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TMI Blog2013 (11) TMI 1599X X X X Extracts X X X X X X X X Extracts X X X X ..... arious decisions mentioned in the order in preceding paras. Since the interest rate paid by the assessee is reasonable, the order of the CIT(A) is reversed and addition is deleted. Thus, assessee’s appeals are allowed and Revenue’s appeals are dismissed on this ground. Addition u/s 14A - Held that:- The assessee has mixed fund in books of account i.e. borrowed as well as self generated. Therefore, the assessee had to prove fund invested in the shares are from the exempted or self generated fund. Now Rule 8D is applicable. Accordingly, the assessee has calculated itself disallowance as per Rue which is very nominal. Thus, we confirm the order of the CIT(A). - ITA Nos. 414 to 417 & 1952/Ahd/2009 & 2461/Ahd/2010, ITA Nos. 524 to 527 & 1923/Ahd/2009, C.O. No. 265/Ahd/2010 - - - Dated:- 29-11-2013 - Shri Mukul Kr. Shrawat, Judicial Member and Shri T.R. Meena, Accountant Member By Appellant Shri D. S. Kalyan, CIT. D.R. By Respondent Shri S. N. Soparkar, Sr. Adv. ORDER PER BENCH These appeals and C.O. filed by Revenue and assessee which have emanated from the orders of CIT(A)-XVI, Ahmadabad, dated 15.12.2008 for A.Y. 2001-02, 03-04, 04-05 05-06, dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT ought to have deleted this disallowance of Interest of ₹ 782778/- also. 3. The Learned CIT(A) has erred in confirming the disallowance u/s 14A amounting to ₹ 217377/-. Grounds of ITA Nos.414 to 417 1952/Ahd/2009 for A.Y. 2001-02, 03-04, 04-05, 05-06 06-07 (Revenue s appeal) (1) On the facts and in the circumstances of the case and in law the Ld. CIT(A) has erred in analyzing the facts and holding that assessee does not have sufficient fund to operate its business, necessitating borrowals. (2) The Ld. CIT(A) erred on the facts in not appreciating that by borrowing money at higher rate from family members of partners and depositing such money in Bank FDRs, assessee has helped them to earn more income by way of interest than what they would have earned otherwise. (3) The Ld. CIT(A) has erred in his findings that funds have been borrowed for business though facts speak otherwise as held by AO. Grounds of ITA No. 2461/Ahd/2010 for A.Y. 2007-08 (Revenue s appeal) (1) The Ld. CIT(A) erred in law and on the facts restricting the disallowance of interest u/s.36(1)(iii) made by the A.O. of ₹ 3,07,94,420/- to ₹ 7,82,778/- allowing rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 2 of Section 147, since in this case original assessment had been made but income chargeable to tax had been under assessed or such income had been made the subject of excessive relief under this Act, then such case would be deemed to be the cases where income chargeable to tax has escaped assessment. This ground alone is sufficient to re-open the original assessment. The Hon ble Delhi High Court in 174 Taxman 444 (Delhi) in the case of Batra Bhatta Co. has held that It does not matter whether the belief of the Assessing Officer is ultimately proved to be right or wrong, but there must be some material upon which such a belief can be founded. He further held that in this case the Assessing Officer had reasonable belief that the income of the appellant has escaped assessment. Further, once an assessment is reopened on some valid reasons, the whole assessment is reopened. In other words, the Assessing Officer is free to examine all the points in reassessment proceedings even though the assessment was reopened on only one issue as held by various courts including Hon ble Supreme Court in 176 ITR 529 (SC) Mewalal Dwarka Prasad. Therefore, he justified the reopening for A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord and verify the reasons recorded by the A.O. for reopening the case and basis of reopening was whether borrowed funds were utilized for the business purposes or not and difference in income tax debited and added back. Recently Hon ble Gujarat High Court in case of Inductotherm (India) P. Ltd. v. CIT (Guj) 356 ITR 481, held that notice u/s. 148 is valid, where excess claim of 80HCC. Hon ble Bombay High Court in case of Ribo India vs. DCIT, where reopening within four years on the basis of tangible material showing escapement by considering the Hon ble Supreme Court decision in kelvinator India, Chaganti Bachi Company Ltd. and Rajesh Jhaveri Stock Brokers Pvt.. However, the Hon ble Bombay High Court decision in case of Export Credit Guarantee Corporation Of India Ltd. vs. Add.CIT, held reopening within four years valid on the ground that A.O. had not applied his mind, change of accounting policy. The Hon ble Punjab and Haryana High Court decision in case of Majinder Singh Kang v. Commissioner of Income-Tax and anr, [2012] 344 ITR 358 (P H), had confirmed the addition where additions were made other than grounds of reopening recorded. Hon ble Supreme Court in case of Central Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry lower rate of interest vis- -vis the higher interest paid on unsecured loan. The A.O. gave the reasonable opportunity of being heard on this issue in all the years. The assessee objected the proceeding u/s.147 in A.Y. 01-02. It is submitted before A.O. that it required huge fund for its business purposes. It had borrowed fund and utilized its business purposes as well as investment in various banks as FDs as per their convenience when they had surplus fund. All the investments made in the bank from their business funds during the year as well as from renewal of FDs. The A.O. further observed that the assessee had opening FDs which were carry forwarded to the next year and also had closing FD. The A.O. held that assessee made excessive payment of interest to relatives of partner. The assessee did not make any attempt to say that borrowings were obtained from the market at lower rate of interest. The assessee could borrow funds from outsider on lower rate of interest. Therefore, assessee s submission is insufficient to explain the interest rate @ 18%. The A.O. finally held that interest paid on borrowed fund was more than interest received of FDs could not be considered as interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from fixed deposit is derived from the business of bidi but whether placing of borrowed funds in fixed deposit is part of the business expediency of the appellant. In my view, it is a part of business expediency hence the interest thereon is allowable as per the. Judgement of Hon'ble Supreme Court in the case of S A Builders. 4.11 As regards the second issue of excessive payment of interest u/s.40A(2)(b), the appellant himself admitted receipt of the borrowed funds from transporters @ 15% from 'Goods deposits @ 13% to 15% as against 18% from the family members. The interest on borrowings from partners is as per Partner ship Deed. In A Y 2001- 02 the rate of interest permissible to partners u/s.40A(2)(b) was 18% which was reduced to 12% from A Y 2002-03 onwards. Thus the interest payment to partners is allowable expenditure at the rates given by the appellant. Since the market rate of borrowing in the case of appellant is 15% in A Y 2001-02 and A Y 003-04 and the rate of interest payable to family members is 18%, the excess payment @ 3% is disallowable u/s. 40A(2)(b). Similarly in A Y 2004- 05 2005-06 the rate of interest in respect of loans from 'goods d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these borrowings which is not excessive. The assessee required to make fund available for FDs which were used for business purposes. The assessee s turn over in A.Y. 01-02 ₹ 168 crore, in A.Y. 03-04 ₹ 170 crore, in A.Y. 04-05 ₹ 167 crore, in A.Y. 05-06 ₹ 175 crore, in A.Y. 06-07 ₹ 186 crore in A.Y. 07-08 ₹ 195 crore and assessee required huge fund for purchase of bidies . He further argued that in A.Y. 03-04 the ld. CIT u/s. 144A has held that 40A(2)(b) is not applicable. It was argued that if the assessee avails this much huge amount from Bank only, are required to under go through formalities, such as certain documents to be executed over and above the partners personal guarantee, further collateral security are required to sanction the loan. Further periodical statement such as stock statement and huge data for loan are required by the bank. Numbers of forms are required to be submitted before the Bank. These procedures are cumbersome and many times partners may not be ready to give personal guarantee. In such cases, even after all the formalities are completed, the assessee may not be in position to avail bank finance. Further, banks are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court and Hon'ble Gujarat High Court, we are of the opinion that the legitimate needs of the business has to be seen from the viewpoint of the Businessman and not from the viewpoint of the Revenue authorities. 9. Coming to the present case, where the assessee has paid interest at the rate of 18% on loans borrowed from directors and shareholders, the Revenue's case is that payment of interest at the rate of 18% irrespective of the fact as to whether it was for business or for making investment in FDRs was excessive because the loan from bank was available at the rate of 14.37%. The other plank of argument from the Revenue is that there were no business exigencies for procuring the loans from directors and shareholders and at least for business purpose. The third argument of the Revenue is that procuring of loans at the rate-of 18% for making investment in FDRs wherefrom the assessee was to earn interest at the rate of 6% also cannot be said to be a beneficial decision to the assessee's business. The assessee's case, on the other hand, is that (i) so far as question of availability of loan from the bank is,concerned, the Revenue has lost sight of the fact, such as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization of fund and argued that FDs were for short time which were encashed before the maturity to pay the purchases. Therefore, these borrowings were for business purposes and there is no diversion of borrowing fund to avoid the tax payment as all the specified persons are highest tax slab. He further submitted that S.A. Builders case cited by the ld. CIT(A) and CIT D.R. is not squarely applicable in case of assessee because in case of S.A. Builders, the appellant advanced money to sister concern but in case of appellant the FDs were made with Nationalized Bank and had not lent money to the outsider on lower rate. Therefore, he requested to delete the addition confirmed by the ld. CIT(A). At the outset, ld. CIT DR relied upon the order of the lower authorities and argued that the assessee is a cash-rich company. There are no outstanding debtors, it proves that the assessee has sufficient fund to make the purchase. Further, he gave the chart for fund borrowed and invested in the FDs and argued that appellant had diverted its income to the specified persons to pay less tax. He further made written submission as under: 1. The A.O. has considered excess of interest paid over i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in unsecured loan raised and fixed deposits made by the firm during these years. (v) The increase in different heads is also analyzed as follows: A.Y. 2001-02 (in crores) A.Y. 2007-08 (in crores) Increase % (i) Purchases 152.4 77.24 11.63 % (ii) Sundry Creditors for Goods 7.89 25.57 224.08 % (iii) Security Deposit for goods. 5.1 7.21 41.37 % (iv) Current account and cash 10.12 13.04 28.85 % (v) Unsecured Loans 16.33 34.57 111.70 % (vi) Fixed Deposits 17.55 58.7 234.47 % (vii) Sundry debtors Nil Nil -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee had claimed exempted dividend income at ₹ 1,97,664/-. The assessee had made investment in shares and security at ₹ 56 lacs. The A.O. gave reasonable opportunity of being heard on this issue and asked to calculate the disallowance u/s.14A r.w. Rule 8D. The appellant claimed before the A.O. that it has not incurred any expenditure for earning the exempt income as assessee has tax free fund of ₹ 36 crore in form of current liability and provision as per Schedule D of balance sheet. However, it computed the disallowance under Rule 8D at ₹ 2,17,377/-, which was added back by the A.O. in the income of the assessee. 11. Being aggrieved by the order of the A.O., the assessee carried the matter before the CIT(A) who had confirmed the addition by observing as under: 4.1 I have considered the submissions of the appellant. The onus lies on the appellant to prove that the investment in shares (resulting into dividend income) is not made out of the interest bearing funds. Merely saying that the appellant has enough non interest bearing funds is not sufficient. Since in this case neither before the AO nor before me the appellant has been able to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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