ACIT, BIKANER v. M/s. Jhanwar Sales Corporation, BIKANER

ITA 528/JODH/2008 | 2005-2006
Pronouncement Date: 29-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 52823314 RSA 2008
Assessee PAN AAAFJ9379F
Bench Jodhpur
Appeal Number ITA 528/JODH/2008
Duration Of Justice 2 year(s) 11 month(s)
Appellant ACIT, BIKANER
Respondent M/s. Jhanwar Sales Corporation, BIKANER
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 29-07-2011
Date Of Final Hearing 25-07-2011
Next Hearing Date 25-07-2011
Assessment Year 2005-2006
Appeal Filed On 29-08-2008
Judgment Text
ITA NOS.527 & 528/JU/2008 1 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL JODHPUR BENCH : JODHPUR JODHPUR BENCH : JODHPUR JODHPUR BENCH : JODHPUR JODHPUR BENCH : JODHPUR BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER AND AND AND AND SHRI K.D. RANJAN ACCOUNTANT MEMBER SHRI K.D. RANJAN ACCOUNTANT MEMBER SHRI K.D. RANJAN ACCOUNTANT MEMBER SHRI K.D. RANJAN ACCOUNTANT MEMBER ITA NOS.527 & 528/JU/2008 ASSESSMENT YEARS : 2004-05 & 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE-1 BIKANER. VS. M/S JHANWAR SALES CORPORATION RANI BAZAR BIKANER. PAN : AAAFJ9379F ASSESSEE BY : SHRI U.C. JAIN & SHRI GOUTAM CHAND BAID REVENUE BY : SHRIM.N. MAURYA SR.DR O R D E R O R D E R O R D E R O R D E R PER K.D. RANJAN AM: PER K.D. RANJAN AM: PER K.D. RANJAN AM: PER K.D. RANJAN AM: THESE APPEALS BY THE REVENUE FOR ASSESSMENT YEAR 2004-05 AND 2005-06 ARISE OUT OF SEPARATE ORDERS OF CIT (APPEALS) BIKANER. THESE APPEALS WERE HEARD TOGETHER AND FOR THE SAKE OF CONVE NIENCE ARE DISPOSED OF BY THIS CONSOLIDATED ORDER. 2. THE FIRST ISSUE FOR CONSIDERATION WHICH IS COMMON IN BOTH THE APPEALS RELATES TO UPHOLDING THE ADDITION OF ` 45 127 /- FOR ASSESSMENT YEAR 2004-05 AND ` 45 890/- IN ASSESSMENT YEAR 2005-06 ON ACCOUNT OF DISALLOWANCE MADE BY THE AO IN RESPECT OF TRAVELLING TELEPHONE INSURANCE AND DEPRECIATION OF CAR. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE IS A PARTNERSHIP CONCERN AND DEALS I N BUILDING MATERIAL CONTRACTORSHIP AND BUILDERS. THE AO IN ASSESSM ENT YEAR 2004-05 DISALLOWED 20% OF TELEPHONE EXPENSES IN RESPECT OF THE BUSINESS CONCERNS RELATING TO TRADING OF CEMENT ETC. T HE TELEPHONE ITA NOS.527 & 528/JU/2008 2 EXPENSE INCURRED IN RESPECT OF THESE BUSINESS CONCERNS WAS AT ` 2 25 636/-. THE AO DISALLOWED ` 45 127/- BEING 20% OF THE EXPENDITURE FOR PERSONAL USE OF THE PARTNERS. FOR ASSESSMENT YEAR 200 5-06 THE AO NOTED THAT THE ASSESSEE INCURRED EXPENSES UNDER THE HEAD TRAVELLING TELEPHONE INSURANCE AND DEPRECIATION OF CAR T OTALING TO `3 04 446/-. THE AO DISALLOWED 20% OF THIS AMOUNT WHICH WORKED OUT TO ` 60 890/-. THE AO OUT OF THIS AMOUNT DEDUCTED THE AMOUNT OF ` 3 5 000/- WHICH WAS DEBITED BY THE ASSESSEE TO PARTNERS CAPITAL ACCOUNT. THE REMAINING AMOUNT OF ` 25 890/- WAS ADDED. ON APPEAL IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE HAD ALREADY DISAL LOWED ` 35 000/- IN BOTH THE YEARS ON ITS OWN AND THEREFORE FURTHER DISALLOWANCE BY THE AO WAS NOT JUSTIFIED. LD. CIT (A) AFTER GOING THROUGH THE FACTS AND THE CONTENTIONS RAISED BY THE ASSE SSEE OBSERVED THAT THE DISALLOWANCE OF ` 35 000/- MADE BY THE ASSESSEE ON ACCOUNT OF ELEMENT OF PERSONAL USE IN RELATION TO VARIOUS EXPENSES WAS REASONABLE AND NO FURTHER DISALLOWANCE WAS CALLED FOR PARTICULA RLY IN THE LIGHT OF THE FACT THAT PROFIT IN RELATION TO MAJOR BUSINESS ACT IVITIES OF THE ASSESSEE HAD BEEN ESTIMATED BY APPLYING THE NET PROFIT R ATE. LD. CIT (A) THEREFORE DELETED THE ADDITION OF ` 45 127/- IN ASSESSMENT YEAR 2004-05 AND ` 25 890/- IN ASSESSMENT YEAR 2005-06. 3. BEFORE US LD. SR. DR SUBMITTED THAT THE DISALLOWAN CE OF 20% OF EXPENSES FOR PERSONAL USE IS JUSTIFIED. ON THE OTHER HAN D LD. AR OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD ALREADY DISALLOWED A BOUT 10% OF THE EXPENSES FOR PERSONAL USE AND THEREFORE NO FURTHER DISALLOWANCE IS JUSTIFIED. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH T HE MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE ABOUT THE F ACT THAT THE ASSESSEE HAS DISALLOWED ` 35 000/- IN EACH YEAR ON ACCOUN T OF PERSONAL USE. THE AO IN ASSESSMENT YEAR 2004-05 HAS DISALLOWED 20% OF ` ITA NOS.527 & 528/JU/2008 3 2 56 636/- WHEREAS HE HAS ALLOWED 100% EXPENDITURE IN RESPECT OF OTHER BUSINESS. THE DISALLOWANCE THUS WORKED OUT TO MOR E THAN 10% IN ASSESSMENT YEAR 2004-05. LIKEWISE IN ASSESSMENT YEAR 2005- 06 THE EXPENDITURE INCURRED BY THE ASSESSEE IN RESPECT OF TRAVE LLING TELEPHONE INSURANCE AND DEPRECIATION OF CAR IS AT ` 3 04 446/-. THE ASSESSEE HAS DISALLOWED ` 35 000/- SUO MOTO . THEREFORE IN OUR CONSIDERED OPINION NO FURTHER DISALLOWANCE IS JUSTIFIE D. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD. CIT (A) DELETING THE ADDITION IN BOTH THE YEARS. 5. THE NEXT ISSUE FOR CONSIDERATION WHICH IS COMMON IN BOTH THE YEARS RELATES TO DELETING THE ADDITION OF ` 1 11 657/ - IN ASSESSMENT YEAR 2004-05 AND ` 80 111/- IN ASSESSMENT YEAR 2005-06. THE AO WHILE COMPLETING ASSESSMENT NOTED THAT THE ASSESSEE FIRM WAS CARRY ING ON TRADING BUSINESS IN CEMENT AND ON EXAMINATION OF TRADI NG ACCOUNT OF TAX PAID WHITE CEMENT PARTICULARLY THE VALUE OF CL OSING STOCK AS DECLARED WITH REFERENCE TO PURCHASES MADE DURING THE YEAR BY APPLYING THE FIFO METHOD. THE AO NOTED THAT THE VALUATION O F CLOSING STOCK OF TAX PAID WHITE CEMENT WAS MADE AT A LOWER PRICE AT A TOTAL AMOUNT OF ` 1 11 657/- IN ASSESSMENT YEAR 2004-05 AND ` 80 111/- IN ASSESSMENT YEAR 2005-06. THE AO REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE VALUATION OF CLOSING STOCK ON FIFO METHOD SHOULD N OT BE ADOPTED. IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE WAS FOLLOWING AVERAGE COST METHOD FOR VALUING THE CLOSING STOCK CONSISTENTLY. THEREFORE NO ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK ON FIFO METHOD CAN BE MADE. ON APPEAL LD. AR OF THE ASSESSEE STRONGLY OBJECT ED TO METHOD OF VALUATION ADOPTED BY THE AO. HE PLACED RELIANCE ON SEVERAL DECISIONS IN SUPPORT OF HIS CONTENTION. LD. CIT (A) AF TER CONSIDERING THE SUBMISSIONS AND FACTS OF THE CASE OBSERVED THAT THE AVERA GE COST METHOD WITH FIFO BASIS WHICH HAD BEEN ADOPTED BY THE ASSESSEE FOR VALUATION OF CLOSING STOCK WAS WIDELY ACCEPTED AND REC OGNIZED ONE. ITA NOS.527 & 528/JU/2008 4 THE METHOD ADOPTED BY THE ASSESSEE WAS SCIENTIFIC AND FLA WLESS. THE AO COULD NOT SUBSTITUTE HIS METHOD OF VALUATION WITH A DOPTED BY THE ASSESSEE. THE CONTENTION OF THE ASSESSEE WAS FORTIFIED BY T HE DECISION PRONOUNCED IN THE CASE REPORTED AT 28 TW 154 IN WHIC H IT WAS HELD THAT VALUATION OF STOCK CANNOT BE SUBSTITUTED FROM COST AVER AGE METHOD TO FIFO METHOD. LD. CIT (A) ACCORDINGLY DELETED THE A DDITION MADE BY THE AO IN BOTH THE YEARS. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH T HE MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE ABOUT THE F ACT THAT THE ASSESSEE HAD BEEN CONSISTENTLY FOLLOWING AVERAGE COST METH OD FOR VALUATION OF CLOSING STOCK. THE AO HAD SUBSTITUTED FIF O METHOD FOR VALUATION OF CLOSING STOCK. THE ADDITION CANNOT BE M ADE BY SUBSTITUTION OF FIFO METHOD AS IT WILL RESULT IN DISTORTED PROFITS O N THE GROUND THAT OPENING STOCK HAS BEEN ACCEPTED BY THE AO WHICH HAS BE EN VALUED AT AVERAGE COST METHOD. SINCE THE ASSESSEE IS VALUING THE C LOSING STOCK CONSISTENTLY ON AVERAGE COST METHOD LD. AO IS NOT JUSTI FIED IN VALUING THE CLOSING STOCK ON FIFO METHOD. ACCORDINGLY IN OU R CONSIDERED OPINION LD. CIT (A) IS JUSTIFIED IN DELETING THE ADD ITION MADE BY THE AO BY SUBSTITUTING THE FIFO METHOD IN PLACE OF AVERAGE C OST METHOD ADOPTED BY THE ASSESSEE. 7. THE NEXT ISSUE FOR CONSIDERATION WHICH IS COMMON IN BOTH THE YEARS RELATES TO DELETING THE ADDITION OF ` 2 29 243/ - OUT OF ` 3 83 547/- IN ASSESSMENT YEAR 2004-05 AND ` 10 31 218/- OUT OF ADD ITION OF ` 11 32 155/- IN ASSESSMENT YEAR 2005-06 ON ACCOUNT OF VA RIOUS EXPENSES DEBITED IN PROFIT & LOSS ACCOUNT IN DIFFERENT DIVISIONS OF ITS BUSINESS. THE FACTS OF THE CASE STATED BRIEF ARE THAT TH E AO FROM TAX AUDIT REPORT NOTED THAT THE ASSESSEE WAS FOLLOWING MERCA NTILE SYSTEM OF ACCOUNTING AND THERE WAS NO CHANGE IN THE METHOD OF ACCOUNTING EMPLOYED DURING THE YEAR UNDER CONSIDERATION. HOWEV ER THE AO NOTED ITA NOS.527 & 528/JU/2008 5 THAT METHOD OF ACCOUNTING FOLLOWED DURING THE YEAR UNDER CONSIDERATION WAS NOT EXACTLY THE MERCANTILE SYSTEM OF ACCOUNTING CL AIMED TO BE REGULARLY EMPLOYED BY THE ASSESSEE IN AS MUCH AS THE RECE IPT OF PAYMENTS IN LIEU OF CONTRACT WORK UNDERTAKEN HAD PAR TIALLY BEEN ACCOUNTED FOR ON MERCANTILE BASIS AND PARTLY ON CASH B ASIS. MOREOVER IT WAS ALSO NOTICED THAT THE ASSESSEE WAS NEITHER MAINTAIN ING ANY STOCK REGISTER OF GOODS/MATERIAL PURCHASED OR CONSUMED NOR WA S MAINTAINING ANY MUSTER ROLL SHOWING THE DEPLOYMENT OF LABOUR ON A PARTICULAR DATE IN A PARTICULAR MONTH WITH THE RESULT THE GENUINENESS OF EXPENSES DEBITED TOWARDS COMPLETION OF WORK CONTRACT AND WORK IN PROGRESS AS DECLARED IN OPENING AND CLOSING STOCK ALSO REMAINED UN VERIFIABLE. THE AO THEREFORE CAME TO THE CONCLUSION THAT ASSESSMENT HA S TO BE MADE IN THE MANNER PROVIDED U/S 144. THE AO ADDED THE DI FFERENCE OF INCOME DECLARED BY THE ASSESSEE AND ESTIMATED @ 8%. THE AO FURTHER ADDED THE DEPRECIATION ON PLANT AND MACHINERY COMP UTER AND VEHICLES AND DETERMINED THE TOTAL ADDITION FROM CONTRACT WOR K OF ` 3 83 547/- IN ASSESSMENT YEAR 2004-05. AS REGARDS ASSESSMENT YEAR 2005-06 THE CONTRACT RECEIPTS WERE AT ` 5 24 12 930/-. THE AO W ORKED OUT THE GROSS PROFIT OF DIFFERENT DIVISIONS OF THE WORK AND ALLOCAT ED ADMINISTRATIVE AND SALARY EXPENSES. THE AO ADDED AFTER MAKING DETAILED E XERCISE AN AMOUNT OF ` 11 32 155/- IN ASSESSMENT YEAR 2005-06. ON APPEAL IN ASSESSMENT YEAR 2004-05 IT WAS SUBMITTED THAT THE ASSESSEE W ORKED PREDOMINANTLY AS SUB CONTRACTOR RATHER THAN A CONTRAC TOR. THE AO HAD APPLIED NET PROFIT RATE OF 8% SUBJECT TO INTEREST AND REMUNERATION TO PARTNERS. THE RATE OF PROFIT APPLIED WAS REPORTED TO BE ASTRONOMICAL. THE AO WHILE APPLYING THE RATE OF 8% HAD DRAWN INSPI RATION FROM PROVISIONS OF SECTION 44AD WHEREAS THE PROVISIONS OF SEC TION 44AD WERE NOT APPLICABLE IN CASE OF SUB-CONTRACTORS. LD. C IT (A) CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE. HE OBSERVED THAT APPL ICATION OF NET PROFIT @ 8% SUBJECT TO DEPRECIATION INTEREST AND REMUNERATION TO ITA NOS.527 & 528/JU/2008 6 PARTNERS WOULD BE REASONABLE AND JUSTIFIABLE. LD. CIT (A) THEREFORE APPLIED THE NET PROFIT RATE OF 8% ON CONTRACT BASIS O F ` 4 32 52 286/- SUBJECT TO DEPRECIATION INTEREST AND REMUNERATION. IN ASSESSMENT YEAR 2005-06 ALSO HE APPLIED 8% ON CONTRACT RECEIPT OF ` 5 87 930/- SUBJECT TO DEPRECIATION INTEREST AND REMUNERATION TO THE PA RTNERS. IN ASSESSMENT YEAR 2004-05 THE ADDITION OF ` 1 54 304/- A ND IN ASSESSMENT YEAR 2005-06 AT ` 92 875/- WAS UPHELD. THE B ALANCE ADDITION WAS DELETED IN BOTH THE YEARS. 8. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH T HE MATERIAL AVAILABLE ON RECORD. DURING THE COURSE OF HEARING L D. SR. DR COULD NOT BRING ANY MATERIAL ON RECORD TO REBUT THE DECISION O F LD. CIT (A). HE HAS APPLIED THE NET PROFIT RATE OF 8% SUBJECT TO DEPRECI ATION INTEREST AND REMUNERATION TO THE PARTNERS. SINCE NO MATERIAL WAS BROUGHT ON RECORD TO PROVE THAT HIGHER PROFIT WAS EARNED BY THE ASSESSEE WE DO NOT FIND ANY REASON FOR TINKERING WITH THE DECISION OF LD. CIT (A). ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT ( A) DELETING THE PART OF THE ADDITIONS IN BOTH THE YEARS. 9. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DELETING THE ADDITION OF ` 88 020/- MADE BY THE AO ON ACCOUNT OF SALARY AND I NTEREST BY HOLDING THAT OPENING CAPITAL ON WHICH INTEREST PAYMENT HAS BE EN MADE WOULD NOT DWINDLE AND WOULD RATHER INCREASE CONSTANTLY BY V IRTUE OF PROFIT EARNING. IN ASSESSMENT YEAR 2005-06 THE AMOUNT DELETED IS AT ` 75 047/-. IN ASSESSMENT YEAR 2004-05 THE AMOUNT DEBITE D IN THE PROFIT & LOSS ACCOUNT IN RESPECT OF SALARY PAID TO PARTNER IS ` 50 000/-. THE INTEREST PAID ON CAPITAL IS AT ` 6 56 761/-. IN ASSESSME NT YEAR 2005-06 THE SALARY PAID TO THE PARTNERS IS AT ` 50 000/- AND I NTEREST IS AT ` 7 40 501/-. ACCORDING TO THE AO THE SALARY AND INT EREST PAID TO PARTNERS WAS NOT EXACTLY WITH THE TERMS OF PARTNERSHIP DEED. IN RESPONSE TO A QUERY RAISED BY THE AO IT WAS SUBMITTED T HAT ITA NOS.527 & 528/JU/2008 7 REMUNERATION TO PARTNERS COULD BE FIXED OR VARIABLE AS PERCENTAGE TO BACK PROFITS OF THE FIRM. THERE IS NO RESTRICTIVE CLA USE FOR DETERMINING THE MODE OF COMPUTATION OF REMUNERATION. AS REGARDS INTEREST ON REDUCING BALANCE IT WAS SUBMITTED THAT U/S 40(B) INTE REST PAID TO PARTNERS CALCULATED IN EXCESS OF 12% SIMPLE INTEREST PER ANNUM SHALL NOT BE DEDUCTIBLE. SECTION 40(B) OF THE ACT DOES NO T LAY DOWN THE MANNER AND METHOD OF COMPUTING INTEREST. THE ASSESSEE W OULD THEREFORE HAVE THE RIGHT TO COMPUTE INTEREST IN SUCH A MANNER AS HE DEEMS FIT PROVIDED THE METHOD IS REASONABLE AND FAIR. THE MOST ACCURATE METHOD OF CALCULATION OF INTEREST WOULD BE DAY-TO-DAY PRODUCT BASIS. HOWEVER THE ASSESSEE CAN ADOPT THE METHOD OF CAL CULATING INTEREST ON OPENING BALANCE FOR THE SAKE OF SIMPLICITY AND IN ORDER TO AVOID CUMBERSOME CALCULATION. THE COMPUTATION OF IN TEREST HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE. HOWEVER THE AO R EJECTED BOTH THE CONTENTIONS OF THE ASSESSEE. HE DISALLOWED REMUNERAT ION OF ` 50 000/- IN BOTH THE YEARS ON THE GROUND THAT REMUNE RATION WAS NOT PAID AS PER PROVISIONS OF PARTNERSHIP DEED. AS REGARD S INTEREST THE PARTNERS HAVE BEEN PAID INTEREST @ 12% ON THE OPENING BALANCE. HE WORKED OUT THE INTEREST AMOUNTING TO ` 38 020/- IN A SSESSMENT YEAR 2004-05 AND ` 25 047/- IN ASSESSMENT YEAR 2005-06 BEING EXCESS OF 12% OF THE INTEREST BY APPLYING THE REDUCING METHOD FOR COMPUTATION OF INTEREST. 10. BEFORE CIT (A) IT WAS SUBMITTED THAT AS PER SECTI ON 40(B) OF INCOME TAX ACT INTEREST AND REMUNERATION SHOULD BE AU THORIZED BY AND IN ACCORDANCE WITH THE TERMS OF PARTNERSHIP DEED. TH EREFORE IF THE INTEREST OR REMUNERATION PAID IS LESS THAN WHAT IS PROVI DED IN PARTNERSHIP DEED IT WILL BE ALLOWED AS DEDUCTION IN THE HANDS OF THE ASSESSEE FIRM AS THE SAME IS LESS THAN OVERALL LIMIT OF INTEREST/REMUNERATION PAYABLE TO PARTNERS AS PER THE P ARTNERSHIP DEED. AS REGARDS THE INTEREST PAID TO PARTNERS ON REDUCING CA PITAL BALANCE IT ITA NOS.527 & 528/JU/2008 8 WAS SUBMITTED THAT SECTION 40(B) MERELY PROVIDE THAT THE INTEREST TO PARTNERS IN EXCESS OF 12% SHALL NOT BE DEDUCTIBLE. NO METHOD OR MANNER HAS BEEN PRESCRIBED FOR COMPUTING THE INTEREST. THEREFORE NO DISALLOWANCE CAN BE MADE OUT OF INTEREST PAID TO THE PARTNERS. LD. CIT (A) AFTER CONSIDERING THE SUBMISSIONS UPHELD THE CONTENT ION OF THE ASSESSEE AND HE DELETED THE ADDITION IN RESPECT OF REMUN ERATION AND INTEREST IN BOTH THE YEARS. 11. BEFORE US IT WAS CLARIFIED BY LD. AR OF THE ASSESSEE THAT SALARY TO PARTNERS HAVE BEEN PAID AT LOWER AMOUNT THAN PRESCRIB ED IN PARTNERSHIP DEED. THE INTEREST HAS BEEN PAID ON OPENI NG BALANCE. ON THE OTHER HAND LD. SR. DR SUPPORTED THE ORDER OF AO . 12. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. U/S 40(B) IN CASE OF ANY FIRM ASSESSABLE AS SUCH ANY PAYMENT OF SALARY BONUS COMMISSION OR REMUNERATIO N IS ALLOWABLE TO WORKING PARTNERS AS PER THE TERMS OF PARTNERSHIP DEE D. IN THE CASE OF THE ASSESSEE THE PAYMENT OF REMUNERATION HAS BEEN MA DE AT A LOWER FIGURE THAN ALLOWABLE AS PER THE PARTNERSHIP DE ED. THEREFORE THE DISALLOWANCE CAN BE MADE OUT OF REMUNERATION PAID TO PARTNERS. THE INTEREST HAS BEEN ALLOWED @ 12% SIMPLE INTEREST PER ANN UM ON THE OPENING BALANCE OF CAPITAL OUTSTANDING IN PARTNERS A CCOUNT. THE AO HAS COMPUTED INTEREST ON REDUCING BALANCE AFTER TAKIN G INTO ACCOUNT THE WITHDRAWALS MADE BY THE ASSESSEE. THE ALLOWANCE OF INTEREST ON OPENING CAPITAL ACCOUNT ALWAYS MAY NOT BE CORRECT PA RTICULARLY IN A CASE WHERE THERE IS OPENING CREDIT BALANCE IN THE CAP ITAL ACCOUNT OF A PARTICULAR PARTNER AND SUBSEQUENTLY THERE IS A DEBIT B ALANCE IN MOST OF THE PERIOD. IN SUCH A SITUATION ALLOWANCE OF INTERE ST ON OPENING CAPITAL BALANCE MAY NOT BE JUSTIFIED. INTEREST ON CAPITAL IS T O BE ALLOWED IF THE SAME HAS BEEN EMPLOYED FOR THE PURPOSES OF BUSINESS. THE AO HAS CALCULATED INTEREST ON REDUCED CAPITAL BALANCE WHICH IN OUR CONSIDERED ITA NOS.527 & 528/JU/2008 9 OPINION IS JUSTIFIED. WE THEREFORE SET ASIDE THE ORD ER OF CIT (A) ON THE ISSUE OF INTEREST AND RESTORE THE ORDER OF THE ASSESSING O FFICER. 13. THE LAST ISSUE FOR CONSIDERATION IN ASSESSMENT YEAR 200 4-05 RELATES TO DELETING THE ADDITION OF ` 1 01 110/- MAD E BY THE AO ON ACCOUNT OF EXCESS INTEREST PAID TO THE RELATIVES OF THE ASSESSEE. THE AO ON EXAMINATION OF PROFIT & LOSS ACCOUNT NOTICED THAT THE ASSESSEE HAD OBTAINED UNSECURED LOANS FROM ITS NEAR RELATIVES SPECIF IED PERSONS U/S 40A(2)(B) OF THE ACT AND PAID INTEREST AT HIGHER RAT E OF BETWEEN 15-18% AGAINST THE NORMAL RATE OF 12%. THE ASSESSEE PAID INTER EST TO 8 PERSONS AT 18% AND TO OTHER THREE PERSONS @ 15%. IN RE SPONSE TO A QUERY RAISED IT WAS SUBMITTED THAT IN EARLIER YEARS NO DISALLOWANCE WAS MADE BY THE AO. THE ASSESSEE HAD PAID INTEREST AT THE SA ME LEVEL. THIS CONTENTION OF THE ASSESSEE WAS NOT ACCEPTED BY THE A O ON THE GROUND THAT THE ASSESSEE HAD NOT DENIED THAT THE MARKET RATE OF INTEREST WAS LOW AND INTEREST WAS AVAILABLE AT LOWER RA TE COMPARED TO EARLIER YEARS. THEREFORE THERE WAS NO JUSTIFICATION FOR PAYMENT OF INTEREST TO PARTNERS WHO ARE REPORTEDLY CLOSE RELATIVE S OF THE ASSESSEE FIRM. THE AO FURTHER NOTED THAT THE ASSESSEE HAD PAID INTEREST TO FINANCIAL INSTITUTIONS AND BANKS @ 13.2%. HE THEREFO RE ALLOWED THE INTEREST @ 13.2% TO ALL THE UNSECURED CREDITORS AND WO RKED OUT THE EXCESS INTEREST PAID AT ` 1 01 110/-. 14. ON APPEAL IT WAS SUBMITTED THAT LOAN WAS RECEIVED FROM CLOSE RELATIVES BY WAY OF UNSECURED LOAN. NO ASSETS WERE PLED GED OR MORTGAGED FOR THE PURPOSE OF TAKING LOANS. THE ASSESSEE HAD BEEN PAYING INTEREST FROM 15-20% AND NO DISALLOWANCE HAS BE EN MADE IN EARLIER YEARS. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION IN THE CASE OF RAMAN LAL MANI BHAI & CO VS. ACIT 25 TW 37 TH AT PAYMENT OF INTEREST TO CLOSELY RELATED PERSONS COULD NOT BE DISALLO WED ON THE GROUND OF EXCESSIVENESS WITHOUT EXPLAINING ITS EXCESSIVE N ATURE. THE ITA NOS.527 & 528/JU/2008 10 SAME VIEW HAS BEEN TAKEN BY HONBLE SUPREME COURT IN THE CASE OF UPPAR INDIA PUB. HOUSE (P) LTD. VS. CIT (1979) 117 IT R 569 (SC). LD. CIT (A) IN VIEW OF THE ABOVE DELETED THE ADDITION. 15. BEFORE US LD. SR.DR SUPPORTED THE ORDER OF THE A O WHILE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE CIT (A). 16. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE AO HAS RECORDED A FINDING OF FACT THAT THE ASSESSEE HAS BEEN PAYING INTEREST OF 13.2% TO FINANCIAL I NSTITUTIONS AND BANKS. THE ASSESSEE HAD PAID INTEREST TO SOME OF THE RELA TIVES AT 15% AND OTHERS AT 18%. NO JUSTIFICATION FOR PAYMENT OF D IFFERENTIAL RATE OF INTEREST TO SOME OF THE RELATIVES HAS BEEN GIVEN. IN O UR CONSIDERED OPINION KEEPING IN VIEW THE FACTS OF THE CASE AND TH AT THE INTEREST PAID IS ON UNSECURED LOANS UNIFORM RATE OF INTEREST @ 15% W ILL BE JUSTIFIED. THE AO IS DIRECTED TO CALCULATE DISALLOWANCE OF INTER EST IN THE CASES WHERE INTEREST HAS BEEN PAID EXCEEDING 15% AND DISALLO W THE SAME. WE ORDER ACCORDINGLY. 17. IN THE RESULT THE APPEALS FILED BY THE REVENUE F OR BOTH THE YEARS ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.07.2011. SD/- SD/- [RAJPAL YADAV] [K.D. RANJAN] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED 29 TH JULY 2011 DK ITA NOS.527 & 528/JU/2008 11 COPY FORWARDED TO:- 1. APPELLANT. 2. RESPONDENT 3. INCOME-TAX OFFICER 4. CIT 5. DR 6. GUARD FILE ASSTT. REGISTRAR ITAT JODHPUR