The DCIT, Circle-1,, Surat v. M/s. Manisha Dyeing & Printing Works Pvt.Ltd.,,

ITA 3600/AHD/2007 | 2004-2005
Pronouncement Date: 30-07-2010 | Result: Dismissed

Appeal Details

RSA Number 360020514 RSA 2007
Assessee PAN AABCM6120D
Bench Ahmedabad
Appeal Number ITA 3600/AHD/2007
Duration Of Justice 2 year(s) 10 month(s) 26 day(s)
Appellant The DCIT, Circle-1,, Surat
Respondent M/s. Manisha Dyeing & Printing Works Pvt.Ltd.,,
Appeal Type Income Tax Appeal
Pronouncement Date 30-07-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted D
Tribunal Order Date 30-07-2010
Date Of Final Hearing 25-05-2010
Next Hearing Date 25-05-2010
Assessment Year 2004-2005
Appeal Filed On 03-09-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL : D BENCH : AHMEDABA D CAMP AT SURAT (BEFORE HONBLE SHRI T.K. SHARMA J.M. & HON'BLE SH RI D.C. AGRAWAL A.M.) I.T.A. NO. 3600/AHD./2007 ASSESSMENT YEAR : 2004-2005 DEPUTY COMMISSIONER OF INCOME TAX -VS.- M/S . MANISHA DYEING & PRINTING WORKS CIRCLE-1 SURAT PVT. LTD. SURAT (PAN : AAB CM 6120 D) (APPELLANT) (RESPONDENT) & I.T.A. NO. 3205/AHD./2007 ASSESSMENT YEAR : 2004-2005 MANISHA DYEING & PRINTING WORKS PVT. LTD. VS.- DY. COMMISSIONER OF INCOME TAX SURAT CIRCLE-1 SURAT (APPELLANT) (RESPONDENT) & I.T.A. NO. 1342/AHD/2008 ASSESSMENT YEAR : 2005-2006 MANISHA DYEING & PRINTING WORKS PVT. LTD. VS.- DY. COMMISSIONER OF INCOME TAX SURAT CIRCLE-1 SURAT (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AVINASH SAXENA DEPARTMENT BY : SHRI H.P. MEENA SR. D .R. O R D E R PER SHRI T.K. SHARMA JUDICIAL MEMBER : THE CROSS APPEAL FILED FOR THE ASSESSMENT YEAR 200 4-05 AND APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 WERE HEARD ON THE S AME DATE ARGUED BY COMMON LD. REPRESENTATIVES THEREFORE THESE ARE DECIDED BY TH IS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP THE CROSS APPEAL FOR THE ASSESS MENT YEAR 2004-05. 2 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 2.1. THE ONLY GROUND RAISED BY THE REVENUE IN ITS A PPEAL FOR THE ASSESSMENT YEAR 2004-05 IS AS UNDER :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LE ARNED CIT(A.) ERRED IN RESTRICTING THE ADDITION OF RS.11 95 367/- MADE ON ACCOUNT OF FALL IN GROSS PROFIT INCLUSIVE OF CLOSING STOCK OF WORK-IN-PROGRE SS TO RS.6 00 000/- THEREBY ALLOWING THE RELIEF OF RS.5 95 367/-. 2.2. THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPE AL FOR THE ASSESSMENT YEAR 2004-05 ARE AS UNDER :- (1) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A.) HAS ERRED IN SUSTAINING ADDITION OF RS.10 1 2 500/- MADE BY THE LEARNED A.O. OUT OF INTEREST PAID ON UNSECURED LOAN S TO DIRECTORS AND THEIR RELATIVES ON THE GROUND THAT THE RATE OF INTE REST OF 18% ON UNSECURED LOANS AVAILED FROM DIRECTORS AND THEIR RE LATIVES IS HIGHER AS COMPARED TO THE RATE OF INTEREST PAID ON SECURED LO ANS AVAILED FROM THE BANK @ 11.25%. (2) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A.) HAS ERRED IN SUSTAINING THE ADDITION OF RS. 6 00 000/- OUT OF RS.11 95 367/- MADE BY THE LEARNED A.O. ON ACCOUNT OF FALL IN GROSS PROFIT MARGIN ON AN AD HOC BASIS IGNORING THE FACT THAT THE FALL IN GROSS PROFIT HAD BEEN ON ACCOUNT OF ROUTINE BUSINES S EXPENSES WHICH THE APPELLANT COMPANY HAD TO INCUR ORDINARILY IN TH E COURSE OF BUSINESS PURELY OUT OF COMMERCIAL PRUDENCE AND BUS INESS EXPEDIENCY. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE THE LE ARNED CIT(A.) HAS ERRED IN SUSTAINING THE SUBJECT ADDITION ALSO WITHO UT HAVING VERIFIED AS TO WHETHER THE LEARNED A.O. HAS BROUGHT ON RECORD A NY FACT WHICH GOES TO ESTABLISH THAT THE APPELLANT COMPANY HAS CONCEAL ED ITS INCOME. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE THE LE ARNED CIT(A.) HAS ALSO ERRED IN SUSTAINING THE ADDITION OF RS.3 20 89 3/- TOWARDS STOCK OF WORK-IN-PROGRESS AS MADE BY THE LEARNED A.O. AS A P ART OF ADDITION ON ACCOUNT OF FALL IN GROSS PROFIT MARGIN AND INCLUDED IN ADDITION OF RS.6 00 000/- SUSTAINED BY THE LEARNED CIT(A.). 2.3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROCESSING OF MAN-MADE FABRICS ON JOB WORK BASIS. F OR THE ASSESSMENT YEAR 2004-05 IT FILED THE RETURN ON 1.11.2004 DECLARING TOTAL INCOME OF RS.17 80 580/-. IN THE ASSESSMENT YEAR UNDER APPEAL I.E. ASSESSMENT YEAR 2004-05 THE ASSESSEE HAS SHOWN TURNOVER OF RS.5 64 07 437/- AND 3 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 GROSS PROFIT OF RS.1 39 22 252/- I.E. 24.68%. IN T HE EARLIER YEAR THE FIGURES WERE RESPECTIVELY RS.4 92 24 900/- AND RS.1 57 16 501/- I.E. 31.93%. 2.4. THE ASSESSING OFFICER FRAMED THE ASSESSMENT UN DER SECTION 143(3) OF THE INCOME TAX ACT ON 29.12.2006 DETERMINING TOTAL INCOME AT RS.39 88 450/-. WHILE MAKING THE ASSESSMENT THE ASSESSING OFFICER HAD MADE THE FOLLOWING ADDITIONS :- (I) ADDITION ON ACCOUNT OF DISALLOWANCE OF EXCESS INTEREST PAID TO PERSONS SPECIFIED U/S. 40A(2)(B) RS.10 12 500/- (II) ADDITION ON ACCOUNT OF FALL IN G.P. INCLUSIVE OF CLOSING STOCK OF WORK-IN- PROGRESS RS.11 95 367/- 3. ON APPEAL THE LEARNED COMMISSIONER OF INCOME TA X(APPEALS) IN THE IMPUGNED ORDER ON 12.07.2007 HAS CONFIRMED THE ADDITION OF RS.10 12 5 00/- ON ACCOUNT OF DISALLOWANCE OF EXCESS INTEREST PAID TO THE PERSONS SPECIFIED UNDER SECTIO N 40A(2)(B) AND RESTRICTED THE ADDITION OF RS.11 95 367/- MADE ON ACCOUNT OF FALL IN G.P. INCL USIVE OF CLOSING STOCK OF WORK-IN-PROGRESS TO RS.6 00 000/-. THUS HE HAS ALLOWED RELIEF OF RS.5 9 5 367/- ON THE GROUND THAT THE ASSESSEE HAS BEEN ABLE TO OFFER AN EXPLANATION FOR FALL IN G.P. DUE TO EXCESS CONSUMPTION OF ELECTRICITY COAL AND LIGNITE. AGGRIEVED BY THE ORDER OF LEARNED COMM ISSIONER OF INCOME TAX(APPEALS) BOTH THE SIDES ARE IN APPEALS BEFORE THE TRIBUNAL. 4. WITH REGARD TO GROUND NO. 1 OF ASSESSEES APPEAL IN ITA NO. 3205/AHD/2007 FOR THE ASSESSMENT YEAR 2004-05 THE LD. COUNSEL OF THE ASS ESSEE EXPLAINED THAT ASSESSING OFFICER DISALLOWED RS.10 12 500/- OUT OF INTEREST PAID ON U NSECURED LOANS TO DIRECTORS AND THEIR RELATIVES ON THE GROUND THAT THE RATE OF INTEREST OF 18% FOR UNSECURED LOANS FROM DIRECTORS AND THEIR RELATIVES IS HIGHER AS COMPARED TO THE RATE OF SECU RED LOANS AVAILED FROM THE BANK AT THE RATE OF 11.25%. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED T HAT THE ASSESSEE HAD OBTAINED SECURED LOAN FROM THE BANK AT THE RATE OF 11.25% BUT RELYING ON THE DECISION OF ITAT GAUHATI IN THE CASE OF ITO VS.- K.S. BHASIN [17 TTJ 134] STATED THAT THE BANK RATE CANNOT BE RELIED UPON AS A GUIDE BECAUSE IN THE CASE OF BANK LOANS CERTAIN SECURITIE S HAVE TO BE PLEDGED. THE ASSESSEE RELIED ON THE JUDGMENT OF THE HON'BLE GUJARAT HIGH COURT IN THE C ASE OF SIRHIND STEEL (P) LTD. VS.- CIT 4 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 REPORTED IN 184 CTR 312 WHEREIN IT WAS HELD THAT D EPARTMENT HAS TO SHOW THAT THE EXCESSIVE PAYMENT HAS BEEN MADE WHILE INVOKING THE PROVISIONS OF SECTION 40A(2)(B). THE LD. COUNSEL CONTENDED THAT THE RATE OF INTEREST @ 18% IS FAIR A ND REASONABLE BECAUSE BY PAYING THIS INTEREST THE ASSESSEE-COMPANY HAS RECEIVED CASH DISCOUNT FRO M TWO OF ITS PRINCIPAL SUPPLIERS FOR AN AMOUNT AROUND RS.10 66 858/- DURING THE SUBJECT FIN ANCIAL YEAR WHICH HAS BEEN PLAUSIBLE WHEN COMPANY HAD MADE PAYMENT TO THOSE SUPPLIERS BY UTI LIZING THE FUNDS OF UNSECURED LOANS WHICH WOULD ULTIMATELY GO TO REDUCE THE COST OF BORROWING OF THE COMPANY. THEREFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN CONFIR MING THE DISALLOWANCE AMOUNTING TO RS.10 12 500/-. 5. ON THE OTHER HAND SHRI H.P. MEENA SR. D.R. APP EARING ON BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE ORDER OF LEARNED COMMISSIO NER OF INCOME TAX(APPEALS). THE LD. D.R. POINTED OUT THAT THE ASSESSEE COULD HAVE EASILY OBT AINED THE SECURED LOAN @ 11.25% BECAUSE IT HAS GOT VARIOUS ASSETS. THUS THERE WAS NO NECESSITY TO TAKE UNSECURED LOAN FROM DIRECTORS AND THEIR RELATIVES. THE ASSESSEE BY DOING SO IT ALLOW ED HIGHER RATE OF INTEREST TO THE DIRECTORS AND THEIR RELATIVES. ON THESE FACTS THE ASSESSING OFFI CER RIGHTLY INVOKED THE PROVISIONS CONTAINED IN SECTION 40A(2)(B) AND DISALLOWED THE EXCESS INTERES T OF 6.75% [18% MINUS 11.25%] WHICH WORKS OUT TO RS.10 12 500/-. IN THE IMPUGNED ORDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) UPHELD THE SAID DISALLOWANCE THEREFOR E THE VIEW TAKEN BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BE CONFIRMED. 6. RIVAL SUBMISSIONS WERE CONSIDERED. IT IS AN WELL SETTLED LAW THAT SECTION 40A(2)(B) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST HELD THAT EXPENDITURE WAS EXCESSIVE AND UNREASONABLE AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF UP PER INDIA PUBLISHING HOUSE PVT. LTD. VS.- CIT [156 ITR 585 (SC)] IT IS TRUE THAT SECURED LOA N FROM BANK WAS AVAILABLE AT THE RELEVANT TIME @ 11.25%. IN THE PRESENT CASE THE ASSESSEE HAS OBT AINED UNSECURED LOAN FROM DIRECTORS AND ITS RELATIVES. THE LOAN WAS TAKEN FOR THE PURPOSE OF BU SINESS THEREFORE INTEREST PAID IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE INCOME TAX ACT 196 1. IT IS AN WELL KNOWN FACT THAT RATE OF INTEREST @ 18% ON UNSECURED LOAN AT THE RELEVANT ASSESSMENT YEAR WAS FAIR AND REASONABLE. WE THEREFORE DELETE THE DISALLOWANCE OF RS.10 12 500/ - MADE BY THE ASSESSING OFFICER. RESULTANTLY THE GROUND NO. 1 OF ASSESSEES APPEAL IS ALLOWED. 5 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 7. THE FACTS RELATING TO CONTROVERSY INVOLVED IN GR OUND NO. 2 OF ASSESSEES APPEAL AND ONLY GROUND OF REVENUES APPEAL ARE THAT DURING THE ASSE SSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THERE WAS A FALL IN G.P. OF 7.54% DURI NG THE YEAR UNDER CONSIDERATION AS COMPARED TO IMMEDIATELY PRECEDING YEAR. THE ASSESSING OFFICER Q UANTIFIED THE FALL IN G.P. AT RS.41 82 996/-. ON BEING ASKED TO EXPLAIN THE FALL IN G.P. THE ASS ESSEE EXPLAINED THAT THERE WAS A STRIKE IN THE TEXTILE INDUSTRY AND RECEIPTS OF GREY CLOTH HAD RED UCED BUT FACTORY HAD TO RUN. PLANT AND MACHINERIES OF THE ASSESSEE WERE ALSO OLD BY SEVEN YEARS THEREFORE IT REQUIRES MORE REPAIRS. BEFORE THE ASSESSING OFFICER THE ASSESSEE EXPLAINE D THE FALL IN G.P. AS UNDER :- PARTICULARS AMOUNT (RS.) INCREMENTAL EXPENSE ON ACCOUNT OF ELECTRICITY DUTY ON POWER CHARGES 8 59 487/- FALL IN AVERAGE RATE OF JOB CHARGES 9 12 724/- INCREMENTAL EXPENSE ON ACCOUNT OF INFERIOR QUALITY OF COAL AND LIGNITE VIS--VIS INCREASE IN RATE OF COAL AND LIGNITE 7 55 396/- INCREMENTAL EXPENSE OF SUGAR AGRO WASTE TO TEST AS SUBSTITUTE OF COAL & LIGNITE 1 78 309/- INCREMENTAL EXPENSE ON ACCOUNT OF REPAIRS & MAINTENANCE 5 37 583/- INCREMENTAL EXPENSE ON ACCOUNT OF STORES & SPARES 4 31 469/- INCREMENTAL COST OF POWER & FUEL 8 82 716/- NON RECEIPT OF REBATE ON ELECTRICITY EXPENSES 1 45 006/- TOTAL 47 02 690/- IN THE ASSESSMENT ORDER THE ASSESSING OFFICER AFTE R CONSIDERING THE VARIOUS FACTORS WHICH AFFECTED THE G.P. OF THE ASSESSEE WORKED OUT THE G. P. ADDITION OF RS.11 95 367/- FOR THE DETAILED REASONS GIVEN IN PARAS 5.3 TO 5.11 OF HIS ORDER. IN THE ASSESSMENT ORDER THE ASSESSING OFFICER ALSO WORKED OUT THE ADDITION OF RS.3 20 983/- ON AC COUNT OF UNDERVALUATION OF WORK-IN-PROGRESS 6 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 BUT MADE NO SEPARATE ADDITION ON THIS ACCOUNT BECAU SE THE ADDITION OF RS.11 95 367/- WAS MADE ON ACCOUNT OF FALL IN G.P. 8. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS) IT WAS CONTENDED THAT THERE WAS AN INCREMENTAL EXPENSE ON ACCOUNT OF ELECTRICITY CHARGES WHICH HAS NOT BEEN ACCEPTED BY THE ASSESSING OFFICER. IT WAS EXPLAINED THAT DUE TO STRIKE IN TEXTILE INDUSTRY THE PRODUCTION WAS ONLY 20% IN FIVE MONTHS FROM APRIL 2003 TO AUGUST 2004. EVEN WHEN THE PRODUCTION IS LESS AND ENTIRE MACHINERY HAS TO RUN AND THEREFORE ELECTRICITY IS REQUIRED TO RUN THE MACHINERY EVEN WHEN THE WORKLOAD GETS CONSUMED TO T HAT EXTENT ATLEAST. IT WAS FURTHER STATED THAT DURING THE YEAR THE ASSESSEE HAS RECEIVED INFERIOR QUALITY OF COAL AND LIGNITE AND THEREFORE THERE WAS HIGHER CONSUMPTION OF COAL AND LIGNITE DURING T HE YEAR AS COMPARED TO EARLIER YEAR. ACCORDING TO ASSESSEE BOTH THESE CONTRIBUTED TO TH E FALL IN GP TO THE EXTENT OF RS.7 55 396/-. 8.1. WITH RESPECT TO WORK-IN-PROGRESS BEFORE THE L EARNED COMMISSIONER OF INCOME TAX(APPEALS) IT WAS STATED BY THE LD. COUNSEL OF TH E ASSESSEE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE DYEING AND PRINTING OF GREY CLOTH ON JOB WORK BASIS AND SINCE GREY CLOTH WAS NOT UNDER ITS OWNERSHIP NO WORK IN PROGRESS WAS SHOWN. 9. AFTER CONSIDERING THE AFORESAID SUBMISSIONS IN THE IMPUGNED ORDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) FOLLOWING THE J UDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. REPORTED IN 1 88 ITR 44 (SC) TOOK THE VIEW THAT THE ASSESSEE IS MANDATORILY REQUIRED TO DISCLOSE THE WORK-IN-PRO GRESS BECAUSE ON THE FABRIC LYING ON MACHINE IT HAS INCURRED COST AND COLOUR CHEMICALS ELECTRIC ITY POWER AND FUEL LABOUR CHARGES AND VARIOUS OTHER EXPENSES WHICH HAVE ALREADY BEEN DEBITED TO P ROFIT & LOSS A/C. FOR WHICH NO REVENUE HAS BEEN RECOGNIZED. THEREFORE THE ADDITION IN RESPECT OF WORK-IN-PROGRESS WAS SUSTAINED. HOWEVER WITH RESPECT TO G.P. ADDITION THE LEARNED COMMISSI ONER OF INCOME TAX(APPEALS) ACCEPTED THE EXPLANATION FOR FALL IN G.P. DUE TO EXCESS CONSUMPT ION OF ELECTRICITY COAL AND LIGNITE. CONSIDERING THE FALL IN G.P. TO THE EXTENT EXPLAINE D BY THE ASSESSEE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) RESTRICTED THE ADDITION ON A CCOUNT OF WORK-IN-PROGRESS AS WELL AS FALL IN G.P. TO RS.6 00 000/- INSTEAD OF RS.11.9 LAKHS MADE BY THE ASSESSING OFFICER WHICH IS ALMOST 50%. THUS THE ADDITION OF RS.6 00 000/- SUSTAINED B Y THE LEARNED COMMISSIONER OF INCOME 7 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 TAX(APPEALS) INCLUDES RS.3 20 983/- ON ACCOUNT OF W ORK-IN-PROGRESS. AGGRIEVED BY THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BOTH T HE SIDES ARE IN APPEALS BEFORE THE TRIBUNAL. 10. AT THE TIME OF HEARING BEFORE US THE LD. D.R. POINTED OUT THAT THE REASONS PUT FORTH BY THE ASSESSEE FOR FALL IN GP WAS CAREFULLY CONSIDERED BY THE ASSESSING OFFICER AND THE FALL IN GP TO THE EXTENT OF RS.29 87 628/- WAS CONSIDERED AS EXPLAINE D AND THE REASONS FOR THE FALL IN GP GIVEN BY THE ASSESSEE WAS NOT ACCEPTED AND THE ASSESSING OFF ICER MADE THE ADDITION OF RS.11 95 367/- AND THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERR ED IN RESTRICTING THE SAME TO RS.6 00 000/-. THE LD. D.R. POINTED OUT THAT THE AS SESSEE HAD TWO STENTER MACHINES HAVING 7 CHAMBERS AND 9 PRINTING MACHINES. THE ASSESSEE HAS SHOWN PROCESSING OF 0.91 CRORE METERS WHICH IS CONSIDERED AS LOW AS COMPARED TO INSTALLED CAPACITY. THE REASONS EXPLAINED FOR FALL IN G.P. WERE DULY CONSIDERED BY THE ASSESSING OFFICER AND THE FALL IN GP TO THE EXTENT OF RS.29 87 628/- WAS CONSIDERED AS EXPLAINED. THUS TH E ASSESSING OFFICER MADE THE ADDITION ONLY TO THE EXTENT OF RS.11 95 367/- WHICH INCLUDES THE AVERAGE RATE OF WORK-IN-PROGRESS TO THE EXTENT OF 3.45% WHICH WAS NOT SHOWN. THEREFORE THE ADDIT ION MADE TO THE EXTENT OF RS.11 95 367/- BE RESTORED. 11. ON THE OTHER HAND THE LD. COUNSEL OF THE ASSES SEE REITERATED THE SUBMISSIONS MADE BEFORE BOTH THE AUTHORITIES BELOW. THE LD. COUNSEL OF THE ASSESSEE ALSO FILED THE WRITTEN SUBMISSION AND OTHER RELEVANT PAPERS WHICH WERE FILED BEFORE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). HE ARGUED THAT THERE IS NO JUSTIFICAT ION WHATSOEVER FOR REJECTING THE BOOKS OF ACCOUNTS AND MAKING THE ADDITION OF RS.3 20 983/- O N ACCOUNT OF WORK-IN-PROGRESS. HE POINTED OUT THE ASSESSEE IS DOING JOB WORK THEREFORE THER E CANNOT BE ANY WORK-IN-PROGRESS. 12. IN REPLY THE LD. D.R. POINTED OUT THAT MERE FA CT THAT COLOURS ARE IN MANUFACTURING PROCESS IS NO GROUND TO HOLD THAT IT HAS NO VALUE. THE JUDG MENT OF THE HON'BLE SUPREME COURT IN THE CASE OF BRITISH PAINTS INDIA LTD. REPORTED IN 188 ITR 44 (SC) IS APPLICABLE IN RESPECT OF A PERSON WHO IS DOING WORK ON JOB WORK BASIS ALSO. 8 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 13. AFTER HEARING BOTH THE SIDES WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT AFTER CONSIDERI NG EACH AND EVERY OBJECTION OF THE ASSESSEE THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) TOOK TH E VIEW THAT IT WILL MEET THE END OF JUSTICE IF THE ADDITION IS RESTRICTED TO RS.6 00 0 00/- WHICH WILL INCLUDE THE ADDITION OF RS.3 20 983/- ON ACCOUNT OF WORK-IN-PROGRESS. WE T HEREFORE INCLINE TO UPHOLD THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ON THIS ISSUE. CONSEQUENTLY THE APPEAL OF THE REVENUE IS DISMISSED AND GROUND NO. 2 OF ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2004-05 IS ALSO DISMISSED. 14. THE ONLY GROUND RAISED BY THE ASSESSEE IN ITS A PPEAL FOR THE ASSESSMENT YEAR 2005-06 READS AS UNDER :- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A.) HAS ERRED IN SUSTAINING DISALLOWANCE OF RS.13 50 00 0/- OUT OF DISALLOWANCE MADE BY THE LEARNED A.O. U/S. 40A(2)(B ) OF INTEREST PAID ON UNSECURED LOANS TO DIRECTORS AND THEIR RELATIVES ON THE GROUND THAT THE RATE OF INTEREST OF 24% ON UNSECURED LOANS AVAILED FROM DIRECTORS AND THEIR RELATIVES IS HIGHER AS COMPARED TO THE RATE O F INTEREST PAID ON SECURED LOANS AVAILED FROM THE BANK @ 11.25%. 15. BRIEF FACTS RELATING TO CONTROVERSY INVOLVED IN THIS GROUND OF APPEAL ARE THAT IN THE ASSESSMENT YEAR UNDER CONSIDERATION THE ASSESSEE-C OMPANY HAD PAID INTEREST ON UNSECURED LOANS @ 24% TO THE DIRECTORS AND THEIR RELATIVES. THE ASS ESSEE-COMPANY HAD ALSO OBTAINED SECURED LOAN FROM BANK @ 11.25%. THE ASSESSING OFFICER ON THE BA SIS OF COMPARISON OF RATE OF INTEREST ON UNSECURED LOANS WITH THE RATE OF INTEREST ON SECURE D LOANS MADE DISALLOWANCE OF INTEREST EXPENSES IN RESPECT OF ALLEGED DIFFERENCE IN RATES I.E. INT EREST OF RS.19 12 500/- PROPORTIONATE TO 12.75% WAS DISALLOWED. 16. ON APPEAL IN THE IMPUGNED ORDER THE LEARNED C OMMISSIONER OF INCOME TAX(APPEALS) REDUCED THE DISALLOWANCE OF RS.13 50 000/- I.E. IN TEREST RATE OF 15%. AGGRIEVED BY THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THE AS SESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 17. AT THE TIME OF HEARING ON BEHALF OF ASSESSEE S HRI AVINASH SAXENA LD. COUNSEL APPEARED AND POINTED OUT THAT THE CREDITORS WHO SUPPLIED TH E GOODS WITH THE EXPLICIT CONDITION MENTIONED 9 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 ON THE BILL THAT IF PAYMENT IS MADE BEYOND THE CRED IT PERIOD INTEREST SHALL BE RECOVERED AT THE RATE VARIED FROM 24% PER ANNUM TO 36% PER ANNUM. IN SUPP ORT OF THIS COPIES OF THESE BILLS WERE SUBMITTED BEFORE THE ASSESSING OFFICER AS WELL AS L EARNED COMMISSIONER OF INCOME TAX(APPEALS). IT WAS SUBMITTED THAT IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL THE MARKET RATE OF INTEREST FOR UNSECURED L OAN WAS 24% THEREFORE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN HOLDING THAT MARKET RATE AT THE RELEVANT TIME WAS 15% AND THEREBY CONFIRMED TO THE ADDITION OF RS.15 00 000/- . 18. ON THE OTHER HAND SHRI H.P. MEENA SR. D.R. AP PEARING ON BEHALF OF THE REVENUE POINTED OUT THAT IN THE IMMEDIATELY PRECEDING YEAR THE INT EREST PAID ON UNSECURED LOANS TO DIRECTORS AND THEIR RELATIVES WAS 18%. IN THE ASSESSMENT YEAR UND ER APPEAL THERE IS A JUMP OF INTEREST @ 6%. THE LD. D.R. FURTHER POINTED OUT THAT MOST OF THE L OANS ARE OLD AND THERE IS NO JUSTIFICATION WHATSOEVER FOR INCREASING THE RATE OF INTEREST FROM 18% TO 24%. 19. RIVAL SUBMISSIONS WERE CONSIDERED. IN THE IMPUG NED ORDER THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS RELIED ON THE DECISION DATE D 31.08.2007 OF THE ITAT AHMEDABAD IN PARA2.3.3 ON PAGE 7 OF HIS IMPUGNED ORDER IN CASE O F EMPIRE MOTORS IN ITA NO. 1272/AHD/2007 FOR THE ASSESSMENT YEAR 2004-05 WHER EIN THE ITAT AHMEDABAD HELD AS UNDER :- SINCE THE CASE BEFORE US RELATES TO AY 2004-05 WHE N THE BANK RATE HAS DRASTICALLY GONE DOWN WE THEREFORE KEEPING IN VIE W THE MARKET CONDITION AND THE BANK RATE ARE OF THE VIEW THAT T HE DISALLOWANCE MADE BY THE A.O. IS EXCESSIVE. IN OUR OPINION THE INTER EST SHOULD HAVE BEEN ALLOWED AT THE RATE OF 21%. WE ACCORDINGLY PARTLY A LLOW GROUND NO. 1 OF THE ASSESSEES APPEAL AND DIRECT THE A.O. TO DISALL OW THE INTEREST AT THE RATE OF 3% PAID TO THE PERSONS FALLING U/S. 40A(2)( B). THUS THIS GROUND STANDS ALLOWED ACCORDINGLY. THE ABOVE DECISION HAS BEEN GIVEN ON THE FACTS OF T HAT YEAR. THE INTEREST DURING THE YEAR AY 2005-06 WAS CONSIDERABLY LOW. SO KEEPING IN MIND THE MARKET CONDITIONS BANK RATES FOR AY 2005-06 T HE INTEREST MAY BE ALLOWED AT 18%. IN VIEW OF THE ABOVE IN THIS YEAR THE A.O. IS DIRECTED TO ALLOW THE INTEREST AT THE RATE OF 18% AND BALANCE 6 % WOULD BE DISALLOWED U/S. 40A(2)(B). THEREFORE THIS GROUND O F APPEAL IS PARTLY ALLOWED. 10 ITA NOS . 3600 & 3205/AHD/2007 & 1342-AHD-2008 20. FROM THE ABOVE IT IS CLEAR THAT FOR THE ASSESS MENT YEAR 2005-06 COORDINATE BENCH OF THE ITAT HELD THAT INTEREST @ 18% IS REASONABLE. IN THE IMMEDIATELY PRECEDING YEAR ALSO THE ASSESSEE-COMPANY ITSELF HAS PAID THE INTEREST @ 18% . WE THEREFORE FOLLOWING THE DECISION OF ITAT AHMEDABAD IN THE CASE OF EMPIRE MOTORS (SUPRA ) DIRECT THE ASSESSING OFFICER TO RE-WORK OUT THE DISALLOWANCE OF INTEREST UNDER SECTION 40A( 2)(B) OF THE ACT BY CONSIDERING THE REASONABLE RATE OF INTEREST @ 18%. THIS GROUND IS PARTLY ALLOW ED. 21. IN THE RESULT THE APPEAL OF THE REVENUE FOR TH E ASSESSMENT YEAR 2004-05 IS DISMISSED. BOTH THE APPEALS OF THE ASSESSEE FOR THE ASSESSMENT YEARS 2004-05 & 2005-06 ARE PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 30.07.201 0 SD/- SD/- (D.C. AGRAWAL) (T.K. SHARMA ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30 / 07 / 2010 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT(A) CONCERNED (4) CIT CONCERNED (5) D.R. ITAT AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGI STRAR ITAT AHMEDABAD LAHA/SR.P.S.