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2012 (7) TMI 332 - AT - Income TaxDisallowance u/s 36(1)(iii) based on the provisions of Sec. 40A(2)(a) of the Act - Interest on loans - held that - The addition was made by the ld. Assessing Officer merely on the premises that lower rate of interest was charged by the assessee from its two relatives and jumped to the conclusion that the assessee made excessive payment. The CBDT in circular no. 6P dated 6.7.1968, while examining the reasonableness of expenditure, has clarified that the Assessing Officer is expected to exercise its judgment in a reasonable and fair manner and should not apply the reasonableness which cause hardship in bona fide cases. - So far as establishing business exigencies are concerned, it has to be judged by the businessman and not by the Revenue unless and until some adverse material is brought on record - Decided in favor of assessee. Long term capital gain on the sale of the house sale deed for a consideration of Rs.30 lakhs - stamp valuation authority determined the value at Rs.35,71,000/- for the purposes of stamp duty levy - fair market value of the house was determined at Rs.36,52,000 - assessee has challenged the valuation Held that - Valuation adopted, approved by the DVO is based upon detailed working and the value of the house as on 1.4.1981 including the cost of the land/cost of the construction. There are very minor variations in the approach of the authorities - no infirmity in the direction of the learned Commissioner of Income Tax (Appeals) to recalculate the long term capital gain by taking the sale consideration at Rs.35.71 lakhs by adopting the cost of the house as on 1.4.1981 at Rs.5.11 lakhs as determined by the DVO Disallowance on account of bad debts - disallowed on the plea that identically in earlier assessment year also, the bad debt was disallowed Held that - Relief was given to the assessee and for the remaining amount of Rs.9,52,500/- in respect of fixed deposits and recurring deposits with Gujarat Mercantile Bank are concerned, these can be considered as capital loss, therefore, the Assessing Officer is directed to examine the claim of the assessee, consequently, the amount to the extent of Rs.9,52,500/- is remanded back for consideration of the ld. Assessing Officer for which due opportunity of being heard be provided to the assessee - appeals filed by the revenue are dismissed
Issues Involved:
1. Deletion of addition on account of excess payment of interest under Section 40A(2)(a) of the Income Tax Act. 2. Long term capital gain on the sale of the house. 3. Disallowance of bad debts. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Excess Payment of Interest under Section 40A(2)(a): The Revenue challenged the deletion of additions made by the Assessing Officer (AO) on account of alleged excessive payment of interest by the assessee to relatives and connected persons. The AO observed that the assessee received interest at lower rates (4%-5%) on advances given but paid higher interest rates (8%-13%) on loans taken from relatives. The AO disallowed the interest payments, deeming them excessive and unreasonable under Section 40A(2)(a) of the Income Tax Act, and not for legitimate business needs. The Commissioner of Income Tax (Appeals) [CIT(A)] examined the claims and found the interest payments to be neither excessive nor unreasonable compared to prevailing market rates. The CIT(A) noted that the AO failed to identify specific loans and interest rates that were allegedly excessive. The Tribunal upheld the CIT(A)'s decision, emphasizing that the reasonableness of interest payments must be judged from the viewpoint of the businessman, not the Revenue. The Tribunal cited various judicial precedents, including Upper India Publishing House (P) Limited vs. CIT and SA Builders Limited vs. CIT, to support its view. The Tribunal concluded that Section 40A(2)(a) cannot apply unless it is first established that the expenditure was excessive and unreasonable. 2. Long Term Capital Gain on Sale of House: The assessee contested the CIT(A)'s decision regarding the long term capital gain on the sale of a house. The house, constructed in 1960, was sold for Rs.30 lakhs in December 2004, while the Stamp Valuation Authority valued it at Rs.35,71,000 for stamp duty purposes. The AO determined the long term capital gain at Rs.11,87,900 after referring the matter to the Stamp Duty Officer and the Departmental Valuation Officer (DVO), who valued the house at Rs.36,52,000. The CIT(A) directed the recalculation of the long term capital gain by adopting the sale consideration at Rs.35.71 lakhs and the cost of the house as on 1.4.1981 at Rs.5.11 lakhs, as determined by the DVO. The Tribunal found no infirmity in the CIT(A)'s direction and affirmed the decision. 3. Disallowance of Bad Debts: The assessee challenged the disallowance of Rs.9,52,500 as bad debts. The AO had disallowed the entire amount of Rs.12,43,500 claimed as bad debts, referencing a similar disallowance in a prior assessment year. The CIT(A) provided partial relief by allowing Rs.2,91,000 but sustained the disallowance of Rs.9,52,500 related to fixed deposits and recurring deposits with Gujarat Mercantile Bank, treating them as capital loss. The Tribunal remanded the matter back to the AO for reconsideration, directing the AO to provide the assessee with an opportunity to present evidence supporting the claim. Final Judgments: 1. The appeals filed by the Revenue were dismissed. 2. Cross-objection No.10/Ind/2012 filed by the assessee was dismissed. 3. Cross-objection No.11/Ind/2012 filed by the assessee was partly allowed for statistical purposes, with directions for further examination by the AO. Pronouncement: This Order was pronounced in the open Court on 28.5.2012.
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