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TMI Blog2010 (9) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are of the opinion that once it is found that the expenditure had been, as a matter of fact, incurred by the assessee , it is not for the Department to consider whether commercial expediency justified the expenditure. Reasonableness of the expenditure can be gone into only for the purpose of determining whether in fact, the amount was spent. There is no material to show that any part of the amount shown to have been debited under the arrangement subsequently came back. Thus ,especially when the ld. DR appearing before us did not place any material controverting the findings of the ld. CIT(A) in these three assessment years so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A).Therefore, ground no.3 in the appeals for the AY 2001-02 AY 2002-03 and ground no. 2 in the appeal for the AY 2003-04 are also dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... s erred in law and on facts in allowing Rs. 95,076/being interest on advance to Pradeep Dadha Agency. 6 The Ld. CIT(A) has erred in law and on facts in allowing Rs. 81,807/-, being interest on advance to Dadha & Co. 7 The Ld. CIT(A) has erred in law and on facts in allowing Rs. 25,90,363/-, being interest on advance to Virtuous Finance Ltd. 8. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer 9. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent. ITA No.1353/Ahd/2005 [AY 2001-2002] 1 On the facts and circumstances of the case, the CIT(A) erred in deleting the disallowance of Rs. 3,26,683/- out of interest made u/s 36(1)(iii). The assessee paid higher interest to the banks whereas charged less interest from the Finance Companies belonging to its own group's companies. 2 On the facts and circumstances of the case CIT(A) erred in deleting the addition of Rs. 8,38,036/-. The assessee advanced loans to M/s Virtuous Finance Ltd. @ 12% whereas paid higher interest to the banks. 3 On the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the advances to associate concerns, M/s Virtuous Finance Ltd. & others. 1(b) The Id CIT(A) failed to take note of the ratio of CIT vs. H.R. Sugar Factory Pvt. Ltd. 187 ITR 363(AII) decided on identical facts, holding that the differential amount of interest paid @ 8% on the funds borrowed for carrying on business but advanced to directors @ 5% was not allowable as deduction. 1(c) The CIT(A) failed to appreciate the legal principle that, the affairs of the assessee being in his special knowledge in terms of section 106 of the Evidence Act, the onus u/s.36(1)(iii) lies on the assessee to prove that each loan is used for the purposes of the business and there is no presumption in law that it is own capital or surplus funds that were diverted for non-business purposes, as settled in the case of Kishanchand Chellaram vs. CIT 114 ITR 654 (Bom), R.Dalmia vs CIT 133 ITR 169 (Del), CIT vs. M.S. Venkateshwaran 222 ITR 163 (Mad), K. Somasundaram & Brothers vs. CIT 238 ITR 939 (Mad) and CIT vs. Motor General Finance Ltd. 254 ITR 449 (Del), which was confirmed in principle by the Supreme Court in the case of Motor General Finance vs. CIT 267 ITR 381 (SC). 2(a) On the facts and in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adhana Investment & Finance Private Limited 6. Bridgestone Investment & Finance Private Limited 7. MacKinon Investment & Finance Private Limited 8. 8. Sholapur Organics Limited 2.1 Since the aforesaid concerns were finance and investment companies of the assessee's own group while in the preceding AY 98-99, the assessee was charging interest @ 18% to 20% pa from outsiders and as concluded in assessment order of the earlier year that charging of interest at a lower rate was not an action arising out of commercial expediency but more of a planning measure, the AO asked the assessee to explain the reasons for charging lower rate of interest from the aforesaid companies in the years under consideration. The assessee replied vide letter dated 18-2-2002 that the interest was charged at a lower rate @ 11/12% on account of the fact that the advances were for short and temporary period. The assessee explained that they had huge interest free own funds at its disposal and the average cost of funds was more than covered even by charging interest at 11/12% pa from these parties. The assessee also argued that charging of interest at lower rates cannot be assessed as income. While ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company to the group concerns in the course of normal commercial practice and with mutual understanding between the parties. It is also a fact that the assessee company has got substantial interest free own funds out of which the advances are made. It is not a case that interest bearing borrowed funds have been diverted to the group concerns interest free or on lower charge of interest or for the purpose other than the business. The decisions relied upon by the appellant duly support the case of the appellant. The disallowance of Rs. 9,36,240/- is therefore ordered to be deleted." 5. Following his own findings in the AY 1999-2000, the ld. CIT(A) deleted the disallowance in the AYs 2000-01 to 2003-04 also. 6. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered in favour of the assessee by the decision dated 30.6.2006 of the ITAT in the assessee's own case for the AY 1998-99 in ITA no. 1233/Ahd./2002. 7. We have heard both the parties and gone through the facts of the case as also the decision of the ITAT. We find that while adjudicating a similar issue in their orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- in the AY 2000-01, Rs. 8,38,036 in the AY 2001-02 & Rs. 12,23,482/- in the AY 2002-03 on account of interest on advances to Virtuous Finance Limited. The AO noticed during the course of assessment proceedings for the AY 1999-2000 that the assessee charged interest @ 14% pa on the amount advanced to one of its sister concerns M/s Virtuous Finance Ltd. [VFL] while their own borrowings were at the minimum bank rate of 17.85% pa during the period relevant to the assessment year under consideration. While referring to his findings in the block assessment order , the AO asked the assessee to explain the reasons for charging lesser rate of interest vis-à-vis market rate revealed by assessee's own borrowings during the previous year. The assessee replied vide its letter dated 7-2-2002 that they had granted advances to Virtuous Finance Ltd. (VFL) @ 14% p.a. during the FY 1998-99. The funds were provided to VFL in order to acquire substantial shareholding in Ambalal Sarabhai Enterprises Ltd. [ASEL]. VFL had assured the assessee that in case it was successful in achieving the reasonable controlling interest in ASEL, then the assessee would get distributorship entitlements for large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that relevant and certainly cannot be a basis for making the disallowance It cannot also be denied that due to its inter-linked business interest with SPIL, the Appellant may also not be in a position to deny any such request made at the behest of SPIL. Due to these facts, VFL would not be in a position to earn commercial rates of return on the funds blocked for such purposes. It cannot be expected that VFL blocks huge funds to further the business interests of the Appellant while on the other hand continuing to pay interest on commercial terms to the Appellant. Charging of interest at lower rate of interest of 14% is according to me, under the circumstances, for the purpose of business. 9 The Appellant has also submitted that it has huge interest free funds amounting to Rs. 3246 Lacs at its disposal. The advances to VFL were made exit of common pool of funds. On such facts, it is for the Assessing Officer to establish the nexus between the borrowed capital and interest free funds, in absence of this finding, no interest could be disallowed. It is also claimed that in absence of any direct nexus having been established by the Assessing Officer, the average cost of funds ought t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the notings found during the search. The said loose notings do not in any way establish the case of the department that the interest for the year had accrued and the same was subsequently reduced. In our opinion the assessing officer cannot enter into the shoes of the assessee and it is the businessman who knows better about the business decision. 34 In view of the above, we find no reason to interfere with the order of the CIT(A) and accordingly dismiss this ground raised by the Revenue. Thus, this ground stands dismissed." 11.1 Since the facts obtaining in the years under consideration are undisputedly similar to the facts obtaining in the block assessment period, we have no hesitation in upholding the findings of the learned CIT(A) in the light of the aforesaid decision of the ITAT in the assessee's own case in IT(SS)A No. 95/Ahd/2001. Therefore, ground no.2 in the appeals for the AY 1999-2000, 2001-02 & 2002-03 as also ground no. 7 in the appeal for the AY 2000-01 are dismissed. 12 Ground no.3 in the appeals for the AY 1999-2000 & AY 2000-01 relates to disallowance of Rs. 16,72,521/- and Rs. 39,75,075/-in relation to transactions with Dadha group. The AO notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that while adjudicating a similar issue in their order dated 31-05-2007 in the assessee's own case in IT(SS)A No.95/Ahd/2001, the Tribunal held as under:- "16 The facts relating to ground No. 2, and Ground No. 3 are that Tamilnadu Dadha Pharmaceuticals Ltd. (TDPL) had amalgamated with Sun Pharmaceutical Industries Limited (SPIL). TDPL was jointly promoted by DADHA family_of Chennai and Tamilnadu Industrial Development Corporation Ltd. (TIDCO) with equity holdings of 25% and 26% respectively. In the beginning, it was proposed that SPIL would purchase he shares in TDPL from the Dadhas. The Dadhas would also purchase he shares held by TIDCO in TDPL and the same would be sold to SPIL. However, the plan of purchasing the shares from Dadhas was later rejected. SPIL and the assessee company submitted that the purchase transaction was not carried out and TDPL amalgamated with SPIL. However, on the basis of certain papers seized both from the office of SPIL and Dadha's it was contended by the Department that the original agreement of purchase of shares was actually implemented though on paper the scheme of amalgamation was reflected. 17 Coming to the specific ground relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds had been offered as collateral security to the State Bank of India, Guindy, Chenai - 32, - against loans which were sanctioned to another sister concern viz., M/s Pradeep Drug Co. Ltd. of which Shri Mohanchand Dadha was the Managing Director. This was a sick company as certified by Board for Industrial and Financial Reconstruction in order No. 175/97 dated 5-12-97. The company suffered accumulated losses of Rs. 11.70 crores. The title deeds of the property were in the custody of State Bank of India who would release it only on discharge of debts due to them. For want of these title deeds, the lessor was unable to get approval of necessary plans for construction of godown the State Government Authorities. In effect, the lease agreement was incapable of being acted upon for the above mentioned reasons and this was well within the knowledge of the lessor even at the time of entering into the lease agreement. The facts and circumstances narrated above lead to the inference that the lease agreement executed was a sham transaction. The Assessing Officer, therefore, held that the various seized materials clearly proved that the security deposit of Rs. 3 crores had been appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced by the appellant to Dadha Pharma Pvt. Ltd. as security against construction and hiring of go down on the reasoning that the said amount of Rs. 3 crore was advanced by the appellant not on account of the said purpose but was advanced on account of different purposes through a colorable device for the purpose other than stated in the lease agreement dated 1.1.1998. The Assessing Officer has stated in the last lines of page 39 of the assessment order that the seized material clearly prove that the amount of Rs. 3 crore was appropriated by the Dadha's against the receivable consideration for their share holding. The issue now arise is whether the amount of interest free advance of Rs. 3 crore which has been appropriated by the Dadha's is as amount given by the appellant for the purpose of business. The appellant's reply in respect of necessity and desirability of giving interest free advances to the members of Dadha group have been reproduced in this order. According to this explanation, M/s. Sun Pharmaceuticals Industries Ltd (SPIL) proposed to acquire Tamilnadu Dadha Pharmaceuticals Ltd (TDPL) and if such acquisition materialized M/s. SPIL could have been benefited tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of Dadha group were treated by the Assessing Officer as given for the purpose of business as no colorable device was used in such advances. According to the Assessing Officer, such advances were utilized by Dadha's for acquisition of TIDCO's holding in TDPL therefore may be treated as used for the purpose of business on account of commercial expediency. The Assessing Officer distinguished the advances of Rs. 3 crores given by the appellant to Dadha Pharma Pvt. Ltd. with the advances given by it to the individual members of Dadha group on the reasoning that the first type of transaction was a colorable device where as the second type of transaction was a straight forward advance. According to the Assessing Officer, colorable and dubious transactions cannot be considered as transactions for the purpose of business. Though he has given the details of application of the advances of Rs. 3 crore, however, he has not given any finding whether such application of the funds advanced by the appellant was not for the purpose of business. Thus, in arriving such finding he has considered incomplete facts upto the stage of giving advance and did not consider the end use of the said ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as for the purpose of business. The net effect of the said advance by the appellant is that the said advance of Rs. 2.5 crore is transferred from the account of Shri Mohanchand Dadha (HUF) to the account of Dadha Pharma Pvt. Ltd a company owned by Dadhas. Thus, as far as the advance of Rs. 2.5 crore is concerned there cannot be any deviation of borrowed funds which came back to the appellant on same day. Besides the application of advance of Rs. 2.5 crore continued to be the same as it was before the said advance was given to Dadha Pharma Pvt. Ltd. In respect of balance amount of Rs. 50 lakhs, the Assessing Officer stated that the same was transferred to Shri Mohanchand Dadha individual account and Shri Pradip Dadha on the same date itself. Thus the purpose application of the amount of Rs. 3 crore advanced through Dadha Pharma Pvt Ltd. are the same as the advance given by the appellant to individuals of Dadha group which have been held by the Assessing Officer as used for the purpose of the business. The Assessing Officer has taken inconsistent view when he has treated the advances given by the appellant to individual members of Dadha group directly as for the purpose, of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 (Bom.) 49. I have considered the submissions of the Assessing Officer and the appellant. In my view the appellant has sufficient interest free funds like share capital and reserve to give the said advance. On such facts, before disallowance of any interest on borrowed capital, the burden is on the Assessing Officer to establish the nexus between the borrowed capital and interest free advances. In thepresent case, the Assessing Officer has not brought out any material to show that borrowed money was used for the purpose of giving advance and therefore even if the advance was not used for the purpose of business, no interest can be disallowed. 50. The appellant has taken another alternative ground that disallowance of interest could not be made as the transactions were wholly and correctly recorded in the regular books of accounts of the appellant. The Assessing Officer has argued that the purpose of advances/deposit etc. have surfaced as a result of search only and hence should be considered in the block assessment only. The appellant relied the decision of the Hon'ble Gujarat High Court in the case of CIT v. N. R. Paper and Board Ltd 162 CTR 488 and Hon'ble Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block. Accordingly, Dadha Pharma Pvt. Ltd. proposed to construct a godown of ground plus one storey each admeasuring five thousand square feet. However, this was not acceptable to the Assessee, who accordingly asked for a refund of the deposit. Dadha Pharma P. Ltd, expressed its inability to refund the entire deposit in 1 lump sum but agreed to do so over a phased period of time. Accordingly, from December'99 they started refunding the deposit which was completed by March'2000. " 23 The Id A.R. strongly contended that the Assessee had entered into the agreement with the Dadha Pharma Pvt. Ltd. for valid business and commercial purposes. The entire sequence of events was well documented. Merely because for valid reasons the parties could not act on the desired intent cannot be a ground for holding- that the parties had never intended to carry out the transactions. Both the parties had accepted the fact that the transaction was in fact to be carried out but for the inability of the party to secure the necessary permissions. He strongly defended the transactions, It was further submitted that the Assessee had huge interest -free funds at its disposal comprising of capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be disputed that pursuant to the amalgamation of TDPL with SPIL, the operations of the Assessee increase greatly. Accordingly, the action of the Assessee for taking a godown on lease to meet its growing requirements cannot be ruled out. In a normal business environment, it is not rare that contracts and agreements cannot be executed or fulfilled. The contract could not be carried out on account of the regulations prescribed for the construction. Further, the said deposit has subsequently been recovered by the Assessee. Even otherwise, it is seen that the Assessing Officer has considered trade advances given by the Assessee to the individual members of the Dadha family as advances in the ordinary course of business. Thus, even if the advances were given in the guise of a deposit, the same would still be considered as for the purpose of business. We have also gone through the decision of the Supreme Court in the case of S. A. Builders (supra), we find in that case Hon'ble Supreme Court has clearly observed that if the business considerations require, interest free funds can be advanced. Since the commercial expediency cannot be doubted in the case of the Assessee, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m SPIL directly or through the said concerns and therefore the advances were given for the purpose of business. I am inclined to accept the said contentions of the appellant as it had little option than to follow the advice of SPIL and therefore in my view the advances given to the said concerns were for the purpose of business. The Appellant has also produced the arbitration award under which interest was charged to M/s. Antariksh Pharma. The Assessing Officer has merely brushed aside this stating that it is post facto agreement done with the sole purpose of negating the findings of the search. I am also not inclined to accept the summary observations of the Assessing Officer. The Assessing Officer is directed to delete the disallowance of Rs.16,47,312/- and Rs. 14,70,831/- made in respect of advances to M/s Antriksh Pharma and M/s Dukan." 17.1 Following his own order in the AY 1999-2000, the ld. CIT(A) deleted the disallowance in the AY 2000-01 also. 18. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered in favour of the assessee by the decision dated 31-05-2007 of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture claimed in books of accounts after giving due credit of the notional advantage of turnover tax. Accordingly net addition of Rs. 89,64,458/- (Rs.,15,53,458/- interest - Rs. 25,89,000/- notional benefit) was made to the total undisclosed income of the Assessee. The Assessee went in appeal against the above disallowance of interest and the Commissioner of Income Tax (Appeals) deleted addition on the above ground by making the following observations: (pages 44 and 45) "56. I have considered the submissions of the Assessing Officer and the appellant. The appellant has contended that it has been considerably benefited, as the appointment of the said concerns had increased appellant's turnover and consequently its profit. The appellant further contended that it has been entirely dependent on SPIL as its total purchases are from SPIL directly or through the said concerns. It further contended that SPIL and the appellant have been benefited considerably on account of merger of TDPL and appointment of the said concerns in the form of increased turnover. It is the case of the Assessing Officer that the appellant, by giving more advances than required to the said concerns aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be treated as -used for the purpose of business. Therefore, the Assessing Officer cannot disallow any interest on borrowed capital attributable to the said advance. In respect of the alternate contentions of the surplus fund being available to the appellant on account of sufficient capital and reserve and also in respect of the issue of disallowance of interest to be considered in the block assessment proceedings, for the same reasons as given by me in respect of advances of Rs. 3 crores, I accept appellant's ground in respect of surplus available and reject the appellant's ground in respect of the said issue to be considered in block assessment proceedings. As I have already held that there cannot be any disallowance of interest on account of advances given by the appellant to M/s. Antariksh Pharma and M/s. Dukan, the Assessing Officer is directed to delete the addition of Rs. 89.64.458/-." 27 The ld. DR relied on the order of AO while the Ld. AR relied on the order of the CIT(A). Both reiterated the submissions made in respect of ground No.2 28. We have carefully considered the rival submissions. We find that the main reason for disallowance is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) in the light of the aforesaid decision of the ITAT in the assessee's own casein IT(SS)A No.95/Ahd/2001. Therefore, ground no.4 in the appeal for the AY 1999-2000 and ground no.2 in the appeal for the AY 2000-01 are dismissed 20. Ground No.5 in the appeal for the AY 1999-2000 and ground no.6 in the appeal for the AY 2000-01 relate to disallowance of Rs. 86,560/- & Rs. 81,807/- respectively on account of interest on advance to Dadha & Co. while ground no.6 in the appeal for the AY 1999-2000 and ground no.5 in the appeal for the AY 2000-01 relate to disallowance of Rs. 1,00,987/- & Rs. 95,076/- respectively on account of interest on advance to Pradeep Dadha Agency. The AO noticed that the assessee had advanced Rs. 30 lacs to Dadha & Company and Rs. 35 lacs to Pradeep Dadha Agency on 31-1-99. Even though the amount remained outstanding as on 31-3-99, no interest had been charged. To a query by the AO, the assessee submitted as regards advance to Dadha & Co. that i. Advances of Rs. 30 lacs was given on 31-01-1999. ii. Amount was refunded and the same was credited on 31-03-2000. iii. Interest of Rs. 344219/- was debited to its account on 31-3-2000 @ 12% for the year 1999-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer is directed to delete the addition." 22.1 Following his own order in the AY 1999-2000, the ld. CIT(A) deleted the disallowances in the AY 2000-01 also. 23. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A). 24. We have heard both the parties and gone through the facts of the case. Undisputedly, the assessee charged and recovered the entire interest including for the period from 31-3-99 till the repayment of the loan. According to the assessee, the interest for the period from 31-1-99 to 31-3-99 had not become payable. The ld. DR appearing before us did not place any material controverting these facts or even the findings of the ld. CIT(A). In the absence of any material so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A).Therefore, ground nos.5 & 6 in the appeals for the AY 1999-2000 & 2000-01 are dismissed. 25. Ground no..7 in the appeal for the AY 1999-2000 & ground no.4 in the appeal for the AY 2000-01 relate to disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported the findings of the ld. CIT(A). 28... We have heard both the parties and gone through the facts of the case. Since there is nothing to suggest that interest had been recovered from Shri M. Maharehand Dadha in cash while the ld. CIT(A) concluded that advances were given to Dadhas for business purposes , there is no apparent reason for the disallowance. The ld. DR appearing before us did not place any material controverting these facts or even the findings of the ld. CIT(A). In the absence of any material so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A).Therefore, ground no.7 in the appeal for the AY 1999-2000 & ground no.4 in the appeal for the AY 2000-01 are also dismissed. 29. Ground no.3 in the appeals for the AY 2001-02 & AY 2002-03 as also ground no. 2 in the appeal for the AY 2003-04 relate to disallowance of Rs. 1,48,57,545/-, Rs.2,29,43,683/- and Rs. 4,25,44,081/- respectively being interest paid to SPIL @ 21% pa on overdue balances resulting from purchases. The AO noticed during the course of assessment proceedings in the AY 2002-03 that the assessee paid interest on overdue supplier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarly, the AO disallowed an amount of Rs. 2,29,43,683/- in the AY 2002-03 and Rs. 4,25,44,081/- in the AY 2003-04. 31. On appeal, the ld. CIT(A) deleted the disallowance in the AY 2001-02 in the following terms: "8.4 I have carefully considered the submissions of the appellant, the comments of the Assessing Officer and the reply of the appellant on the counter comments. The issue can not be decided without looking at the facts and circumstances of the case. The appellant is the authorized sole distributor of all formulation products of SPIL in India. The business of the appellant has grown consistently as seen from the table and had dramatically increased from Rs. 132.05 crores in A.Y. 98-99 to Rs. 305.77 crores in A.Y. 2001-02. It is observed that the appellant had huge requirements of finance/working capital in the nature of Sundry Debtors and inventory, to meet its growing business needs. Hence the commercial justification of going in for Suppliers credit can not be questioned. Coming now to the interest rate charged, I see tremendous force in the arguments of the appellant. The rate of interest has to be viewed in the overall circumstances of the case. Different type of fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in the sum of Rs. 56.63 of the assessee's claim for interest paid to M/s. Sun Pharmaceutical Industries Ltd. (SPIL in short) out of the total interest allowed to it at Rs. 283.17 lacs. The basis for the disallowance was that the same stood allowed in excess, i.e., @ 24% per annum (p.a.), while the assessee had availed of borrowings, in the form of unsecured loans, ICDS etc. at rates ranging from 18% p.a. to 20% p.a. The payee concern, being an entity covered u/s.40A(2)(b) of the Income-tax Act, 1961 ('the Act' hereinafter), the disallowance stood effected to the extent 4%, p.a., being deemed in excess, by applying s.40A(2)(a) of the Act In appeal, the same stood deleted by the Ld. CIT(A), accepting the assessee's contention that, firstly, the payee concerned stood not covered u/s. 40A(2)(b) of the Act. The assessee was facing dearth of finance and the rate of the market borrowings varied in the range of 24% p.a. to 30% p.a. As such, there is no cause for inferring the rate of 24% p.a. as excessive, so as to invoke (a) of the Act, particularly when there was no taxation motivation involved. Aggrieved, the Revenue is in appeal. 7 Before us, the Ld. D.R. relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself has issued a Circular to the effect that the provision being an unduly harsh one is to be applied only selectively and where the tax motivation stands established. 8.2 In view of the foregoing we do not find much merit in the Revenue's case, so that Ld. CIT(A) has, in our view, rightly deleted the impugned disallowance and we confirmed." 33.1 In the instant appeals, the provisions of sec. 40A(2)(a) of the Act have not been specifically invoked. As pointed out by the ld. CIT(A), the AO did not dispute the genuineness of business expenditure but made the above addition of differential interest on the ground of reasonableness. Similar payment of interest has been allowed by the AO himself in the preceding two assessment years. The ld. CIT(A) also concluded that with rapid growth in the turnover of the company and the assessee having already borrowed huge amount of funds from the bank, chose to pay interest to its creditors. Since the interest has been paid wholly and exclusively for the purposes of the business while both the assessee and SPIL were liable to tax at the same rates, therefore the arrangement could not be said to for reducing the tax liability. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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