TaxTMI 
TaxTMI 
2014 (12) TMI 880
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....l: 1. On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the addition of Rs. 29,21,991/- made on account of disallowance U/s. 40A(2)(b) of the I.T. Act, 1961. 2. On the facts and in the circumstances of the case, the CIT(A) has not appreciated the finding of the A.O. that the borrowed funds were invested in FDRs and investment in FDRs not being part of business activity or incidental to business of the assessee. 3. On the facts and in the circumstances of the case, the CIT(A) has erred in not appreciating the fact that the funds borrowed from relatives were not utilized in business activity of the assessee that involves sale/purchase of Chewing Tobacco. 3. The facts which are revealed from the re....
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....aying interest @ 12% at one hand and on the other hand to keep the money with the bank at lower rate investing the money into the FDR to the extent of Rs. 4.25 Crores, itself show that there was no need to borrowed funds for the business purposes. The assessee challenged the addition made by the Assessing Officer before the Ld. CIT(A) and Ld. CIT(A) deleted the addition. Before the Ld. CIT(A) the assessee made the submissions raising the following points challenging the additions made by the Assessing Officer: i. Raw material required for our product is an agro based commodity and consequently its production as such is subject to weather conditions resulting uncertainties and consequently market fluctuations. ii. In view of above, we ....
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.... order, submissions made by the appellant as also the contentions raised by the AR. The AO has disallowed part of the interest mainly on the ground that the appellant had invested in FD while simultaneously making borrowings. However, no disallowance could be justified on such a ground. The fact that borrowing was made for the purpose of business is not in dispute and once the fact of borrowing for the purpose of business is established, interest has to be allowed. Necessity of borrowing could not be the criteria for allowing or disallowing any expenditure. Again, the AO has taken a view that the relatives would have earned at 9% only had they invested in FD with bank. In my opinion what the lenders would have done had they not invested wit....
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....td., 74, ITR, 723 Bom. CIT V. Gautam Motors, 334, ITR, 326; Delhi. Shivanga Builders V. ACIT 316, ITR (aT) 433; Ahd. 10. Further, all the depositors who are relatives (except in two cases where interest paid comes to ? 4,01,854/-) are assessed to tax and are subject to same rate of taxation viz; 30%. In the past (including in A. Y. 2008-09 where assessment was completed u/s. 143 (3) of the Act) no disallowance was made out of the interest paid. The AO has merely adopted rate at 12 % without taking into account the market condition and circumstances under which the unsecured loans were taken. Again, unsecured loans from relatives, as rightly pointed out by the learned AR are not likely to the withdrawn. Further if withdrawn, such fu....
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....unt also as well as withdrawal to the extent of Rs. 1,31,51,907/-. As explained by the assessee, the assessee has only borrowed Rs. 26 Lacs. The assessee also explained that there is tedious procedure if the money is borrowed from the bank and even then rate of interest is 14.25% + additional mortgage fee of 1%, documentation processing etc. The assessee also explained that as per the provisions of Sec. 40(b) while computing income of the firm, the interest @ 12% p.a. is allowable on credit balances on the partners' accounts. In this case there is no dispute about the fact that the borrowing was made for the purpose of business. The logic applied by the Assessing Officer if tested from the Businessman's point of view then same cannot be acc....
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....s. The said FDRs carried different rates of interest ranging from 8.75% to 8.10%. As observed by the Assessing Officer the assessee has unsecured loan to the extent of Rs. 2.45 Crores during the year and on the said loan the assessee has paid the interest @ 16% p.a. The Assessing Officer, therefore, proceeded to disallow the interest portion to the extent of differential rate of interest i.e. rate of interest on FDRs and interest paid on unsecured loan. The assessee filed the reply as in the A.Y. 2009-10 and disallowed part of interest by working out the difference i.e. rate of interest earned on the FDRs and rate of interest paid to the unsecured loan which is admittedly @ 16%. The Assessing Officer took the bank interest @ 14.25% and work....