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TMI Blog2013 (11) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... or the Respondent : Shri G. B. Parikh ORDER:- PER : T. K. Sharma This appeal by the revenue is against the order dated 26-03-2012 of CIT (A), Jamnagar for the assessment year 2008-09. 2. Briefly stated, the facts are that the assessee is an individual derives income as a manufacturer and trading in engine valves and engineering automobiles items as a proprietor in the firm name of M/s. Suzuki Engineers. For the assessment year under appeal, he filed the return of income declaring total income of Rs.7,07,743/- on 27-10-2008. The accounts of the assessee are audited as required u/s.44AB of the Act. Complete quantitative details are maintained. The AO observed that during the year under consideration the assessee has credited interest @ 18% on the loans taken from family members. The AO issued notice to the assessee calling upon him to show cause as to why the interest credited at the rate of 18% on the borrowings from the family be not restricted to 12%. In reply, the assessee contended that these are unsecured loans without any guarantee and taken for long period and earlier this type of interest have been allowed by the department and hence the rate of 18% is allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curities. Also various evidences have been submitted during the course of assessment proceedings. Appellant further submitted that in the case of Shri Haren T. Davda the hon'ble ITAT, Rankot bench in ITA No.33 and 34/Rjt/2007 vide order dtd. 30-10-2009 held that interest paid to relatives at the rate of 18% is reasonable and has filed a copy of the said order alongwith the written submission. I have also gone through the said order of the hon'ble ITAT, Rajkot bench. I find that there is no case of disallowance u/s.40A(2)(b) of the Act. Payment of interest @ 18% is not high comparing to the market rate which is around 18%. AO has mechanically made this disallowance without bringing any adverse thing on record or any comparable case to indicate excessiveness. In view of the above and also following the above order of hon'ble ITAT, Rajkot bench in the case of Shri Haren T. Dave for A.Ys. 2002-03 2003-04, the disallowance of Rs.3,22,091 made by the AO out of interest payment is deleted." 4. In respect of fall in GP, the AO observed that in the previous two assessment years i.e. AY 2006-07 and 2007-08, the assessee has declared GP at the rate of 25.20% and 40.23% respectively. But f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO was not justified in making addition by taking the GP rate at 5% of total turnover and the same is hereby ordered to be deleted." Aggrieved with the order of ld. CIT(A) deleting both additions, the revenue is in appeal before this Tribunal on the following grounds:- "1. The CIT(A) erred in law and in facts in holding that disallowance of interest of Rs.3,22,091/- paid on loans taken from family members u/s.40A(2) of the IT Act is wrong. 2. The CIT(A) erred in law and in facts in deleting the addition of Rs.12,07,079/- by taking the GP rate at 5% of total turnover." 7. At the time of hearing before us, on behalf of revenue, Shri Avinash Kumar, D. R. appeared and with regard to disallowance of interest u/s.40A(2)(b) of the Act contended that as per the provisions of sec.40A(2) of the Act, " f the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable for which rate of interest is to be paid little bit more and hence rate of interest at the rate of 18% is reasonable in favour of business which is normal practice in the commercial premises and hence the ld. CIT(A) is correct in allowing the same. 10. With regard to G.P. addition, the counsel of the assessee pointed out that full quantitative details are maintained, books of account are audited, nowhere in the assessment order AO rejected the books of account, no single defect for maintaining books of account was found, therefore, ld. CIT (A) is legally and factually correct in deleting the G.P. addition of Rs.12,07,079/- made by AO in the assessment order. 11. Having heard both sides, we have carefully gone through the orders of authorities below. It is well settled law that section 40A(2)(a) cannot have any application unless it is first held that expenditure was excessive and unreasonable looking to the interest paid by the assessee to bank and to supplier, interest @18% paid by the assessee on unsecured loan is neither excessive nor unreasonable. We also find force in the contention of the ld. Counsel for the assessee that it is easy to get funds from the market t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in its judgment dated 29.8.2011 in CIT v. Surya Herbal Ltd., CC 13694/2011,, tax implication in one case should not be considered in isolation when the principle involved therein would have cascading effect on a large number of cases. It is therefore necessary that the issue involved in the matter under consideration receives careful consideration before it is cited in other cases as precedent. Keeping this aspect in view, the matter was discussed with my learned Brother. We have however not been able to reach a consensus. I therefore proceed to record my Note of Dissent. 2. I have carefully gone through the order proposed by my Learned Brother confirming the order of CIT(A) deleting the addition of Rs.12,07,079/- made by the AO on account of low rate of gross profit and also deleting the disallowance made by the AO on account of excessive rate of interest paid by the assessee on deposits/loans accepted by the assessee from his own HUF, son and wife. While I concur with the order proposed by my Learned Brother confirming the order of the CIT(A) deleting the addition of Rs.12.07,079/-, I am unable to agree with his order endorsing the decision of the CIT(A) deleting the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revailing in the market. The entire transaction is basically in the nature of an arrangement by which the funds of the family remain in the family fetching a significantly higher rate of interest than what these funds would fetch if deposited in banks or elsewhere. Apart from the aforesaid factual aspects of the case, the AO also took note of the order dated 19th March 2010 passed by this Bench in Girdharisingh Rathore (supra) in which it has been held that the AO was justified in disallowing interest paid by the assessee over and 12% u/s 40A(2). Following the aforesaid order of this Tribunal, the AO disallowed interest paid over and above 12%. In my considered view, the AO has committed no error on the facts of the case in following the aforesaid order of this Tribunal. 6. The ld. CIT(A), however, relied upon an earlier order passed by this Tribunal on 30.10.2009 relating to an earlier assessment year in Haren T Davda (supra) for AY 2002-03 in which this Tribunal has held as under: "37. We have considered the rival submissions. We hold that the assessing officer has not brought out how rate of interest at 18% is excessive or unreasonable. Section 40A(2)(b) cannot be invok ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Tribunal dated 19-03-2010 in Girdharisingh Rathore (supra), I would consider appropriate to confirm the order of the AO restricting the reasonableness of payment of interest to 12%. In this view of the matter, the order passed by the CIT (A) in this behalf deserves to be reversed. I hold accordingly. ORDER G.C. Gupta: On account of difference in opinion between the learned Judicial Member and learned Accountant Member of ITAT, Rajkot Bench, this matter has been referred to me by the Hon'ble President, ITAT for consideration and disposal under Section 255(4) of the Income Tax Act, 1961. The Hon'ble President, ITAT has referred the following question: "Whether on the facts and circumstances of the case, the ld. CIT(A) is justified in deleting the disallowance of interest of Rs.3,22,091/- which was paid on loans taken from family members under Section 40A(2) of the Income Tax Act, 1961 ?" 2. I have carefully considered the above question drawn by the learned Members of the Rajkot Bench and have perused the proposed orders of the learned JM and the learned AM. I have heard the learned CIT-DR and the learned counsel of the assessee. 3. The contentions of learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee relates. 5. The learned counsel for the assessee has opposed the submissions of the learned CIT-DR. He submitted that yield of 15.80% on the capital of the assessee is not relevant to the issue since, it has been calculated on the balance capital as on the last date of the accounting period. He submitted that the assessee was paying more than 18% on secured loans and submissions of the learned CIT-DR that the average rate of interest paid to the bank loans was around 10.73% was not correct, since has been calculated on the balance as on the last date of accounting period. He submitted that the bank was charging 17.04% interest on the monthly basis, and therefore the effective rate of interest comes to more than 18% per annum. He referred to the statement of accounts of the ICICI bank at page no.20 and 21 of the compilation filed before the Tribunal in support of the submission that the effective rate of bank interest was 18.44%per annum. He submitted that no similar addition was made in the earlier years, and the loans from the relatives of the assessee were unsecured loans and therefore carries higher rate of interest. He submitted that under the provisions of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly members of the assessee being assessed to tax at the rate of 0% to 10%, whereas the assessee is liable to pay tax at an average rate of nearly 20%, and therefore there is a diversion of taxable income by the assessee in the hands of the family members, is also, in my view, without any merit. For the disallowance under section 40A(2) of the Act, the guiding factor as per the scheme of the Act is that whether such expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facility for which the payment has been made etc. I find that merely because the assessee by incurring legitimate and reasonable expense, is liable to pay a lesser amount of income-tax, it cannot be said that the provision of the Section 40A(2) of the Act can be invoked in order to maximum the coffers of the Revenue. I find that the assessee has filed copy of the bank statement from ICICI Bank to establish that it has paid interest at the effective rate of 18.44% per annum during the period for the secured loan. The bank rate suggested by the learned CIT-DR at the rate of 10.73% is patently wrong since has been worked out on the basis of the balance in the account a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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