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TMI Blog2009 (1) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) on facts, in law and in the peculiar circumstances, erred in confirming the addition of Rs. 1,86,047 made under the interest by invoking the provisions of s. 40A(2)(b) in the present case. 4. The learned CIT(A) on facts, in law and in the peculiar circumstances, erred in confirming the addition of Rs. 18,000 out of rent debited to P L ale in the present case." 2. Earlier to this, assessee had challenged the order of the AO and also that of the learned CIT(A) on the ground that notice under s. 143(2) after issuance of notice under s. 148(1) was not served within the statutory period of twelve months from the end of the month in which return of income in response to notice under s. 148 was filed. The issue was allowed in favour of the assessee by the order of the Tribunal, dt. 8th Aug., 2005. In the meantime, the provision of s. 148(1) was amended by the Finance Act, 2006, thereby an assessment would not be quashed merely on the ground that notice under s. 143(2) was served after the statutory period of twelve months. This was made effective by the insertion of proviso in s. 148(1) with retrospective effect. The Revenue had challenged the order of the Tribunal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m whom assessee had borrowed unsecured loans. This rate was considered excessive and unreasonable in terms of s. 40A(2)(b). The AO had asked the assessee to file the list of all transactions covered under s. 40A(2)(b) and justify the reasonableness. The AO noted that assessee received interest @ 8 per cent on Hundies which were collected through bank. He also paid lower rate of interest on the loan taken by it from banks. It seems that assessee did not file any substantive explanation for paying higher rate of interest @ 24 per cent to relatives of directors. Though it was claimed before the AO that such payment of interest @ 24 per cent was accepted in earlier assessment years, but this argument was not found favourable with the AO. He, accordingly, considered that interest @ 18 per cent is reasonable and therefore, proceeded to disallow a sum of Rs. 1,86,047 being difference between 18 per cent and 24 per cent of interest. 8. Further, the assessee had debited a sum of Rs. 1,02,000 as rent payable to Satya Narain Khatri, HUF. According to the AO, there was MoU, according to which only a rent of Rs. 7,000 per month (Rs. 84,000 for whole year) is payable. He, therefore, considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axed and hence, the same has escaped assessment. He referred to the decision of Tribunal, Delhi Bench (Third Member) in the case of Asstt. CIT vs. O.P. Chawla (2008) 116 TTJ (Del)(TM) 755 : (2006) 8 SOT 242 (Del)(TM) for the proposition that if reasons are recorded by the AO as a pretence, an excuse to enquire into gift received by the assessee without there being any material or evidence coming into possession after the return was processed under s. 143(1)(a), then such reasons could not be held to be valid and reopening of assessment would be void ab initio. He also referred to the decision of Lucknow Bench of the Tribunal in the case of Gaja Nand Rama Nand vs. ITO in ITA No. 135/Luck/2006, decided on 16th June, 2006, for the proposition that unless AO undertakes an exercise to find out what is the market rate of interest prevailing in the region, he could not have disallowed a part of interest paid by the assessee under s. 40A(2)(b) of the Act. A reference to the decision of the Lucknow Bench of the Tribunal in the case of Manohar Lal Santwani vs. Dy. CIT in ITA No. 1046/Luck/2006 for the asst. yr. 2001-02 decided on 29th June, 2007 was also made for the proposition that where A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT in ITA Nos. 1483 to 1485/Del/2001, decided on 16th May, 2008, for the proposition that reopening of assessment would be justified if there is any failure on the part of the assessee to disclose material facts at the time of original assessment. 14. The learned Departmental Representative then referred to the decision of the Hon'ble Gujarat High Court in the case of Praful Chunilal Patel vs. Asstt. CIT (1998) 148 CTR (Guj) 62 : (1999) 236 ITR 832 (Guj), for the proposition that if there is subsequent discovery of mistake in assessment, then reassessment within four years is permissible. According to him, the reasons in the phrase 'reason to believe' would mean cause or justification only. If the AO has a cause or justification to think or suppose that income has escaped assessment, he can said be to have reason to believe that such income has escaped assessment. The reason to believe could not mean that AO would have finally ascertained the facts by legal evidence. The learned Departmental Representative further referred to the decision of the Hon'ble Supreme Court in the case of Kantamani Venkata Narayana Sons vs. Addl. ITO (1967) 63 ITR 638 (SC), for the proposition that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee may get loans/credits at cheaper rates. Similarly, it may be policy of the Government to lend money to the industrialists/entrepreneurs at reasonable/low rates so that goods and services produced by entrepreneurs are available in the market at cheaper prices for the consumption of common public. But, same philosophy or ideology may not be true for private parties who lend the money to the entrepreneurs or industrialists for earning an income. They may consider inherent risk in lending money and therefore, may charge higher rate of interest, therefore, it is not for the assessee to prove with material evidence that payment made by it or expenditure incurred by it for goods or services received was reasonable and according to market rates. If we go through the provisions of s. 40A(2), then it is clear that it is for the AO to draw an inference, on the basis of some material available with him that payment made by the assessee or expenditure incurred by it was excessive or unreasonable having regard to the fair market rate thereof. For the sake of convenience, we reproduce s. 40A(2)(a) as under: "40A(2) Expenses or payments not deductible in certain circumstances.-(a) Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. In the present case, the AO has only recorded the reasons that for asst. yr. 1995-96, payment of interest @ 24 per cent is on higher side than the fair market interest rate. Without having any information as to what should be the fair market rate, the AO could not have inferred that interest payment @ 24 per cent is on higher side and therefore, the difference was chargeable to tax as income which has escaped assessment, What is missing from the reasons recorded is the information about fair market rate of interest which should have been paid by the assessee. Here, it is not relevant whether such information is available from the record or is coming from external sources to the AO. Such information can come to him from the record of this assessee or from the record of any other assessee or can be gathered by him through enquiries under s. 133(6)/133A or otherwise. But, before framing his mind about the fair market rate of interest, there has to be some information with the AO. Otherwise, it could not be inferred that payment of interest made by the assessee @ 24 per cent is on higher side. In any case, the AO is required to record all the four ingredients of s. 147 before he ..... X X X X Extracts X X X X X X X X Extracts X X X X
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