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TMI Blog2024 (6) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... rties and the said provision cannot be invoked in order to make disallowance in respect to unrelated parties. Therefore, disallowance made u/s. 40A(2)(b) in respect to unrelated parties is liable to be deleted. Whether the assessing officer has correctly adopted the rate of 11% as fair market value of interest based on interest rate charged by the assessee from M/s. Mariya Ship Breaking Pvt. Ltd? - As in the instant facts, the Tax Authorities have failed to bring on record any comparable cases as to the fair market value of similar services (i.e. the prevalent rate of interest). As we observe that the AO and CIT(A) have not given any specific finding as to how the aforesaid interest rate paid by the assessee was excessive and unreasonable specially in the light of the facts that the funds obtained by the assessee were without any security, there was no immediate obligation to repay the funds in the near future and such loans were taken without any security. In addition, we note that the assessee had also filed application under Rule 46A, in which the assessee had filed additional evidences in the form of Benchmarking Prime Lending Rate of SBI and Personal loan rates of SBI. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er consideration. Such disallowance was made by the assessing officer after adopting rate of interest of 11% as Fair Market Value of interest based on the rate of interest charged by the assessee from M/s. Mariya Ship Breaking Pvt. Ltd. 4. In appeal, the Ld. CIT(A) confirmed the addition with the following observations: The appellant, engaged in the business of trading of MS Scrap (Ferous Non Ferous Scrap) in the name and style of M/s Singhal Steel had furnished return of income on 28.09.2013 declaring total income at Rs. 16,91,710/. The case was selected for scrutiny. AO completed the assessment by assessing the total income at Rs. 1,49,35,169/- by disallowing Rs. 14,06,585/- out of interest payment, disallowing excess rent claimed of Rs. 60,000/-, disallowance u/s 40A of Rs. 74,438/-, disallowing deemed rent of Rs. 40,425/-, disallowing unexplained salary of Rs. 1,06,000/-, disallowing cessation of liability u/s 41(1) of Rs. 76.726/- and unexplained cash credits u/s 68 of Rs. 67.89,405/- During the course of assessment proceedings it was noticed by AO that the appellant has paid interest @15% and up on deposits and unsecured loans and most of the persons are covered u/s 40A(2)(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee submitted that only three parties viz M/s. Mariya Ship Breaking Pvt. Ltd., M/s. Payal Singhal and Shree Subhadra Steel P. Ltd. are related parties, as is evident from the Tax Audit Report (at Page No. 12 of the Paper Book). Accordingly, the Ld. Counsel for the assessee submitted that disallowance u/s. 40A(2)(b) of the Act can be made only in respect of related parties. The said provisions cannot be invoked in order to make disallowance in respect of payments to unrelated parties. Therefore, on this count, disallowance u/s. 40A(2)(b) in respect of interest paid to 17 unrelated parties deserves to be deleted. 6. The second argument of the Ld. Counsel for the assessee was that no disallowance can be made u/s 40A(2)(b) of the Act unless the assessing officer brings on record, the fair market value of similar services. In this case, the assessing officer has not determined the Fair Market Value of interest in question. Rather, such disallowance has been made by the assessing officer after adopting 11% rate of interest as Fair Market Value of interest based on the rate of interest charged by the assessee from M/s. Mariya Ship Breaking P. Ltd. Accordingly, the Ld. Counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contentions and perused the material available on record. On going through the facts of the instant case, in our considered view, the ld. assessing officer and Ld. CIT(A) have erred in facts and in law in confirming the additions in respect of excessive amount paid to unrelated parties by invoking the provisions of Section 40A(2)(b) of the Act In order to invoke the provisions of Section 40A(2)(b) of the Act, the primary condition as is that the disallowance can be made only in respect of excessive amount paid to related parties . In this case, as per the contents of the Tax Audit Report only three parties have been reported as related parties viz M/s. Mariya Ship Breaking Pvt. Ltd., M/s. Payal Singhal and Shree Subhadra Steel P. Ltd. Nothing has been brought on record to show/demonstrate the balance parties in respect to whom the provisions of Section 40A(2)(b) of the Act have been invoked are related parties within the meaning of Section 40A(2)(b) of the Act. Therefore, in our considered view, disallowance u/s. 40A(2)(b) of the Act can be made only in respect of relates parties and the said provision cannot be invoked in order to make disallowance in respect to unrelated parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively as against that paid in other cases @ 18%. The Assessing Officer accordingly invoked section 40A(2) (b) of the act to benchmark assessee's interest payment @ 18% and computed the corresponding interest disallowance @ 6% coming to Rs. 6,86,717/- thereby treating 24% interest in question as excessive. The CIT(A) upholds Assessing Officer's action. 3. We have heard both the parties. There is no dispute that both the lower authorities have invoked the impugned section 40A(2)(b) disallowance by benchmarking assessee's interest rate paid in other cases @ 18% to disallow 6% excessive rate in case of above three payees. There is not even iota of discussion in the lower orders about market rate of interest. Nor any exercise in this direction seems to have been carried out. Hon'ble jurisdictional high court in (2014) 50 taxamann.com 52 (Guj) CIT vs. Sarjan Realities Ltd holds that the impugned disallowance cannot be invoked solely because an assessee has made interest payments at different rates to various parties. We repeat that there is no other material discussed apart from adopting interest rate @ 18% as paid to other payees. We accordingly follow hon'ble jur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness needs have to be determined by the businessman and not by the Assessing Officer, and if it is appeared to the AO that a particular person could not fetch this much salary from the open market, only then he can disallow part of that salary. 10. During the course of hearing, it was brought to our notice that profit before taxes for the year has increased from Rs. 95.90 lakhs to Rs. 153.28 lakhs. The assessee had a jump in turnover by 62.9%. It was also contended that had the assessee was a partnership firm, it could give maximum remuneration to the partners upto 194.41 lakhs, whereas, it has paid remuneration to directors and other related parties to the extent of Rs. 199.80 lakhs. The assessee has submitted this comparative status before the AO. A perusal of the finding recorded by the ld.CIT(A) would reveal that the ld.CIT(A) has observed that the assessee has failed to furnish evidence with regard to the attendance of the employees. It is pertinent to observe that salary has not been disallowed on this ground by the AO. He has not disbelieved the relationship of employees and employer. He has disbelieved that salary was paid in excessive. Similarly, the ld.CIT(A) has observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de under section 40(a) (ia) of the Act by holding that the amendment carried out by Finance Act, 2010 can be held to be retrospective from AY 2005- 06. Now, so far as the disallowance made under section 40A(2)(b) of the Act on the ground of motor bus rent is concerned, it appears that the AO disallowed 5% of the total payments towards motor bus rent by observing that the assessee has failed to reconcile the difference in payments as per tax audit report and as submitted during the assessment proceedings and had also not produced any comparative prices. The learned CIT(A) deleted the said disallowances by observing that the AO has not made out any case for excessive or unreasonable payments to the related purpose towards the motor bus rent. The learned CIT(A) also observed that no comparative prices for similar transport services was cited by the AO and therefore, was not justified in making ad hoc disallowance of 5% under section 40A(2)(b) of the Act and therefore, the CIT(A) as such rightly deleted the disallowances made under section 40A(2)(b) of the Act. Considering the provisions of Section 40A(2)(b) of the Act and the Evidence Act, if the AO was of the opinion that the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assesses disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. We are in complete agreement with the view taken by the ITAT and the observations made by the learned ITAT while deleting disallowances made by the AO under section 40A(2)(b) of the Act on motor bus rent. No error has been committed by the learned ITAT which calls for interference of this Court. No question of law much less any substantial question of law arises. 5. Further, this Court also took into consideration, another decision of this Court in CIT-IV VS. SARJAN REALITIES LTD. , [2014] 50 Taxmann.com 52 (Gujarat), wherein, in Para-4 it is observed as under; 4. Heard Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it to be the real reason. In other words, the AO proceeded only on the basis of assumptions, without there being any material in support, thereof, and rejected the explanations given by the assessee, which, in turn wrongly confirmed by the CIT(A) and the Tribunal. 7. Mr. Mehta, learned Advocate for the Respondent-Revenue, does aforesaid position of law. 8. not dispute the So far as firs question is concerned, the factual scenario also permits us to held that provisions of Section 40A(2)(b) will permit the assessee allowance of labour charges paid to the female relatives of the Director of the assessee Company and that on facts and seeing that the law declared is in favour of the assessee, the disallowance could not have been made in the facts of the case. We held that the interpretation of Section 40A(2)(b) would not permit disallowance when there was no finding the effect that the labour charges paid were in excess of the fair market charges and that the authorities below disallowed the labour charges without ascertaining the fair market value of the same. 12.3. Accordingly, in view of the facts of the instant case, we observe that the assessing officer and Ld. CIT(A) have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee submitted before us that a detailed documentary evidences with respect to funds received from the parties. The ld. Counsel for the assessee submitted a chart of supporting documentary evidences with respect to various lenders of unsecured loans, which was furnished before the Tax Authorities, the details of supporting evidences filed by the assessee are given below for ready reference: 1) Jagruti H. Mehta: Rs. 7,09,251/- ➤ Confirmation-Pg.55 of P/B ➤ PAN details - Pg.55 of P/B ➤ Acknowledgment of ITR Pg.56 of P/B ➤ Bank statement Pgs.233 r.w. 255 of P/B; 2) Kishor K. Shah: Rs. 5,00,000/- ➤ Confirmation - Pg.57 of P/B ➤ PAN details - Pg.57 of P/B ➤ Bank statement - Pgs.58-60 of P/B ➤ Acknowledgment of ITR-Pg.207 of P/B 3) Rekhaben Modi: Rs. 15,00,000/- ➤ Correct name is Rakshaben Modi ; ➤ Confirmation - Pg.61 of P/B ➤ Acknowledgment of ITR Pg.62 of P/B ➤ PAN details - Pg.62 of P/B ➤ Bank statement - Pg.63 of P/B 4) Shree Subhadra Steel P. Ltd.: Rs. 13,20,631/- ➤ Confirmation - Pg.64 of P/B ➤ Acknowledgment of ITR Pg.65 of P/B ➤ PAN details - Pg.65 of P/B ➤ No fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the record placed before us and the order of Ld. CIT(A), it is evident that the assessing officer did not make any efforts to further inquire into the genuineness of the parties from whom the amounts had been obtained. It is further observed that Ld. CIT(A) while passing the order did not refer to the additional evidences furnished by the assessee, during the course of appellate proceedings and neither any reference to the observations made by the assessing officer in the remand report, while dismissing the appeal of the assessee on this issue. Ld. CIT(A) has not given any adverse remark to the documentary evidences placed on record by the assessee with respect to the addition made by the assessing officer u/s 68 of the Act. Accordingly, looking into the instant facts, we are of the considered view that the assessee has furnished adequate documentary evidences in support of its case and the department has not pointed out any specific infirmity in the supporting evidences filed by the assessee. Accordingly, looking into the instant facts, ground no. 3 of the assessee s appeal is allowed. The balance grounds of appeal raised by the assessee are general in nature and do not require ..... 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