ITO 20(2)(2), MUMBAI v. M LALCHAND KJOTHARI & CO, MUMBAI

ITA 1910/MUM/2010 | 2006-2007
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 191019914 RSA 2010
Assessee PAN AAGFM3234J
Bench Mumbai
Appeal Number ITA 1910/MUM/2010
Duration Of Justice 1 year(s) 4 month(s) 20 day(s)
Appellant ITO 20(2)(2), MUMBAI
Respondent M LALCHAND KJOTHARI & CO, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 29-07-2011
Date Of Final Hearing 11-05-2011
Next Hearing Date 11-05-2011
Assessment Year 2006-2007
Appeal Filed On 10-03-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S. SYAL (AM) & SHRI N.V. VASUDEVAN ( JM) I.T.A.NO.359/MUM/2010 (A.Y. 2006-07) M/S. M. LALCHAND KOTHARI & CO. SHOP NO.2 MARWADI CHAWL S.V.ROAD ANDHERI (W) MUMBAI-400 058. PAN: AAGFM3234J VS. INCOME-TAX OFFICER WARD-20(2)(2) MUMBAI. APPELLANT RESPONDENT I.T.A.NO.1910/MUM/2010 (A.Y. 2006-07) INCOME-TAX OFFICER WARD-20(2)(2) MUMBAI. VS. M/S. M. LALCHAND KOTHARI & CO. SHOP NO.2 MARWADI CHAWL S.V.ROAD ANDHERI (W) MUMBAI-400 058. PAN: AAGFM3234J APPELLANT RESPONDENT ASSESSEE BY MS. RITIKA GARG. DEPARTMEMT BY SHRI AB ANI KANTA NAYAK. DATE OF HEARING 26-07-2011 DATE OF PRONOUNCEMENT 29-07-2011 O R D E R PER R.S. SYAL AM : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE CIT( A) ON 23-12-2009 IN RELATION TO THE ASSTT. YEAR 2006-07. 2. THE FIRST TWO GROUNDS OF REVENUES APPEAL ARE AG AINST THE DELETION OF ADDITION OF RS.37 LAKHS MADE BY THE AO ESTIMATING G ROSS PROFIT ON UNACCOUNTED SALES OF RS.1 CRORE AND FURTHER BY HOLDING THAT THE BOOKS OF ACCOUNT WERE NOT PROPERLY MAINTAINED. ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 2 3. BRIEFLY STATED FACTS OF THESE GROUNDS ARE THAT T HE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND RETAIL OF JEWELLE RY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE PRODUCED WEIGH T-WISE DETAILS OF STOCK OF GOLD ALONG WITH QUANTITIES OF JEWELLERY WITHOUT GIV ING CARATAGE OF SUCH STOCK AVAILABLE. FURTHER DESPITE THE AOS REQUIREMENT T HE ASSESSEE FAILED TO PRODUCE OPENING AND CLOSING STOCK ITEM-WISE AND WEIGHT-WISE OF SILVER ORNAMENTS. IT WAS ALSO NOTICED THAT THE ASSESSEE CHOSE TO MENTION ON THE SELF-MADE PURCHASE BILLS GOLD ORNAMENTS PURCHASED GIVING DETAILS OF ORNAME NTS PURCHASED AND QUANTITY OF ORNAMENTS PURCHASED ON SOME OF THEM. FURTHER TH ERE WERE NO DETAILS OF THE JEWELLERY WHICH WAS CLAIMED TO BE MANUFACTURED FROM THE OLD GOLD ORNAMENTS. THE ASSESSEE SUBMITTED THAT NO SUCH RECORDS WERE MA INTAINED. FURTHER THE ASSESSEE WAS NOT ABLE TO EXPLAIN CORRELATION BETWEE N THE STOCK AVAILABLE WITH IT AND THE STOCK SOLD AND REMAINING UNSOLD AT THE YEAR END. CONSIDERING ALL THESE FACTS THE AO CAME TO THE CONCLUSION THAT THE BOOKS OF ACCOUNT WERE NOT PROPERLY MAINTAINED. HE THEREFORE REJECTED THE BOOK RESULT S. IT WAS OPINED THAT THE ASSESSEE HAD CONCEALED SALES OF RS.1 CRORE. BY APPL YING THE GROSS PROFIT RATE OF 37% HE MADE ADDITION OF RS.37 LAKHS. THE LD. CIT(A ) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS ADVANCED BEFORE HIM AND CAME TO HOLD THAT THE BOOKS OF ACCOUNT WERE PROPERLY MAINTAINED AND THERE WAS NO C ASE FOR THEIR REJECTION. AS A RESULT OF THAT THE ADDITION OF RS.37 LAKHS WAS DE LETED. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. BOOKS OF ACCOUNT CAN BE SAID TO BE PROPERLY MAINTAINED IF CORRECT INCOME CAN BE DEDUCTED THERE FROM. IF HOWEVER THE ACCOUN TS ARE IN SUCH A SHAPE FROM WHICH IT IS NOT POSSIBLE TO FIND OUT THE CORRECT IN COME THE AO IS WITHIN HIS POWERS TO REJECT SUCH BOOK RESULTS AND PROCEED TO DETERMIN E THE INCOME AS PER SOME FAIR AND REASONABLE ESTIMATE. THE POINTS TAKEN NOTE OF B Y THE AO FOR THE REJECTION OF ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 3 BOOKS OF ACCOUNT CLEARLY GO TO SHOW THAT THE FIGURE S OF OPENING AND CLOSING STOCK TOGETHER WITH THEIR QUANTITY AND CARATAGE WERE NOT CAPABLE OF PROPER VERIFICATION. IF THE FIGURES OF OPENING OR CLOSING STOCKS ARE NOT SUBJECT TO VERIFICATION THE ACCOUNTS CANNOT BE HELD TO BE PROPER. WHEN WE CONSI DER ALL THE RELEVANT FACTS DISCUSSED ABOVE WE FIND THAT THE ACCOUNTS WERE RIG HTLY REJECTED BY THE AO AND THE CIT(A) WAS NOT JUSTIFIED IN HOLDING OTHERWISE. WE THEREFORE OVERTURN THE IMPUGNED ORDER ON THIS ISSUE. 5. THE NEXT POINT AFTER THE REJECTION OF BOOKS RESU LTS IS TO MAKE A FAIR ESTIMATE OF THE INCOME WHICH COULD HAVE BEEN EARNED BY THE ASSESSEE. THIS ESTIMATE OF INCOME CAN BE MADE BY CONSIDERING THE G ROSS PROFIT RATE DECLARED BY THE ASSESSEE IN THIS YEAR VIS--VIS THAT IN THE PRE CEDING YEAR AND ALSO THE AMOUNT OF TURNOVER OR BY COMPARING THIS GROSS PROFIT RATE WITH THAT DECLARED BY THE OTHER ASSESSEES IDENTICALLY PLACED. THE COURSE OF ACTION ADOPTED BY THE AO IN THE INSTANT CASE IS THAT HE ACCEPTED THE GROSS PROFIT D ECLARED BY THE ASSESSEE AS SUCH AND MADE FURTHER ESTIMATE OF CONCEALED SALES AT RS. 1 CRORE AND THUS APPLIED GROSS PROFIT RATE OF 37% ON SUCH ESTIMATED CONCEALE D SALE TO MAKE THE ADDITION OF RS.37 LAKHS. THERE IS NO BASIS WHATSOEVER AS TO HOW THE FIGURE OF RS.1 CRORE HAS BEEN ARRIVED AT BY THE AO. IF THE AO WAS NOT CO NVINCED WITH THE PROPER MAINTENANCE OF BOOKS OF ACCOUNT IT WAS OPEN TO HIM TO REJECT SUCH BOOKS OF ACCOUNT AND MAKE A FAIR AND REASONABLE ESTIMATE OF THE INCOME EARNED BY THE ASSESSEE. IT IS SEEN FROM THE ASSESSMENT ORDER THAT THE ASSESSEE DECLARED GROSS PROFIT RATE IN THIS YEAR AT 37.67% ON SALES OF RS. 99.44 LAKHS. THE RELATIVE FIGURE OF TURNOVER FOR THE IMMEDIATELY PRECEDING YEAR IS R S.98.81 LAKHS WITH GROSS PROFIT RATE OF 28.76%. THUS IT IS EVIDENT THAT NOT ONLY T HE AMOUNT OF TURNOVER HAS INCREASED BUT THE GROSS PROFIT RATE ALSO SHOT UP B Y AROUND 9%. IN OUR CONSIDERED OPINION THE LD. CIT(A) WAS JUSTIFIED IN DELETING T HIS ADDITION. ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 4 6. THE NEXT ISSUE RAISED BY THE REVENUE IN ITS APPE AL IS AGAINST ALLOWING OF INTEREST EXPENDITURE @ 9% ON LOANS TAKEN FROM GOD FAMILY MEMBERS OF THE PARTNERS. THE ASSESSEE IN ITS APPEAL IS AGGRIEVED AGAINST THE SUSTENANCE OF ADDITION ON ACCOUNT OF INTEREST U/S.40A(2)(B) BY TH E LD. CIT(A) IN EXCESS OF 9% PER ANNUM PAID TO THE FAMILY MEMBERS OF THE PARTNER S. THE FACTS APROPOS THESE GROUNDS ARE THAT THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF INTEREST AT RS.21 54 102/-. ON BEING CALLED UPON TO JUSTIFY THE CLAIM THE ASSESSEE SUBMITTED THAT THE LOANS WERE TAKEN FOR BUSINESS PURPOSE AND UTILIZED ACCORDINGLY. THE AO NOTED THAT THERE WAS NO BUSINESS PRUDENCE IN CONTIN UING WITH THE LOANS TAKEN WHEN ONLY A FEW ITEMS REMAINING IN STOCK WERE RUNNI NG ITEMS. HE THEREFORE HELD THAT THE HUGE LOANS TAKEN FROM RELATIVES AND FAMILY MEMBERS WERE ALLOWED BY THE ASSESSEE TO REMAIN INVESTED IN NON-PRODUCTIVE S TOCKS. RESULTANTLY THE ADDITION OF RS.21.54 LAKHS WAS MADE. WHEN THE MATTE R CAME UP BEFORE THE LD. CIT(A) HE NOTED DOWN THE DETAILS OF PARTIES FROM W HOM LOANS WERE OBTAINED RATE OF INTEREST AND RELATION WITH THE ASSESSEE. TH IS HAS BEEN TABULATED IN PARA 3.3 OF THE IMPUGNED ORDER. FROM THIS TABULATION TH E CIT(A) NOTICED THAT THE RATE OF INTEREST CHARGED BY DIFFERENT PARTIES WAS NOT UN IFORM INASMUCH AS IT WAS PAID AT HIGHER RATE TO FAMILY MEMBERS AND HUFS OF THE PARTNERS IN COMPARISON WITH OUTSIDE PARTIES. WHEN CALLED UPON TO EXPLAIN AS TO WHY THE PROVISIONS OF SEC. 40A(2)(B) BE NOT APPLIED IN RESPECT OF INTEREST PAI D TO THE FAMILY AND HUFS OF THE PARTNERS THE ASSESSEE STATED THAT THE RATE OF INTE REST PAID TO THE FAMILY MEMBERS WAS COMMENSURATE WITH THE MARKET CONDITIONS. IT WAS ALSO STATED THAT BANK WAS CHARGING INTEREST @ 14% DURING THE RELEVANT PERIOD. IN PRINCIPLE THE LD. CIT(A) AGREED WITH THE VIEWPOINT OF THE ASSESSEE THAT THE INTEREST PAID IN RESPECT LOANS BORROWED WAS DEDUCTIBLE. HOWEVER RELYING ON THE PR OVISIONS OF SEC. 40A(2)(B) HE DIRECTED THAT THE INTEREST PAID TO THE GOD AND THE FAMILY MEMBERS OF THE ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 5 PARTNERS SHOULD BE RESTRICTED TO 9% AND THE EXCESS INTEREST SHOULD BE DISALLOWED. BOTH THE SIDES ARE IN APPEAL AGAINST THEIR RESPECTI VE STANDS. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS SEEN THAT THE AO ACCEPTED THE ASS ESSEES CONTENTION THAT THE LOANS AVAILED BY IT WERE USED FOR THE BUSINESS PURP OSE. THE ONLY REASON ASSIGNED BY HIM FOR MAKING DISALLOWANCE OF INTEREST IS THAT THE ASSESSEE ALLOWED THE LOANS TO REMAIN INVESTED IN NON-PRODUCTIVE STOCKS. IN OUR CONSIDERED OPINION THE PARAMETER FOLLOWED BY THE AO FOR MAKING DISALLOWANC E OF INTEREST IS NOT SUSTAINABLE IN LAW BECAUSE OF THE CLEAR MANDATE OF SEC. 36(1)(III) WHICH PROVIDES THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPI TAL BORROWED FOR THE PURPOSE OF BUSINESS IS DEDUCTIBLE. THE AO HAS TO EXAMINE AS TO WHETHER THE CAPITAL BORROWED WAS USED FOR THE PURPOSE OF BUSINESS OR NO T. IF IT IS SO USED THEN HE CANNOT SUGGEST THAT THE ASSESSEE SHOULD HAVE TAKEN OTHER OPTIONS OR REPAID THE LOANS BECAUSE OF ITS INVESTMENT IN NON-PRODUCTIVE S TOCKS. WE THEREFORE APPROVE THE VIEW TAKEN BY THE LD. CIT(A) IN HOLDING THAT TH E INTEREST PAID BY THE ASSESSEE IS COVERED U/S.36(1)(III) OF THE ACT. 8. IN SO FAR AS THE APPLICABILITY OF SEC. 40A(2)(B) IN RESPECT OF INTEREST PAID TO FAMILY MEMBERS AND HUFS OF THE PARTNERS IS CONCERNE D WE FIND THAT THE ASSESSEE PAID INTEREST AT MAXIMUM RATE OF 12% . THE PRESCRIPTION OF SEC. 40A(2) IS TO DISALLOW ANY EXPENDITURE IN RESPECT OF WHICH PAYMEN T HAS BEEN MADE TO THE PERSONS REFERRED TO IN CLAUSE (B) OF THE SUB-SECTIO N AND THE AO IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSE E OR THE BENEFIT DERIVED BY THE ASSESSEE THEREFROM. THERE CANNOT BE ANY DISPUTE ON THE FACT THAT THE ASSESSEE ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 6 BORROWED AMOUNT FROM ITS RELATIVES AND INVESTED THE SAME TO MEET ITS WORKING CAPITAL REQUIREMENTS. IN SUCH A SITUATION THE ACT OF BORROWING FROM THE RELATIVES CANNOT BE HELD TO BE FOR A NON-BUSINESS PURPOSE. AS REGARDS THE INTEREST TO BE CALLED EXCESSIVE OR UNREASONABLE IT HAS TO BE COMP ARED WITH THE FAIR MARKET VALUE OF THE AMOUNT BORROWED. IF INSTEAD OF BORROW ING FROM ITS RELATIVES AT A PARTICULAR RATE OF INTEREST THE ASSESSEE CAN EASIL Y MAKE BORROWINGS AT A LOWER RATE OF INTEREST IN SIMILAR SITUATION SUCH EXCESS WOULD BE THE SUBJECT MATTER OF DISALLOWANCE U/S.40A(2)(B). ADVERTING TO THE FACTS OF THE INSTANT CASE WE NOTE THAT THE RATE OF INTEREST PAID BY THE ASSESSEE TO I TS RELATIVES IS AT THE HIGHEST OF 12% WHICH IS STILL LOWER THAN THE RATE OF INTEREST CHARGED BY THE BANKS AT THE MATERIAL TIME. BY NO STANDARD THE INTEREST PAID TO THE FAMILY MEMBERS CAN BE CONSIDERED AS EXCESSIVE. WE THEREFORE REVERSE TH E VIEW TAKEN BY THE LD. CIT(A) ON THIS ISSUE AND HOLD THAT THE INTEREST OF RS.21.54 LAKHS CLAIMED BY THE ASSESSEE IS DEDUCTIBLE IN ENTIRETY. 9. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED AND THAT OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 29TH DAY OF JULY 201 1. SD/- SD/- (N.V. VASUDEVAN) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 29TH JULY 2011. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A)-31 MUMBAI. ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 7 4 CIT-20 MUMBAI. 5.DR B BENCH MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER ASST.REGISTRAR ITAT MUMBAI. ITA NOS.359 & 1910/M/10 M.LALCHAND KOTHARI & CO.. 8 DETAILS DATE INITIALS DESIGN ATION 1. DRAFT DICTATED ON 26-07- 2011 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 26-07- 2011 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER * -