9911796707
TMI Blog2013 (8) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... issued notice upon the assessee under section 142(1) of the Act. That during the assessment proceedings, vide order dtd.16/12/2010, representative of the assessee was directed to explain infirmities in the books of accounts on account of discrepancy in stock. It appears that no explanation was submitted by the assessee and therefore, the Assessing Officer, while passing order of assessment. rejected the books of accounts of the assessee under section 145 of the Act observing that he is not satisfied with the correctness and completeness of books of accounts. 2.02. It appears that sufficient opportunity was also granted to the assessee to give explanation in respect of infirmities found in the books of accounts. However, the assessee failed to avail the same. That thereafter and after rejecting the books of accounts under section 145 of the Act, the Assessing Officer made addition of Rs.1,61,39,361/- towards excessive payment of salary and interest to the relatives covered under section 40(a)(2)(b) of the Act, in the income of the assessee. 2.03. Feeling aggrieved by the order of assessment dtd. 27/12/2010 passed by the Assessing Officer, the assessee preferred appeal before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case, it is open to the Income Tax Appellate Tribunal to completely change the basis of disallowance from u/s. 40A(2)(b) which invoked by the AO to S.36(1)(iii) which had not been invoked by any of the lower authorities? (v) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in confirming the order of the AO in disallowing salary expenditure amounting to Rs.30,48,715/-? (vi) Whether in the facts and circumstances of the case, is it open to the Income Tax Appellate Tribunal to completely change the basis of disallowance from u/s.40A(2)(b) which was invoked by the AO to S.37 which had not been invoked by any of the lower authorities? (vii) Whether, in the facts and under the circumstances of the case, the order of Income Tax Appellate Tribunal is perverse inasmuch as : (a) it was passed without giving proper opportunity of hearing to the counsel of the appellant who was prevented from arguing the appeal because the Tribunal indicated that there was no merits in the appeal of the Revenue and therefore there was no need to argue; (b) it considers the material and evidences, which are not emanating from the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee claimed disallowance of the aforesaid amount under section 40(A)(2)(b) of the Act on the amount of loan taken from three persons, namely, Mr.Bhavik J. Shah, Mr.Tejas Shah and Mr.Jignesh Shah and the interest paid to them at the rate of 16% per annum. It was found that so far as Mr.Bhavik J. Shah is concerned, he is son of the assessee and Mr.Tejas Shah and Mr.Jignesh Shah are his nephews. It was also found by the Assessing Officer as well as ITAT that the assessee made gift of Rs.20,00,000/- to each of the three persons, namely, Mr.Bhavik J. Shah, Mr.Tejas Shah and Mr.Jignesh Shah on 19/6/2007 and immediately thereafter the aforesaid three persons placed the same amount in the hands of the assessee on which interest at the rate of 16% aggregating to Rs.7,46,965/- was claimed as deduction by the assessee. While disallowing the aforesaid claim and making addition of the aforesaid amount of Rs.7,46,965/- to the total income, the Assessing Officer observed as under : Here it is important to mention that business exigency and prudency are the two basic parameters to determine the allowability of any expenditure. Therefore no prudent businessman will gift his money when there is cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the present case, the money was first diverted by the assessee from his business disguising it as gift to the aforesaid three persons and thereafter the same money was taken back by the assessee from the aforesaid two persons on which the impugned interest was claimed by the assessee to have paid to them. On the facts of the case, there is no borrowing of capital and therefore the requirement of section 36(1)(iii) is not fulfilled. Without prejudice to the aforesaid, the entire series of transactions are illusory, colourable and not genuinely for the purpose of the business. In this view of the matter, the assessee is not entitled to deduction u/s 36(1) (iii). The order of the AO making the impugned disallowance is therefore restored. 19. Reliance placed by the ld. CIT(A) on section 40A(2)(b) is completely misplaced for the reason that the deduction towards the interest paid on borrowed capital has to be examined firstly with reference to the provisions of sec.36(1)(iii) and thereafter with reference to the provisions of section 40A(2). In the present case, the series of transactions carried out by the assessee simply indicate a colourable device to ensure deduction of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the assessee within the meaning of section 40A(2)(b) and not others. He however, does not dispute that all the three persons are closely related to the assessee which may or may not be covered by section 40A(2)(b). 26. Relationship by itself, without more, cannot lead to the inference of excluding the possibility of a payment being wholly and exclusively for the purpose of business. Dealing with relatives in contrast with or in preference to stranger is neither prohibited by law nor can be tabooed. Indeed, it is natural to do so but this does not give a licence to cover up dishonest transactions or impermissible transfers. The courts and authorities are not expected to wear blinkers to overlook or condone the passing off public revenue to one's own kith and kin by subterfuge clandestine or clever devices clothes in legalistic jargon, instead it is their duty to lift the veil of apparent legality and get to the truth or substance of a transaction to deal with it in accordance with law. It is only appropriate, indeed normal, that dealings involving transfer of funds to near and dear ones need to be looked into with care and caution and necessary inferences drawn if there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid three persons has increased by about 7 times. On being asked as to whether similar increase (more than 7 times over the preceding year) in salary was given to other staff member, the reply of the assessee was in negative. The test of commercial expediency in giving seven times increase in their salary is not satisfied. There is nothing on record to show that the aforesaid three persons contributed more towards the sale or the profit or the well-being of the business of the assessee than what they had contributed in the past so as to justify more than seven times increase in their salary in the year under appeal. On the facts and circumstances of the case, we are satisfied that the increase in their salary in the year under appeal was not motivated by considerations of commercial expediency but by considerations extraneous to the business. In this view of the matter, the disallowance made by the AO is restored." 7.00. We are in complete agreement with the reasoning given by the ITAT. The tribunal has rightly observed that although payment might have been made and there might have been agreement in existence, still it would be open to the Assessing Officer to take int ..... 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