TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 1599
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....er 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 primary 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 unreasonable in terms of provisions of section 40A(2)(b) having regard to the fair market value. It is submitted that payment of interest by the firm on goods security deposits and other persons at 15% is not comparable and therefore interest paid @ 18% is reasonable and not excessive, if compared with the market rate as per Bank's lending Rates." Grounds of ITA No.525/Ahd/2009 for A.Y. 2003-04 (Assessee's appeal) "1. The learned CIT(A) has erred in confirming the disallowance of interest 40A(2)(b) considering that 18% was excessive and unreasonable and thereby confirmed 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 Tax u/s 144A of the IT Act. It is prayed that disallowance be deleted and it should be held that 18% int....
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....e assessee on 19.10.2001 declaring total income of Rs. 3,81,25,803/-. The 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 assessee 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 back income tax in computation of income. He has reasons to believe that some income has escaped assessment. Therefore, notice u/s.148 of IT 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 observed that at the time of original assessment, the A.O's. focus was on allowability of excessive interest under Section 40A(2)(b) which has held as reasonable in the original assessment. However, the assessment has been reopened 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 busi....
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....rification in query no.2 regarding excessive/ unreasonable 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. also 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 accepted the assessee's reply and no disallowance was made by the A.O. in original assessment. He relied upon the decision of Hon'ble 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 quashed in case of re-assessment. He further argued that ld. CIT(A) had confirmed the reopening on the basis of wrong reasoning and no addition 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 that within four years the A.O. can reopen the case u/s. 148 even issue already considered by him. The reopening was on account of whether borrowed funds were for the purpose of business which was not considered by the A.O. in....
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....r 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 unreasonable 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 proceeding, the assessee was asked to furnish details of interest expenses and copy of interest account. The said expenditure had been debited in p&l account 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 relatives of the partner, partners and others varies from 12% to 18%. The assessee had made 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 A....
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....om all FDs vary from 7% to 9%. The difference between interest paid and interest 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 assessee 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 expediency of the appellant. The Hon'bte Supreme Court in 288 ITR Page 1 (SC) S.A. Builder has held that if it is found that a particular expenditure or 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 have been used by the appellant only for its business purposes. Perhaps the Assessing Officer wants to say that the income from fixed deposit is not derived from the business of the appellant as there is no d....
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....CIT(A) analyzed the fund borrowed and invested in FDs and held that borrowings were used for business purpose and FDs made in Corporation Bank at 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 with SBI on 27.03.2007 form the borrowed fund of Rs. 1.45 crore of Corporation 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 that assessee was in need of borrowing and after considering the borrowed funds and FD made held that 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 gave different findings on the ground that earlier years' borrowings were made for business purposes but fund had diverted for lower rate of interest, no disallowance of interest on such old loan can be made in this year unless it is proved that such ....
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....identical issue of interest disallowance u/s. 40A(2)(b) was considered in which funds were borrowed @ 22%. The Hon'ble High Court has confirmed the order of Tribunal 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 Hon'ble Gujarat High Court. He further submitted following decisions for rate of interest u/s. 40A(2), for maximum marginal rate and money borrowed in earlier year. The orders of this Tribunal in the case of sister concern (Prabhudas Kishoredas Tobacco Products Ltd.) for rate of interest, 236 CTR 113 (SC), 310 ITR 306 (Bom.), CIT vs. Advaitya Products P. Ltd. (Tax Appeal No.1478/2008 of Gujarat High Court) for maximum marginal rate & 229 CTR 93 (Del), 310 ITR 306 (Bom.) & 316 ITR 426 (Bom.) for money borrowed for earlier year. The Hon'ble Gujarat High Court in case of CIT vs. Advaitya Products P. Ltd (supra), order dated February 15, 2010 has decided the issue on sale price charged from sister concerns held no diversion of income to avoid paying tax. The Hon'ble Jabalpur Bench in case of M/s. J. P. Tobacco Products (P.) Ltd. vs. ACIT, Cir., Sa....
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.... provisions of section 40A(2)(a) could be invoked only by bringing evidence 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 loans from bank. It is so, because loans from bank cannot be compared to the loans from open market. Bank loans are secured i.e. the assessee has to give sufficient security and have first charge on the assets of the party, whereas unsecured loans from private parties and from directors and shareholders have no charge over the assets of the assessee. Even otherwise, loans from directors and shareholders as well as from open market being easily available and there being no threat of early withdrawal, the rate of interest paid on such loans cannot be considered excessive by comparing the rate of interest 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 investing in FDRs earning interest from bank, was quite normal and applicability of provisions of section 40A....
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....e assessee is trader / agent of the products of group company. The assessee has its marketing network and has appointed distributors and sub distributors. The facts and circumstances of the case reveals that the assessee is promoting family business and has monopoly of the family products and funds of the family members have been mainly utilized for non business purposes. Thus, it is evident that the assessee is accommodating 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 following interesting facts: (i) Sundry Debtors of the assessee firm for all the assessment years is shown at NIL, which proves that the assessee is doing cash sales. (ii) The quantum of Advance against goods & security for deposit of goods received by the assessee firm prove that it is selling premium product for which advance payment is received from the customers. (iii) The assessee firm has enough cash and bank balance for all the assessment years which is enough to....
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.... have been re-negotiated for earlier year. Therefore, rate of interest, paid by the assessee is quite reasonable having regard to the fair market value of such services. Therefore, the CIT(A) was incorrect in restricting the interest 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 the assessee is reasonable, the order of the CIT(A) is reversed and addition is deleted. Thus, assessee's appeals are allowed and Revenue's appeals are dismissed on this ground. 10. Ground no.3 in C.O. in A.Y 07-08 is against confirming 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 lacs. 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 claimed before the A.O. that it has not incurred any expenditure for earning the exempt income as assessee has tax free fund of Rs. 36 crore in form of current liability and provision as per Schedule D of balance ....