M/s. Balkishsan Jagannath Goyal (HUF),, Indore v. The Dy. CIT.,, Indore

IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH JUDICIAL MEMBER AND SHRI R.C.SHARMA ACCOUNTANT MEMBER PAN NO. : AAAHG4726M I.T.A.NO. 590/IND/2009 A.Y. : 2006-07 M/S.BALKISHAN JAGANNATH GOYAL (HUF) DY. CIT 1(1) S.NO.71 DHAR ROAD VS INDORE. P.NO.2A-I INDORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANOJ GUPTA C.A. RESPONDENT BY : SHRI PRADEEP KUMAR MITRA SR. DR O R D E R PER R. C. SHARMA A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) DATED 16.9.2009 FOR THE ASSESSMENT YEAR 2 006-07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME -TAX ACT 1961. -: 2: - 2 2. THE ONLY GRIEVANCE OF THE ASSESSEE RELATES TO DISALLOWANCE OF INTEREST BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE INCOME-TAX ACT 1961. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUSED. 4. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF DAL. IN THE COURSE OF SCRUTINY ASS ESSMENT THE AO FOUND THAT THE ASSESSEE WAS PAYING INTEREST @ 18% TO THE PERSONS SPECIFIED U/S 40A(2)(B) OF THE INCOME-T AX ACT 1961. THE AO OBSERVED THAT LOAN FROM BANK WAS AVAIL ABLE @ 13.25 % THEREFORE THE ASSESSEE HAS PAID EXCESS IN TEREST ON THE LOANS TAKEN FROM PERSONS FALLING U/S 40A(2)(B) OF THE INCOME-TAX ACT 1961. ACCORDINGLY HE DISALLOWED DE DUCTION OF INTEREST UP TO 5 % IN CASE OF SUCH PERSONS. BY THE IMPUGNED ORDER THE LD. CIT(A) AFTER GIVING PART RELIEF HELD THAT 15 % INTEREST WAS REASONABLE AND RESTRICTED THE DISALLOW ANCE TO THE EXTENT OF 3% AGAINST WHICH THE ASSESSEE IS IN FURTH ER APPEAL BEFORE US. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND FOUND THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURIN G OF DAL. -: 3: - 3 DURING THE YEAR IT HAS ACHIEVED PRODUCTION AND SAL E TARGET OF RS. 17 CRORES OUT OF HIS OWN CAPITAL OF RS. 12 LAKH S AND BANK LOAN OF RS. 60 LAKHS. IN TERMS OF ITS REQUIREMENT O F WORKING CAPITAL OF RS. 250 LAKHS SINCE THE BANK HAS ONLY S ANCTIONED RS. 60 LAKHS THE ASSESSEE HAS ARRANGED REST OF THE FUNDS BY TAKING UNSECURED LOAN FROM MARKET RELATIVES AND FR IENDS OF RS. 180 LAKHS. HOWEVER THE AO HAS ALLOWED 13 % OF INTEREST ON THE BASIS OF RATE OF INTEREST CHARGED BY THE BAN K AS A LEGITIMATE INTEREST RATE BALANCE WAS DISALLOWED U/ S 40A(2) OF THE INCOME-TAX ACT 1961. THE LD. CIT(A) HAS CONSID ERED 15 % INTEREST RATE AS REASONABLE AND RESTRICTED DISALLOW ANCE TO THE EXTENT OF 3 % INTEREST RATE. WE FOUND THAT EVEN THE EFFECTIVE RATE OF INTEREST OF THE BANK WAS WORKED OUT TO BE 1 8.3 %. THE BASIC RATE OF BANK INTEREST WAS 13.25 % AS INTEREST PAYABLE ON BANK LOAN WAS ON MONTHLY RATES THE EFFECTIVE COST AFTER ANNUALIZING THE SAME COMES TO 14.35 %. PROCESSING FEE/RENEWAL CHARGES INSPECTION AND STOCK AUDIT CHA RGES ON BANK LOANS WORKS OUT TO BE ADDITIONAL COST OF 1.5%. LEGAL DOCUMENTATION AND STAMP DUTY EXPENSES FOR CARRYING ON PROCESS OF DOCUMENTATION AND STAMP DUTY EXPENSES FO R -: 4: - 4 MORTGAGE AND HYPOTHECATION WORKS OUT AT 1 %. FURTHE R FINANCE CONSULTANTS FEE AND ADMINISTRATIVE EXPENSES FOR SA NCTION OF LOAN WORKS OUT TO BE EARNING 1.5 %. THUS THE EFFEC TIVE RATE OF INTEREST FROM BANK IS CALCULATED AT 18.35 %. MERELY BECAUSE BASIC RATE OF BANK INTEREST WAS 13.25% THE HIDDEN/ INDIRECT COST FOR OBTAINING BANK FINANCE AND CARRYING BANK F INANCE CANNOT BE IGNORED. WHILE DISALLOWING ANY CLAIM OF D EDUCTION U/S 40A(2) THE BURDEN IS ON THE REVENUE TO SHOW TH AT WHATEVER ASSESSEE IS PAYING TO THE PERSON SPECIFIED U/S 40A(2) IS MORE THAN THE PREVAILING MARKET RATE. PREVAILING MARKET RATE DOES NOT MEAN THE BASIC RATE OF INTEREST PAYABLE TO BANK BUT THE OTHER INDIRECT AND HIDDEN COST INCURRED FOR OBT AINING LOAN RELATING TO PROCESSING FEE INSPECTION FEE STOCK A UDIT FEE LEGAL DOCUMENTATION CHARGES AND THE STAMP DUTY EXPENSES F OR MORTGAGE AND HYPOTHECATION CANNOT BE LEFT OUT. THUS THE REASONABLE RATE OF INTEREST IS TO BE COMPARED WITH THE TOTAL COST INCURRED FOR OBTAINING BANK FINANCE WHICH WOR KS OUT TO BE 18.35 % WHEREAS THE ASSESSEE IS PAYING INTEREST TO THE PERSONS SPECIFIED U/S 40A(2) TO THE EXTENT OF 18 % ONLY. WE ALSO FOUND THAT THE ASSESSEE HAS ALSO AVAILED LOAN FROM -: 5: - 5 NATIONAL AGRICULTURE COOP. MARKETING FEDERATION WH ICH IS A GOVERNMENT OF INDIA ENTERPRISE @ 18% WHICH HAS BEE N DULY NOTED BY THE LD. CIT(A). ACCORDINGLY THERE IS NO J USTIFICATION OR REASONABLENESS FOR REACHING TO THE CONCLUSION THAT INTEREST PAID BY THE ASSESSEE TO RELATIVES AND FRIENDS @ 18% IS EXCESSIVE OR UNREASONABLE SO AS TO DISALLOW THE SAM E U/S 40A(2) OF THE INCOME-TAX ACT 1961. IT IS WORTH MEN TIONING HERE THAT WHATEVER FUNDS THE ASSESSEE COULD HAVE AR RANGED FROM THE BANK HE HAS ARRANGED AND THE BALANCE FUND S REQUIRED FOR THE BUSINESS HAS TO BE ARRANGED FROM O THER SOURCES. FURTHERMORE BANK LOAN IS NOT AVAILABLE JU ST ON ASKING OR PERSONAL GUARANTEE BUT SO MANY OTHER COL LATERAL SECURITIES ARE ALSO INSISTED BY THE BANK IN ADDITIO N TO HYPOTHECATION OF STOCK WORTH MORE THAN THE AMOUNT O F LOAN SANCTIONED BY THE BANK WHEREAS LOANS FROM FRIENDS AND RELATIVES AVAILABLE JUST ON ASKING DEPENDING UPON P ERSONAL RELATION. FRIENDS ARE APPROACHABLE ROUND THE CLOCK EVEN DURING NON-BANKING HOURS. THUS WE HAVE TO KEEP INT O ACCOUNT ALL THESE FACTS AND CIRCUMSTANCES FOR COMIN G TO THE -: 6: - 6 CONCLUSION THAT INTEREST PAID BY THE ASSESSEE TO FR IENDS AND RELATIVES WERE EXCESSIVE OR UNREASONABLE. 6. IN VIEW OF ABOVE DISCUSSION WE DO NOT FIND ANY ME RIT IN THE ACTION OF LD. CIT(A) FOR RESTRICTING RATE O F INTEREST AT 15 % AS AGAINST 18 % ACTUALLY PAID BY THE ASSESSEE. 7. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWE D. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 8 TH FEBRUARY 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 8 TH FEBRUARY 2011. CPU* 89