M/s. Mehra Electric Co., Kolkata v. ITO, Ward - 35(4), Kolkata, Kolkata

ITA 49/KOL/2010 | 2005-2006
Pronouncement Date: 30-04-2010

Appeal Details

RSA Number 4923514 RSA 2010
Bench Kolkata
Appeal Number ITA 49/KOL/2010
Duration Of Justice 3 month(s) 22 day(s)
Appellant M/s. Mehra Electric Co., Kolkata
Respondent ITO, Ward - 35(4), Kolkata, Kolkata
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Assessee
Bench Allotted SMC
Tribunal Order Date 30-04-2010
Assessment Year 2005-2006
Appeal Filed On 08-01-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI D. K. TYAGI JM & HONBLE SRI C . D. RAO AM] I.T.A. NO.49/KOL/2010 ASSESSMENT YEAR: 2005-06 M/S. MEHRA ELECTRIC CO. KOLKATA. -VS- INCOME-TAX OFFICER WD-35(4) KOLKATA (PA NO.AAFFM 3064 M) (APPELLANT) (RESPONDENT) APPELLANT BY : SRI P. R. KOTHARI RESPONDENT BY : SRI P. KOLHE O R D E R PER D. K. TYAGI JM: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE LD. CIT(A) KOLKATA DATED 02.12.2009 FOR ASSESSMENT YEA R 2005-06 ON THE FOLLOWING GROUNDS : 1.FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE LD. CIT(A) ERRED IN SUSTAINING THE ORDER OF LD. ASSESSING OFFICER PARTL Y DISALLOWING RS.57 576/- OUT OF INTEREST PAID/PAYABLE ON SOME UNSECURED LOANS. 2. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE LD. CIT(A) ERRED IN SUSTAINING THE ORDER OF AO DISALLOWING RS.32 .339/- ON ACCOUNT OF MOTOR CAR EXPENSES. 3. FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE THE LD. CIT(A) ERRED IN SUSTAINING THE ORDER OF LD. AO DISALLOWING RS.22 67 5/- ON ACCOUNT OF DEPRECIATION ON MOTOR CAR. 2. GROUND NO. 1 RELATES TO SUSTAINING THE DISALLOWA NCE OF RS.57 576/- OUT OF INTEREST PAID ON UNSECURED LOANS. FACTS OF THE CASE ARE THA T DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAS PAI D INTEREST AT THE RATES RANGING FROM 12% TO 24%. HE ALSO NOTED THAT THE MARKET RATE OF INTEREST WAS 15%. THEN THE AO DISALLOWED THE INTEREST IN EXCESS OF 15% AND MADE A N ADDITION OF RS.57 576/-.. IN APPEAL THE LD. CIT(A) CONFIRMED THIS ACTION OF THE AO. AGGRIEVED BY THIS THE ASSESSEE IS NOW IN APPEAL BEFORE US. 3. AT THE TIME OF HEARING BEFORE US THE LD. COUNSE L FOR THE ASSESSEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFOR E THE LOWER AUTHORITIES FURTHER SUBMITTED THAT THE FOLLOWING FACTS HAVE BEEN OVERLO OKED BY THE LOWER AUTHORITIES WHILE MAKING/SUSTAINING THE DISALLOWANCE. 2 I) THERE IS NO DISPUTE ABOUT THE FACT THAT THE SUBJ ECT LOANS WERE TAKEN AND UTILIZED FOR THE PURPOSES OF THE BUSINESS AND THERE IS NO FI NDING OF ANY DIVERSION OF THESE BORROWED FUNDS FOR ANY NON-BUSINESS PURPOSES. II) ALL THE CONDITIONS OF SECTION 36(1)(III) AND SE CTION 37(1) OF THE INCOME TAX ACT 1961 FOR ALLOWABILITY OF TOTAL INTEREST ON SUBJECT LOANS WERE SATISFIED. III) THERE IS NO DISPUTE ABOUT THE FACT THAT ALL TH E SUBJECT LOAN CREDITORS IN RESPECT OF WHOSE LOAN THE INTEREST OVER 15% P.A. WAS DISALLOWE D HAVE CONFIRMED THE PAYMENT OF INTEREST TO THEM AT THE RATES CLAIMED BY THE ASSESSEE WHICH IS AVAILABLE AT PAGES 8 TO 21 OF THE PAPER BOOK. IV) THERE IS NO DISPUTE ABOUT THE FACT THAT ALL THE SUBJECT LOANS IN RESPECT OF WHICH INTEREST OVER AND ABOVE 15% P.A. WAS DISALLOWED WE RE OLD LOANS BROUGHT FORWARD FROM EARLIER YEARS AND NO DISALLOWANCE OF INTEREST HAD EVER BEEN MADE IN PAST ON ANY GROUND WHATSOEVER. V) THERE IS NO DISPUTE ABOUT THE FACT THAT OUT OF L OANS SELECTED BY AO FOR SUBJECT DISALLOWANCE OF INTEREST NONE OF THE LOAN CREDITOR S EXCEPT KALPANA MEHRA NITU MEHRA SHAIL MEHRA AND SHALINI MEHRA WERE RELATIVES OF OR OTHERWISE CONNECTED WITH THE PARTNERS. VI) THAT THERE IS NO UNIFORM MARKET RATE OF INTERES T AT WHICH EVERY ONE COULD BORROW EVERY TIME AND RATE OF INTEREST ON UNSECURED LOANS FROM PARTIES VARIES FROM MAN TO MAN TIME TO TIME AND VARIOUS OTHER FACTORS SUCH AS LIQUIDITY POSITION IN MARKET ECONOMIC SITUATION AND BUSINESS EXIGENCIES OF THE BORROWER AT THE MATERIAL TIME. IT MAY BE OBSERVED THAT OUT OF TOTA L 37 LOAN CREDITORS FOR THE YEAR UNDER THIS APPEAL 2 LOANS WERE BEARING INTEREST @ 24% P.A. 3 LOANS WERE BEARING INTEREST @ 21% 11 LOANS WERE BEARING INTEREST @ 18 % P.A. 12 LOANS WERE BEARING INTEREST @ 15% P.A. AND BALANCE 9 LOANS WER E BEARING @ 12 P.A. IN OTHER WORDS NO UNIFORM RATE OF INTEREST WAS THERE FOR AL L LOAN CREDITORS. VII) THE AO HAD NOT DISCLOSED ANY BASIS GROUND OR REASON FOR TAKING 15% P.A. AS BENCHMARK MARKET RATE OF INTEREST ON UNSECURED LOAN S. EVEN THE BANK LOANS WHICH ARE OBTAINED AFTER OFFERING FULL SECURITY ARE BEARING INTEREST OF ABOUT 13.75% P.A. WHICH ARE COMPOUNDED MONTHLY COUPLED WI TH MANY LABOURSOME PAPER FORMALITIES AND EMBARRASSMENT OF BEING UNCOM FORTABLE WITH PUBLIC DISPLAY OF THE FACT OF BEING DEBTOR OF THE BANK AND HYPOTHE CATION OF STOCK AND OTHER ASSETS WHEREAS SUBJECT LOANS ON WHICH INTEREST OVER 15% P.A. WERE CHARGED WERE COMPLETELY UNSECURED ON WHICH NO SECURITY WHATSOEV ER WAS OFFERED AND THE INTEREST WAS GENERALLY CHARGED ANNUALLY. HENCE TH ERE WAS NO JUSTIFICATION FOR TAKING THE RATE OF 15% P.A. AS REASONABLE MARKET RA TE. HE ALSO RELIED ON THE FOLLOWING CASE LAWS : I) CIT VS. DALMIA CEMENT (B) LTD. (2002) 254 ITR 377 II) S. A. BUILDERS LTD. VS- CIT (2007) 288 ITR 1 (SC) III) BANSIDHAR ONKARMAL VS. CIT (1965) 58 ITR 462 (ORR) IV) IV) EAST INDIA INDUSTRIES (MADRAS) LTD. VS. CIT (19 57) 31 ITR 803 (MAD) 3 V) BIRLA GWALIOR P. LTD. VS. CIT (1962) 44 ITR 867 VI) ITO VS. NEELAM CINE ENTERPRISES (1997) 58 TTJ 403 ( AHD.) HE LASTLY URGED BEFORE THE BENCH TO DELETE THE ADDI TION SO CONFIRMED BY THE LD. CIT(A). 4. ON THE OTHER HAND THE LD. DR HEAVILY RELIED ON THE ORDER OF THE LD. CIT(A) AND PRAYED BEFORE THE BENCH TO CONFIRM THE SAME. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED THE MATERIAL AVAILABLE ON RECORD AND THE CASE LAWS CITED BY THE LD. COUNSEL FOR THE ASSESSEE. WE FIND THAT THE RATE OF INTEREST CLAIMED TO HAVE PAID BY THE ASSESSEE VARIE S FROM 12% TO 24%. THE AO MADE THE DISALLOWANCE BY OBSERVING THAT DURING THE FINA NCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2005-06 THE REASONABLE RATE OF INTEREST ON LOAN WA S 12% TO 15%. HENCE THE CLAIM OF THE ASSESSEE WAS MUCH HIGHER THAN THE MARKET RATE O F INTEREST. CONSIDERING THE MARKET RATE @ 15% THE EXCESS INTEREST CLAIMED OF RS.57 57 6/- OVER AND ABOVE THE SAID RATE WAS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF TH E ASSESSEE. ON THE SAME ANALOGY THE LD. CIT(A) FOUND NO JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE AO AND HE CONFIRMED THE ACTION OF THE AO. WE ALSO FIND THAT IT WAS NOT DISPUTED BY THE REVENUE AUTHORITIES THAT UNSECURED LOANS ARE BASICALLY THOS E LOANS WHICH ARE VERY RISKY AND THE INTEREST RATES OF THESE LOANS ARE VERY MUCH HIGH TH AN OF THE NORMAL SECURED LOAN. THIS TYPE OF LOAN IS IN REAL NOT SECURED BY ANY VALUABLE PROPERTY. HERE IN THIS TYPE OF LOAN THE LENDER ONLY GIVE THE AMOUNT OF MONEY TO THE BORROWE R ON THE BASIS OF THE PROMISE WHICH THE BORROWER HAS MADE. FOR GETTING THE SPECIFIC AMO UNT OF LOAN THE BORROWER SHOULD ALWAYS CONTAIN A GOOD CREDIT HISTORY BECAUSE THE G OOD CREDIT HISTORY IS VERY VALUABLE FOR THE BORROWER. IF WE ANALYZE THEN WE CAN ANALYZE THA T THE LENDER IS IN A TOUGH SITUATION BECAUSE IN THIS TYPE OF LOAN THE LENDER IS HAVING G REATER NUMBER OF RISKS. THE FINANCIAL RISK AND LOSS IS VERY DIFFICULT FOR ANYONE TO MANAG E BUT THE PERSON HAS TO TAKE THE RISK TOO FOR THE SAKE OF GETTING MONEY. HERE IN THIS CAS E THE GENUINENESS OF THE LOAN AND THAT OF THE PAYMENTS MADE BY THE ASSESSEE WERE NEVER IN ISSUE. ONCE THE TRUE NATURE OF THE TRANSACTION IS REALIZED THERE IS NO SCOPE TO REDU CE THE QUANTUM PAID AS INTEREST TO ANYTHING CONSIDERED REASONABLE BY THE TAXING AUTHOR ITIES ON SUBJECTIVE OR OBJECTIVE STANDARDS. WE ALSO FIND THAT HAVING ONCE ACCEPTED THAT THE LOAN RAISED WAS GENUINE AND FOR BUSINESS PURPOSES AND INTEREST WAS PAID AND PRO VISIONS OF S.40A(2)(B) ARE NOT APPLICABLE THE AO WAS NOT JUSTIFIED IN CONSIDERING THE REASONABLENESS OF THE RATE AT WHICH THE INTEREST PAID. MOREOVER THE MARKET RATE OF INTEREST IS ALWAYS HIGHER THAN THE 4 BANK RATE. WE ALSO FIND THAT THE HONBLE SUPREME C OURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT (2007) 288 ITR 1 (SC) HAS HELD AS UNDE R : ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEE N THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINE SS OF THE ASSESSEE ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM- CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFI TS. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT CITED SUPRA WE ARE OF THE CONSIDERED OPINION THAT THE RATE OF INTEREST ON LOAN AS SHOWN BY THE ASSESSEE SHOULD BE ACCEPTED.. WE ORDER ACCORDINGLY. 6. GROUND NOS. 2 AND 3 RELATE TO SUSTAINING THE DIS ALLOWANCE OF RS.32 339/- AND RS.22 675/- ON ACCOUNT OF MOTOR CAR EXPENSES AND DE PRECIATION ON MOTOR CAR RESPECTIVELY. FACTS OF THE CASE ARE THAT THE ASSES SEE INCURRED CAR EXPENSES OF RS.3 23 393/-. THE AO DISALLOWED ONE-TENTH OF THE SAID EXPENSES WITH ONE-TENTH OF THE DEPRECIATION ON MOTOR CAR AMOUNTING TO RS.32 339/- AND RS.22 675/- RESPECTIVELY ON THE GROUND THAT PERSONAL USE OF CAR CANNOT BE RULED OUT IN ABSENCE OF LOG BOOK. IN APPEAL THE LD. CIT(A) CONFIRMED THE ACTIONS OF THE AO. AGG RIEVED BY THE SAID ORDER NOW THE ASSESSEE IS IN APPEAL BEFORE US. 7. AT THE TIME OF HEARING BEFORE US THE LD. COUNSE L FOR THE ASSESSEE SUBMITTED THAT THE CAR EXPENSES CLAIMED THIS YEAR WERE NOT ON HIGH ER SIDE IN COMPARISON TO EARLIER YEARS FOR WHICH A CHART DEPICTING TURNOVER FROM AY 2001-0 2 TO 2005-06 HAS BEEN GIVEN BY HIM WHICH IS PLACED IN THE FILE. HE ALSO SUBMITTED THAT IN ABSENCE OF MAINTENANCE OF LOG BOOK CIRCUMSTANTIAL EVIDENCE MAY BE LOOKED INTO. T HE SAID CHART CLEARLY SHOWS THAT CAR RUNNING EXPENSES CANNOT BE TERMED AS EXCESSIVE CON SIDERING THE GROWTH OF BUSINESS AND CONSIDERING THAT IN PAST EVEN U/S. 143(3) NO DISALL OWANCE OF CAR EXPENSES HAS BEEN SUSTAINED WHEN THE CAR EXPENSES WERE COMPARATIVELY HIGH. WITHOUT PREJUDICE TO THE ABOVE HE ALSO SUBMITTED THAT WITH THE INCREASE IN TURNOVER THE CAR RUNNING EXPENSES ARE LIKELY TO INCREASE IN ABSOLUTE TERMS BUT IT IS NOT NECESSARY THAT AS BECAUSE OF INCREASE IN CAR EXPENSES DUE TO GROWTH IN BUSINESS THE PERSON USE WILL ALSO INCREASE PROPORTIONATELY. HENCE AD HOC DISALLOWANCE OF 1/1 0 TH OF CAR EXPENSES WITH 1/10 TH OF CAR DEPRECIATION IS HIGHLY EXCESSIVE ALSO. 8. ON THE OTHER HAND THE LD. DR RELIED ON THE ORDE RS OF THE LOWER AUTHORITIES. 5 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE DISALLOWANCES MADE BY THE AO AND SUSTAINED THE SAME BY THE LD. CIT(A) ARE QUITE REASONABLE CONSIDERING THE TUR NOVER OF THE ASSESSEES BUSINESS. THEREFORE WE DO NOT FIND ANY JUSTIFICATION TO INTE RFERE WITH THE ORDERS OF THE LOWER AUTHORITIES AND THE SAME IS UPHELD. THESE GROUNDS OF THE APPEAL OF THE ASSESSEE ARE DISMISSED. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 11. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30 .4.10 SD/- SD/- (C. D. RAO) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30TH APRIL 2010 COPY TO : 1. M/S. MEHRA ELECTRIC CO. P-39/40 EXRA STREET KOLKA TA-1. 2. ITO WARD-35(4) KOLKATA. 3. CIT(A) KOLKATA 4. CIT 5. D.R. ITAT KOLKATA. TRUE COPY BY ORDER DEPUTY REGISTRAR JD.(SR.P.S.) I.T.AT. KOLKATA