNED CIT(A), THE REV ENUE IS IN APPEAL BEFORE US. 4. THE LEARNED AR REITERATED THE SUBMISSIONS MADE B EFORE THE AUTHORITIES BELOW. IT WAS FURTHER PLEADED BY THE LE ARNED AR THAT FOR THE PRECEDING ASSESSMENT YEAR 2006-07, THE LEARNED CIT( A) HAD ALLOWED THE INTEREST AT 18% FOR WHICH THE ASSESSEE HAD NOT DISP UTED. THE LEARNED DR ON THE OTHER HAND, RELIED ON THE ORDERS OF THE REVE NUE AUTHORITIES. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIAL ON RECORD. ON PERUSING THE ORDER OF THE LE ARNED CIT(A) FOR THE PRECEDING ASSESSMENT YEAR, WE FIND THAT THE LEARNED CIT(A) HAD ALLOWED INTEREST PAYMENT AT 18% TO SUCH RELATED PARTIES OF THE ASSESSEE. THE RELEVANT PORTION OF THE ORDER IS REPRODUCED HEREIN BELOW FOR REFERENCE: 4.2 DURING APPEAL, APPELLANT STATED THAT APPELLANT IS REQUIRED TO PAY INTEREST @ 20% TO 24% ON THE PERSONAL LOANS FRO M ICICI BANK, HDFC BANK ETC. SIMILARLY, FINANCE COMPANIES ALSO CH ARGE 20% TO 25% ON UNSECURED LOANS AND TATA CAPITAL LTD. CHARGE S 19.5% INTEREST + 1.5% PROCESSING FEE. THE APPELLANT CONTE NDED THAT WHENEVER FIRM REQUIRES FUND, THE SAME HAVE BEEN TAK EN FROM THE SPECIFIED PERSONS @18% AND THIS HAS BEEN THE PRACTI CE FOR SEVERAL YEARS AND NO ADDITIONS WERE MADE IN EARLIER YEARS. THE UNSECURED LOANS ARE OBTAINED WITHOUT ANY MORTGAGE OR GIVING G UARANTEES. FURTHER, IT RELIED ON THE DECISION OF HONBLE ITAT BENCH A, AHMEDABAD IN ITA NO.59/AHD/2005 AND 2285/AHD/2006 D ATED 3/3/2009 IN THE CASE OF SAUMIL TRADERS PVT. LTD. VS . ITO FOR A. Y. 2001-02 AS PER WHICH INTEREST UP TO 24% WAS ALLOWED . 4.3 I HAVE CONSIDERED THE CONTENTIONS OF THE APPELL ANT AS WELL AS THE ASSESSMENT ORDER. THE AO HAS MERELY STATED THAT INTEREST PAYMENT SHOULD HAVE BEEN RESTRICTED TO THE BANK RAT E I.E. 12%. HOWEVER, IT IS SEEN THAT LOANS FROM THE BANK AND LO ANS FROM THE SPECIFIED PERSON ARE OBTAINED ON DIFFERENT TERMS SO THERE CANNOT BE COMPARISON BETWEEN THE TWO. THE LOANS FROM THE SPEC IFIED PERSONS ARE UNSECURED LOANS WHILE THE BANK LOANS ARE SECURE D LOANS BY WAY ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 5 OF GUARANTEE AND APPROPRIATE SECURITY. FURTHER, APP ELLANT HAS GIVEN THE INSTANCES WHERE INTEREST OF MORE THAN 18% HAS B EEN CHARGED BY BANKS AND FINANCE COMPANIES DEPENDING ON NATURE OF LOAN, DURATION AND PARTIES POSITION WHICH NOT BEEN DISPUTED BY THE AO. THE SEC. 40A (2) (A) REQUIRES THAT TO MAKE DISALLOWANCE, THE EXPENDITURE HAS TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO FA IR MARKET VALUE OF GOODS, SERVICES OR FACILITIES OR LEGITIMATE NEED S OF BUSINESS OR BENEFIT DERIVED THERE FROM. IN ASSESSEES CASE, IT IS NOT DISPUTED THAT LOANS HAVE BEEN OBTAINED FOR THE PURPOSE OF BUSINES S. THERE IS NOTHING ON RECORD TO SHOW THAT THE INTEREST PAID IS EXCESSIVE AS COMPARED TO INTEREST ON LOANS AVAILABLE FROM THE MA RKET ON SIMILAR TERMS AND BENEFIT DERIVED FROM THEM WAS NOT REASONA BLE. IN FACT, SPECIFIC INSTANCES WERE GIVEN BY APPELLANT TO JUSTI FY THE RATE OF INTEREST BEING PAID WHICH IS NOT DISPUTED. SO, THER E IS NO VIOLATION OF THE TERMS OF SECTION 40A (2) (A) OF THE ACT. ACCORD INGLY, ADDITION OF RS.6,21,532/- IS DELETED. 6. IT IS APPARENT FROM THE ABOVE THAT THE ASSESSEE HAD BEEN PAYING INTEREST @18% FOR THE LOAN OBTAINED FROM ITS RELATE D PARTIES FOR EARLIER YEARS AND THE REVENUE HAS NOT DISPUTED THE SAME. FU RTHER, THE BANK RATE OF INTEREST AT 12% CANNOT BE COMPARED WITH THE PRIV ATE LOANS ARRANGED FROM OUTSIDE PARTIES DUE TO VARIOUS FACTORS. CONSID ERING THIS FACT, THE LEARNED CIT(A) IN HIS ORDER CITED SUPRA HAG JUDICIO USLY ALLOWED THE INTEREST PAYMENT AT 18% WHICH WE ALSO FIND IT QUITE REASONAB LE. THEREFORE, FOR THE RELEVANT ASSESSMENT YEAR 2007-08 ALSO WE HOLD THAT THE ASSESSEES CLAIM OF INTEREST AT 20% MAY BE RESTRICTED TO 18% AS AGAI NST 12% ALLOWED BY THE LEARNED AO AND BY THE LEARNED CIT(A). 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.932/AHD/2010 FOR THE ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED. ITA NO.2975/AHD/2010 (REVENUES APPEAL FOR AY 2006-07) 8. THE LONE GROUND RAISED BY THE REVENUE IN THIS A PPEAL IS REPRODUCED HEREIN UNDER FOR REFERENCE: ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 6 1. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.6,21,532/- MADE U/S 40A (2) (B) OF T HE I. T. ACT. 9. THE FACTS OF THE CASE AND THE ISSUE IN THE PRESE NT CASE FOR THE ASSESSMENT YEAR 2006-07 IN REVENUES APPEAL NO.2975 /AHD/2010, ARE SIMILAR AND IDENTICAL TO THE FACTS AND ISSUE INVOLV ED IN THE ASSESSEES APPEAL IN ITA NO.932/AHD/2010 FOR THE ASSESSMENT YE AR 2007-08. SINCE, WE HAVE HELD THAT THE RATE OF INTEREST PAID TO THE RELATED PARTIES FOR THE LOAN OBTAINED BY THE ASSESSEE SHALL BE RESTRICTED TO 18% FOR THE ASSESSMENT YEAR 2007-08 BASED ON THE DECISION OF THE LEARNED C IT(A) FOR THE RELEVANT ASSESSMENT YEAR 2006-07, WE HEREBY CONFIRM THE ORDE R OF THE LEARNED CIT(A). ACCORDINGLY, THE APPEAL OF THE REVENUE DOES NOT SURVIVE. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. C.O. NO.331/AHD/2010 (IN ITA NO.2975/AHD/2010 FOR AY: 2006-07) 11. THE ASSESSEE HAS THROUGH ITS CROSS OBJECTION NO .331/AHD/2010 IN REVENUES APPEAL IN ITA NO.2975/AHD/2010 HAS CHALLE NGED THE VALIDITY OF REASSESSMENT WHICH WAS FURTHER CONFIRMED BY THE LEA RNED CIT(A). SINCE, WE HAVE DECIDED THE APPEAL OF THE REVENUE IN FAVOUR OF THE ASSESSEE ON MERITS, ASSESSEES CROSS OBJECTION WITH REGARD TO R EOPENING OF THE ASSESSMENT U/S 148 OF THE ACT HAS BECOME ACADEMIC. THEREFORE, WE DO NOT CONSIDER IT NECESSARY TO ADJUDICATE THE ISSUE A T THIS STAGE AND ACCORDINGLY, WE DISMISS THE CROSS OBJECTION FILED B Y THE ASSESSEE. ITA NO.932 & 2975/AHD/2010 AND CO NO.331/AHD/2010 ( AY: 2006-07 & 2007-08) M/S. EXCEL ENGINEERS 7 12. IN THE RESULT, ASSESSEES APPEAL IN ITA NO.932/ AHD/2010 FOR THE ASSESSMENT YEAR 2007-08 IS PARTLY ALLOWED, AND BOTH THE REVENUES APPEAL IN ITA NO.2975/AHD/2010 FOR THE ASSESSMENT YEAR 200 6-07 AND THE ASSESSEES CROSS OBJECTION NO.331/AHD/2010, ARE DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14-12-2012. SD/- SD/- (G. C. GUPTA) VICE PRESIDENT (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER LAKSHMIKANT LAKSHMIKANT LAKSHMIKANT LAKSHMIKANTA AA A DEKA DEKA DEKA DEKA / // / COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: - DIRECT ON COMPUTER 05-12 -12 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 06-12-12/10-12-12 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: