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2019 (4) TMI 1281 - AT - Income TaxInterest rate paid to related party u/s 40(A)(2)(b) - payment made to the person specified - disallowance @ 3% - HELD THAT - There were certain non-related parties to whom the assessee has paid interest on the borrowed fund at the rate of 18% per annum. Therefore it is incorrect to hold that the assessee has paid an excessive rate of interest to the related parties. Thus it is transpired from the order of lower authorities that the assessee in most of the cases has paid interest at a higher rate to the related parties. But it is also an undisputed fact that there were very few unrelated parties to whom the interest has been paid at the rate of 18% per annum. Thus it is incorrect to hold that the assessee has paid interest @18% per annum to its related parties only. - Decided in favour of assessee Addition on account of diversion of interest-bearing funds towards interest-free advances/loans/investments - HELD THAT - On perusal of the balance sheet of the assessee as on 31st March 2010, it was noticed that owned fund and Reserve surplus of the assessee stands 6.51 crores whereas the outstanding credit balance of cash credit (both the accounts) in aggregate is 3 crores approximately. Thus a presumption can be drawn that the assessee has not diverted any borrowed fund for noncommercial activity. See RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT . Thus we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above. - Decided in favour of assessee. Difference in the value of the stock as per the bank statement and as per the audit annual accounts - as explained that the difference is arising on account of the higher value of stock declared to the bank to avail the higher amount of cash credit facility from the bank - HELD THAT - There was no difference in the quantity recorded by the assessee in its books of accounts in the stock statement as well as the stock statement furnished to the bank. Thus there is no dispute that the difference in the valuation of closing stock for ₹ 39,15,600/- was arising due to the declaration of the higher value of the stock to the bank. In such situations, courts have held that there cannot be any addition in the total income of the assessee in the event assessee has declared the inflated value of the stock. See COMMISSIONER OF INCOME TAX - III VERSUS RIDDHI STEEL AND TUBES PVT. LTD. 2013 (10) TMI 291 - GUJARAT HIGH COURT - Thus the ground of appeal of the assessee is allowed. Difference in the value of debtors as per the bank statement given to bank and as per the audit annual accounts - assessee before the CIT (A) filed certain additional evidence to demonstrate that the difference is arising in respect of one-party namely Quality casting industries which has been written off in the books of accounts of the assessee. However, the appeal of the assessee was rejected by the Ld. CIT (A) on the ground that there was no application under rule 46A was filed by the assessee - HELD THAT - In our considered view if the assessee failed to move an application for the admission of additional evidence then the Ld.CIT (A) should have granted opportunity to the assessee to rectify the defect. But on perusal of the order of the Ld.CIT (A) we note that no such opportunity to rectify the mistake was given to the assessee. Therefore after considering the facts in totality and in the interest of justice and fair play we are inclined to restore this issue to the file of AO for fresh adjudication as per the provisions of law and in the light of above-stated discussion. Hence the ground of appeal of the assessee is allowed for statistical purposes.
Issues Involved:
1. Disallowance of interest paid to related parties under Section 40A(2)(b) of the Income Tax Act. 2. Disallowance of interest expenditure due to alleged diversion of interest-bearing funds. 3. Addition due to the difference in the value of stock as per bank statement and audited accounts. 4. Addition due to the difference in the value of book debts as per bank statement and balance sheet. Issue-wise Detailed Analysis: 1. Disallowance of Interest Paid to Related Parties: The Assessee challenged the disallowance of ?1,67,463/- out of ?3,34,926/- made by the AO, who observed that the Assessee paid interest at 18% to related parties, whereas the prevailing market rate was 12%. The CIT(A) partially upheld the disallowance, reducing it to 3% based on the interest ledger account, which showed that interest rates ranged from 12% to 18% paid to various parties, both related and unrelated. The Tribunal found that the AO did not provide tangible material to support the 12% rate and noted that the Assessee paid similar rates to unrelated parties. It concluded that the Assessee knows its business needs best and allowed the appeal, citing judgments from the Delhi High Court and the Tribunal itself supporting the Assessee's discretion in business expenditure. 2. Disallowance of Interest Expenditure Due to Alleged Diversion of Funds: The AO disallowed ?16,83,923/- claiming the Assessee diverted interest-bearing funds towards interest-free advances/loans/investments. The Assessee argued that it used credit facilities for business purposes and provided explanations for the utilization of funds. The CIT(A) upheld the disallowance due to the Assessee's failure to provide a daily cash flow statement and evidence of fund utilization. The Tribunal, however, observed that the Assessee's own funds exceeded the borrowed funds, invoking the principle from the Bombay High Court's judgment in Reliance Utilities and Power Ltd. that presumes investments are made from interest-free funds if they are sufficient. The Tribunal reversed the disallowance, directing the AO to delete the addition. 3. Addition Due to Difference in Stock Value: The AO added ?39,15,600/- due to a discrepancy between the stock value reported to the bank and in the audited accounts. The Assessee explained the difference was due to foreign exchange gains and the exclusion of central excise duty in the books. The CIT(A) rejected this explanation, noting the lack of supporting evidence and additional evidence submitted without a request under Rule 46A. The Tribunal found that the difference arose from inflated stock values reported to the bank for higher credit facilities and cited the Gujarat High Court's judgment in CIT Vs. Read the steel and tubes private Ltd., which held that inflated stock values for bank purposes do not warrant income addition. The Tribunal directed the AO to delete the addition. 4. Addition Due to Difference in Book Debts Value: The AO added ?5,55,720/- due to a discrepancy between the book debts reported to the bank and in the audited accounts. The Assessee attributed the difference to a write-off of bad debts from Quality Casting Industries, which was not verified by the authorities. The CIT(A) rejected the Assessee's plea due to the lack of an application under Rule 46A for additional evidence. The Tribunal noted that the CIT(A) should have allowed the Assessee to rectify this procedural defect and remanded the issue to the AO for fresh adjudication, allowing the Assessee's appeal for statistical purposes. Conclusion: The Tribunal allowed the Assessee's appeal on the first three issues, directing the AO to delete the disallowances and additions. The fourth issue was remanded for fresh adjudication. The appeal was partly allowed for statistical purposes.
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