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TMI Blog2012 (8) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer found that the major expenditure claimed by the assessee was the payment of interest to the trustees and their relatives. The Assessing Officer applied the provisions of section 40(ba) of the Act and disallowed the interest paid to the directors/trustees amounting to Rs. 21,51,418 holding that since the assessee is liable to be assessed as an AOP, the interest paid cannot be allowed as a deduction. The Assessing Officer also made a disallowance of Rs. 1,81,132 under section 40A(2)(b) in respect of the interest paid to the relatives of the trustees holding that the interest paid by the assessee at 18% per annum was excessive. The assessee being aggrieved by the order of the Assessing Officer filed an appeal before the CIT(A), Mysore. The learned CIT(A) partly allowed the appeal of the assessee holding that the disallowance under section 40(ba) of the Act cannot be made. The learned CIT(A) however upheld the disallowance of interest made under section 40A (2)(b) of the Act. Being aggrieved by the order of the learned CIT(A), the Revenue is an appeal before us and the assessee has filed cross-objections. 3.1 Revenue's ground of appeal are as under : "1. Whether the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent issue viz. relating to relief under section 80L of the Act. The said judgment, it was submitted, was distinguishable and cannot be applied to the assessee's case. The learned Departmental Representative further pointed out that it was the assessee itself who filed its return of income in the status of "AOP" and therefore it cannot claim to be assessed in the status of individual. He prayed that the order of the learned CIT(A) on this point be reversed. 4.2 The learned Authorised Representative on the other hand, supported the order of the learned CIT(A). He submitted that the judgment of the Hon'ble High Court of Bombay in Shardaben Bhagubhai Mafatlal Public Charitable Trust No. 8's case (supra) relied on by the learned CIT(A) laid down the principles for the assessment of the income of a charitable trust when exemption stands forfeited. He also relied on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. K. Shyamaraju [1991] 189 ITR 175 to contend that the trustees of the trust cannot be assessed as "AOP". He drew our attention to the findings of the learned CIT(A) at para 4 of his order where he has held that the trustees cannot be treated as Members o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on page 4 of his order is as under : "In view of the above decision of the Hon'ble Court I hold that the trustees cannot be treated as members of the AOP even if the trust is to be assessed as an AOP for rate purposes. The relationship between the settler of the trust, the trustees and the beneficiaries is not that of a membership of a common association. Provisions of section 40(ba) cannot be invoked to disallow the interest paid to the trustees if the trust deed so provides for." In other words, the learned CIT(A) has not held that the assessee must be assessed in the status of "individual". He has applied the judgment of the Hon'ble High Court of Bombay in the case of Shardaben Bhagubhai Mafatlal Public Charitable Trust No. 8 (supra) to conclude that the trustees cannot be considered as members of the AOP. In fact, Hon'ble High Court of Karnataka in the case of K. Shyamaraju (supra) has also held that the trustees as representative assessees cannot be held assessable as AOP. Therefore, whether or not the assessee is assessed in the status of AOP or individual, it does not matter. The disallowance under section 40(ba) of the Act, can be made only with regard to the interest p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the benefit derived by or accruing to the assessee from such payment. Perhaps the learned ITO felt that the interest paid by the appellant @ 14-1/4% to banks represented the fair market value of the loan facility and, therefore, came to the conclusion that the interest paid by the appellant to the relatives of trustees @ 18% per annum was excessive. The learned ITO has lost sight of the fact that while the loans borrowed from banks were secured against the movable and immovable properties of the appellant, the loans borrowed from the relatives of the trustees were unsecured. The appellant had pledged all its assets to secure loans from banks. The banks would not make any further advances to the appellant. It, therefore, had to resort to borrow from private persons. It must be appreciated that it's difficult to borrow from unknown persons without security or guarantee. The appellant, therefore, borrowed monies from the relatives of trustees who obviously took the risk of advancing funds without any security or guarantee. In the circumstances, interest paid to them on such loans @ 18% cannot be said to be excessive or unreasonable interest paid on unsecured loans cannot be compare ..... X X X X Extracts X X X X X X X X Extracts X X X X
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