The ACIT, Circle 5, Ahmedabad v. Prabhudas Kishordas Tobacco Products Ltd, Ahmedabad

ITA 782/AHD/2006 | 2002-2003
Pronouncement Date: 30-04-2010 | Result: Dismissed

Appeal Details

RSA Number 78220514 RSA 2006
Bench Ahmedabad
Appeal Number ITA 782/AHD/2006
Duration Of Justice 4 year(s) 1 month(s)
Appellant The ACIT, Circle 5, Ahmedabad
Respondent Prabhudas Kishordas Tobacco Products Ltd, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 30-04-2010
Date Of Final Hearing 21-04-2010
Next Hearing Date 21-04-2010
Assessment Year 2002-2003
Appeal Filed On 30-03-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD BBENCH BEFORE SHRI G.D. AGARWAL VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH JUDICIAL MEMBER ITA NO.782/AHD/2006 [ASSTT.YEAR: 2002-03] ASSTT. COMMISSIONER OF INCOME- VS PRABHUDAS KISHORD AS TOBACCO TAX CIRCLE-5 AHMEDABAD PRODUC TS PVT. LTD. AHMEDABAD PAN NO.AABLP1495Q ITA NO.2064/AHD/2006 [ASSTT. YEAR: 2003-04] ASSTT. COMMISSIONER OF INCOME- VS PRABHUDAS KISHORD AS TOBACCO TAX CIRCLE-5 AHMEDABAD PRODUCTS PVT. LD. AHME DABAD PAN NO.AABLP1495Q (APPELLANT) (RESPONDENT) REVENUE BY : SHRI B.S. GAHLOT CIT-DR ASSESSEE BY: SHRI S.N.SOPARKAR & SHR I Y.R. SHAH O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE TWO APPEALS BY REVENUE ARE ARISING OUT OF OR DER OF COMMISSIONER OF INCOME-TAX (APPEALS)-XI AHMEDABAD IN APPEAL NOS.CI T(A)- XI/119 & 233/2005-06 OF DATED 13-01-2006 AND 18-07-2006. THE ASSESSMENTS WERE FRAMED BY THE ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE-5 AHMEDABAD U/S .143(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HI S ORDERS DATED 31-03-2005 AND 23- 03-2006 FOR ASSESSMENT YEARS 2002-03 AND 2003-04 RE SPECTIVELY. 2. THE FIRST ISSUE IN THIS APPEAL OF THE REVENUE IN ITA NO.782/AHD/2006 IS AGAINST THE ORDER OF CIT(A) IN ALLOWING THE DEDUCTI ON U/S.80-IA OF THE ACT ON THE GROUND THAT THE ASSESSEE IS A MANUFACTURER OF BIDI WHICH IS MANUFACTURING ACTIVITY ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 2 AND DEDUCTION U/S.80-IA IS ALLOWABLE. AGGRIEVED R EVENUE IS IN APPEAL BEFORE US ON THIS ISSUE. 3. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE IN ITS OWN CASE BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF CIT V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS P. LTD. (2006) 282 ITR 568 (GUJ) WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT HAS CONSIDERED THE ISSUE THAT TENDU LEAVES AND TOBACCO WHICH ARE USED AS INPUTS DO NO RETAIN THEIR INDEPE NDENT IDENTITY AFTER HE BIDIS ARE ROLLED AFTER UNDERGOING SEVERAL PROCESS. COMMERCIAL LY THE FINAL PRODUCT IS KNOWN IN THE TRADE AS A DISTINCT COMMODITY AND HAS A SEPARAT E MARKET. FURTHERMORE MERELY BECAUSE AN ASSESSEE GETS THE WORK DONE THROUGH CONT RACT WORKERS IN OTHER WORDS ENTERS INTO A CONTRACT WITH THE WORKERS AND PAYS TH EM PER PIECE THE RELIEF COULD NOT BE DENIED. THE TEST IS WHETHER THE OUTSIDE AGENCY W ORKS DIRECTLY UNDER THE SUPERVISION AND CONTROL OF THE ASSESSEE IT BEING I MMATERIAL WHETHER THE PROCESSING IS DONE BY THE WORKERS EMPLOYED BY THE ASSESSEE AT A PLACE OUTSIDE THE PREMISES OF THE ASSESSEE. IN RELATION TO THE ADDITIONAL REASON GIVEN BY THE ASSESSING OFFICER FOR DENYING RELIEF UNDER SECTION 80-I OF THE ACT BOTH THE COMMISSIONER (APPEALS) AND THE TRIBUNAL HAD FOUND THAT FOR THE PURPOSES OF DE TERMINING WHETHER A UNIT IS A SMALL SCALE INDUSTRIAL UNDERTAKING OR NOT WHILE ASCERTAI NING THE MONETARY LIMIT LAID DOWN IN THE PROVISION ALL ASSES OF THE BUSINESS WERE NOT T O BE TAKEN INTO CONSIDERATION. THE TRIBUNAL WAS JUSTIFIED IN TREATING THE ACTIVITIES C ARRIED ON BY THE ASSESSEE AS AMOUNTING TO MANUFACTURER OF BIDIES ENTITLING THE ASSESSEE TO RELIEF UNDER SECTIONS 80HH AND 80-I. THE HONBLE HIGH COURT HAS DECIDED THIS ISSUE IN AS SESSEES OWN ASSESSEE RESPECTFULLY FOLLOWING THE SAME WE DISMISS THIS IS SUE OF THE REVENUES APPEAL AND THE ORDER OF CIT(A) IS UPHELD. 4. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE RE VENUE IN ITA NO.782/AHD/2006 AND ITA NO.2064/AHD/2006 IS AS REGARDS TO THE ORDER OF CIT(A) IN RESTRICTING THE DISALLOWANCE CLAIMED U/S.37 OF T HE ACT TO RS.25 000/- AND RS.65 000/- RESPECTIVELY IN BOTH THE YEARS AND THE FACTS BEING EXACTLY IDENTICAL IN BOTH THE YEARS WE FIND THAT THE TRIBUNAL IN ASSESS EES OWN CASE IN ITA NO.4002/AHD/2003 FOR ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 27-07 -2007 HAS ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 3 ALREADY CONSIDERED THIS ISSUE AND CONFIRMED THE ACT ION OF CIT(A) DELETING THE ADDITION BY GIVING FOLLOWING FINDING IN PARA-15:- 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. WE F IND THAT SIMILAR ISSUE CAME UP BEFORE THE TRIBUNAL IN THE ASSESSMENT YEAR 2000- 01 WHEREIN VIDE ORDER DATED 22.12.2006 IN ITA NO.3120/AHD/2003 THE TRIBU NAL DISMISSED THE APPEAL OF THE REVENUE AND UPHELD THE ORDER OF THE L D. CIT(A) IN ALLOWING 1/3 EXPENSES IN ASSESSEES OWN CASE. ACCORDINGLY WE CO NFIRM THE ORDER OF THE LD. CIT(A) IN ALLOWING 1/3 OF THE EXPENSES OUT OF RS.1 33 136/- CLAIMED BY THE ASSESSEE AND THIS GROUND OF REVENUE IS DISMISSED. RESPECTFULLY FOLLOWING THE TRIBUNALS DECISION IN A SSESSEES OWN CASE (SUPRA) OF EARLIER YEAR WE UPHOLD THE ORDERS OF CIT(A) AND TH IS COMMON ISSUE OF REVENUES APPEALS IN BOTH YEARS IS DISMISSED. 5. THE NEXT ISSUE IN REVENUES APPEAL IN ITA NO.782/AHD/2006 IS AS REGARDS TO THE ORDER OF CIT(A) DELETING THE ADDITION MADE BY T HE ASSESSING OFFICER ON ACCOUNT OF GROSS PROFIT (GP). FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. THE LD. CIT(A) XI ABAD HAS FURTHER ERRED IN L AW AND FACTS WHILE DELETING ADDITION OF RS.1 14 00 920/- ON ACCOUNT OF G.P. 6. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT DURING THE YEAR UNDER CONSIDERATION THE GP RATIO IS REDUCED TO 10.54% AS AGAINST GP OF EARLIER YEAR AT 11%. ACCORDINGLY THE AO DISCUSSING THE GP RATIO MADE ADDITION BEING THE DIFFERENCE OF GP DISCLOSED BY THE ASSESSEE AND ESTI MATED BY HIM AT 11%. THE AO HAS NOT REJECTED THE BOOK RESULTS AND ALSO NOT INVO KED THE PROVISION OF SECTION 145 OF THE ACT AND WITHOUT REJECTING THE BOOK RESULTS HE ESTIMATED THE GP RATE BASED ON EARLIER YEAR. IT IS THE CASE OF THE ASSESSEE THAT T HE ASSESSEE-COMPANY IS DEALING IN MANUFACTURING OF BIDI FOR MORE THAN 30 YEARS AND MA INTAINING FULL QUANTITATIVE AND QUALITATIVE RECORDS OF RAW MATERIALS PRODUCTION AN D FINISHED PRODUCTS AND SUCH QUANTITATIVE AND QUALITATIVE RECORDS WERE PRODUCED BEFORE THE ASSESSING OFFICER FROM TIME TO TIME AND NO DEFECT WHATSOEVER WAS FOUND IN THE SAME. EVEN THE ACCOUNTS ARE AUDITED U/S.44AB OF THE ACT AND FURTHER THE ACC OUNTS ARE SUBJECT TO AUDIT BY EXCISE DEPARTMENT AND ALSO EXAMINED BY LABAOUR DEPA RTMENT AND NO DISCREPANCY WHATSOEVER HAVE BEEN POINTED OUT BY THE AO IN THE B OOKS OF ACCOUNT. WE IN VIEW OF THESE FACTS ARE OF THE VIEW THAT AO CANNOT ESTIMAT E THE GP RATE WITHOUT POINTING OUT ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 4 DEFECTS IN THE BOOKS OF ACCOUNT AND WITHOUT REJECTI NG THE BOOK RESULTS. LD. COUNSEL FOR THE ASSESSEE BEFORE US SUPPORTED THE ORDER OF C IT(A) BY RELYING THE JURISDICTIONAL HIGH COURTS DECISION IN TAX APPEAL NO.1878 OF 2008 IN THE CASE OF IT V. SUESH SCRAP INDUSTRIES LD. DATED 02-03-2010 WHEREIN HONBLE HIGH COURT IN PARA-6 AND 7 AS UNDER:- 6. THE ENTIRE APPEAL PROCEEDS ON MISCONCEPTION. EX CISE OF POWERS UNDER SECTION 145 OF THE ACT CANNOT BE AN ASPECT OF GROSS PROFIT ADDITION BUT IT IS THE OTHER WAY ROUND. ONLY AFTER BOOKS OF ACCOUNTS H AVE BEEN REJECTED FOR ANY OF THE REASONS PROVIDED BY SECTION 145 OF THE ACT W OULD THE ASSESSING OFFICER BE ABLE TO MAKE ESTIMATE OF PROFITS. EVEN ON FACTS WHEN ONE CONSIDERS THE SUBMISSIONS MADE BY THE DEPARTMENTAL REPRESENTATIVE BEFORE TRIBUNAL AS RECORDED IN PARAGRAPH NO.3 OF THE IMPUGNED ORDER DA TED 02 ND MAY 2008 IT BECOMES CLEAR THAT AT NO STAGE WAS IT EVER URGED TH AT COMMISSIONER (APPEALS) HAD WRONGLY CANCELLED REJECTION OF BOOKS OF ACCOUNTS. 7. IN THE CIRCUMSTANCES IN ABSENCE OF ANY ERROR IN THE IMPUGNED ORDER OF TRIBUNAL NO QUESTION OF LAW MUCH LESS A SUBSTANTI AL QUESTION OF LAW ARISES FROM THE IMPUGNED ORDER OF TRIBUNAL. 7. SINCE NO DEFECTS WERE POINTED OUT BY THE ASSESS ING OFFICER IN THE BOOKS OF ACCOUNT AND THE BOOKS OF ACCOUNT ARE NOT REJECTED IN ABSENCE OF THE SAME THE GP RATE CANNOT BE APPLIED ARBITRARILY. ACCORDINGLY W E UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF THE REVENUES APPEAL IS DISMISSED. 8. THE NEXT COMMON ISSUE IN THESE APPEALS OF THE RE VENUE IN ITA NO.782/AHD/2006 AND ITA NO.2064/AHD/2006 IS AS REGARDS TO THE ORDER OF CIT(A) DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER U/S.40A(2)(B) OF THE ACT. FOR THIS REVENUE HAS RAISED THE COMMON GROUND AS U NDER:- ITA NO.782/AHD/2006 4. THE LD. CIT(A) XI ABAD HAS FURTHER ERRED IN L AW AND ON FACTS WHILE DELETING DISALLOWANCE OF RS.77 09 880/- MADE U/S.40 A(2)(B) OF THE IT ACT 1961. ITA NO.2064/AHD/2006 2. THE LD. COMMISSIONER OF INCOME TAX (A)-XI AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE OF RS.1 16 26 420/- ON ACCOUNT OF DISALLOWANCE OF EXCESS INTEREST PAID TO PERSONS SPE CIFIED UNDER SECTION 40A(2)(B) OF THE I.T. ACT 1961. 9. THE FACTS IN BOTH YEARS ARE EXACTLY IDENTICAL H ENCE WE WILL DISCUSS THE FACTS IN ITA NO.782/AHD/2006 FOR ASSESSMENT YEAR 2002-03. THE BRIEF FACTS ARE T HAT THE ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 5 ASSESSING OFFICER MADE DISALLOWANCE OF INTEREST PAI D TO THE ASSOCIATE PARTIES @ 22% BEING UNREASONABLE AS AGAINST THE LOAN TAKEN F ROM BANKS @ 18.25% TO 19.05%. THE AO DISALLOWED THE EXCESS INTEREST BEING DIFFERENTIAL OF THE AMOUNT OF 22% MINUS 19.05% = 2.5% OF THE TOTAL INTEREST PAID TO RELATED PARTIES U/S.40A(2)(B) OF THE ACT. BEFORE THE ASSESSING OFFICER THE ASSES SEE PLEADED THAT TO CARRY ON THE BUSINESS OF ABOUT RS.248 CRORES OF VOLUME THE COMP ANY REQUIRES HUGE FUNDS AND ACCORDINGLY THE FUNDS WERE ARRANGED FROM ASSOCIATE CONCERNS WHO ARE IN A POSITION TO GIVE BIG LOANS. MAJORITY OF THE BORROWINGS ARE OLD AND FROM SHAREHOLDERS OF THE COMPANY. THE ASSESSEE STATED THE REASON WHY HIGHER RATE OF INTEREST @ 22% COMPARING THE BANK INTEREST OF 19.5% WAS PAID BY TH E ASSESSEE AND FOR THIS THE REASONS WERE SUBMITTED AS UNDER:- THE ASSESSEE IS CARRYING ON BUSINESS OF MANUFACTUR ING OF BIDIES. THE TURNOVER OF THE ASSESSEE COMPANY FOR THE YEAR UNDER REVIEW IS RS.2 47 84 60 723/- I.E. ABOUT 248 CRORES. TO CARRY ON THE BUSINESS OF SUCH LARGE VOLUME THE COMPANY REQUIRES HUGE FUNDS AT TH E DISPOSAL OF ASSESSEE. THE ASSESSEE HAS BORROWED FUNDS FROM PERSON SPECIFI ED U/S.40A(2)(B) WHO ARE IN A POSITION TO GIVE LARGE LOAN TO THE ASSESSE E. MAJORITY OF THE BORROWINGS ARE OLD BORROWINGS. THE COMPANY HAS BORROWED UNSECU RED LOAN FROM HE SHAREHOLDERS OF THE COMPANY. THE SHAREHOLDERS FROM WHOM THE COMPANY OBTAINED UNSECURED LOANS COVERED UNDER THE DEFINITI ON OF SPECIFIED PERSONS ENVISAGED U/S.40A(2)(B) OF THE INCOME TAX ACT. THE DEPOSITS ARE BY AND LARGE IN THE NATURE OF PERMANENT DEPOSITS AND THEY BEING SHAREHOLDERS OF THE COMPANY/SPECIFIED PERSONS THE COMPANY IS IN A POSI TION TO STOP THE WITHDRAWALS IF THE COMPANY NEEDS TO CONTINUE THE DE POSITS. THESE LOANS BEING UNSECURED THE COMPANY IS NOT REQUIRED TO GIVE ANY SECURITY TO THE DEPOSITORS EVEN THOUGH THEY HAVE GIVEN THE LOANS EXCEEDING MOR E THAN CRORES OF RUPEES. THE ASSESSEE COMPANY HAS PAID 22 PERCENT TO THE UNSECURED DEPOSITORS. SIMILARLY THE ASSESSEE COMPANY WAS PAYI NG INTEREST @ 22% IN EARLIER YEARS. FOR THE COMPANY IT IS DIFFICULT TO RAISE SUCH HUGE FUNDS AS GIVEN BY THE SPECIFIC PERSONS. WE HEREBY SUBMIT THAT ALTERNATIVELY WE MAY AVAIL T HIS HUGE AMOUNT FRO BANKS ONLY. TO OBTAIN BANK LOANS WE HAVE TO UNDERGO LOT OF FORMALITIES AS UNDER:- 1. TO OFFER PRIMARY SECURITY & 100% COLLATERAL SECU RITY AS PER HE NORMS OF THE BANKS WHICH IS NOT PRACTICAL AND POSSIBLE. 2.THE DIRECTORS OF THE COMPANY ARE REQUIRED TO GIVE PERSONAL GUARANTEE WHICH MAY NOT BE ACCEPTABLE BY EACH AND EVERY DIREC TOR. 3. THE COMPANY IS REQUIRED TO FURNISH FORMS STATEME NTS SUCH AS CMA DATA STOCK STATEMENTS AND OTHER NECESSARY DOCUMEN TS REQUIRED BY THE BANK FROM TIME TO TIME. AS PER BANKING PRACTICE THEY HAVE TO INSPECT PERIODICALLY THE SECURITY OFFERED BY THE CO MPANY. ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 6 THE ASSESSING OFFICER HAS NOT BELIEVED THE EXPLANAT ION OF THE ASSESSEE AS SATISFACTORY AND MADE DISALLOWANCE. AGGRIEVED ASS ESSEE PREFERRED APPEAL BEFORE CIT(A). 10. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY GIVING FOLLOWING FINDING IN PARA-6.2 6.2.1` AND 6.2.2 AS UNDER:- 6.2 I HAVE PERUSED THE SUBMISSIONS OF THE A.R OF T HE APPELLANT CAREFULLY. I HAVE ALSO GONE THROUGH THE DECISIONS RELIED UPON BY THE A.R AND THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE ASSESS MENT ORDER. IT IS SEEN THAT HE DEPOSITED/LOANS RECEIVED BY THE APPELLANT ARE AD MITTEDLY FOR BUSINESS PURPOSES AND FOR WHICH THE ASSESSING OFFICER HAS NO T DOUBTED AND NO STATED ANY THING THAT THE SAME IS NOT UTILIZED BY THE APPE LLANT FOR ITS BUSINESS PURPOSES. IT IS FURTHER SEEN THAT MAJORITY OF THE B ORROWERS ARE OLD BORROWER AND THAT TOO ARE THE SHAREHOLDERS OF THE APPELLANT COMP ANY. 6.2.1 AS IT COULD BE SEEN FROM THE REPLY FILED BY T HE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT ALL THE PERSO NS TO WHOM THE APPELLANT COMPANY HAD PAID INTEREST ARE PAYING TAX AT MAXIMUM MARGINAL RATE AND COPY OF ACKNOWLEDGEMENT OF RETURN FILED BY SUCH DEPOSITO RS ARE FILED BEFORE THE ASSESSING OFFICER. THIS SHOWS THAT THERE IS NO LOSS OF REVENUE WITH REGARD TO TAX LIABILITY. FURTHER THE ASSESSING OFFICER HAS N OT GIVEN ANY ADVERSE COMMENTS IN THIS REGARD. IT IS FURTHER SEEN THAT TH E APPELLANT IS PAYING INTEREST PAYMENT AT 22% SINCE LAST TEN YEARS AND ITS CLAIM I S CONSISTENTLY ALLOWED BY THE ASSESSING OFFICER. 6.6.2 AS IT COULD BE SEEN FROM THE SUBMISSION OF TH E A.R. IF THE APPELLANT HAD TO BORROW HEAVY LOANS FROM BANKS SEVERAL FORMALITI ES TO BE FOLLOWED WHICH COULD DELAY IN MEETING IMMEDIATE FINANCIAL NEEDS OF THE APPELLANT APART FROM SPENDING VARIOUS INCIDENTAL EXPENSES AS NARRATED BY THE A.R. IN GETTING LOANS FROM FINANCIAL INSTITUTIONS. THEREFORE COMMERCIAL EXPEDIENCY COMPELS THE APPELLANT TO BORROW MONEY FROM SHAREHOLDERS WHICH I S MORE CONVENIENT TO THE APPELLANT. IT IS ALSO SEEN THAT THE APPELLANT NEED NOT OFFER ANY SECURITY TO OBTAIN LOANS FROM THE SHAREHOLDERS. AGGRIEVED REVENUE CAME IN APPEAL BEFORE US. 11. BEFORE US LD. CIT-DR SHRI B.S. GEHLOT RELIED ON THE ASSESSMENT ORDER AND STATED THAT THE ASSESSING OFFICER HAS RIGHTLY DISAL LOWED THE EXCESS INTEREST PAID TO RELATED PARTIES BY INVOKING U/S.40A(2)(B) OF THE AC T. ACCORDINGLY HE URGED THE BENCH TO CONFIRM THE ASSESSMENT ORDER. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE SHRI S.N. SOPARKAR ARGUED THAT THE ORDER OF CIT(A) IS A REASONED ORDER AND THE DISALLOWANCE IS DELETED BY THE REASONS THAT FOR OBT AINING BANK LOAN 100% COLLATERALS SECURITY IS TO BE PROVIDED WHICH IS NOT POSSIBLE A ND PRACTICABLE. HE STATED THAT EVEN THE DIRECTORS OF THE COMPANY ARE REQUIRED TO GIVE P ERSONAL GUARANTEE WHICH IS NOT ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 7 ACCEPTABLE TO EACH AND EVERY DIRECTOR. EVEN SO MUCH FORMALITIES ARE REQUIRED IN THE SHAPE OF FORMS STOCK STATEMENTS ARE TO BE SUBMITTE D PERIODICALLY CMA DATA AND OTHER NECESSARY DOCUMENTS FROM TIME TO TIME TO THE BANK FOR OBTAINING SUCH LOANS. EVEN HE ARGUED THAT INTEREST CHARGE BY ASSOCIATE PA RTIES @ 22% IS QUITE REASONABLE BY CONSIDERING THE RATE CHARGED BY THE BANK RATE I. E. 19.5%. LD. COUNSEL FOR THE ASSESSEE STATED THAT THERE ARE HUGE LEGAL EXPENSES SUCH AS STAMP CHARGES REGISTRATION CHARGES ETC. WHICH ARE TO BE INCURRED WHICH WILL COST AS ADDITIONAL 2.2% ON GETTING THE LOAN FROM BANK AND THE LOAN FROM THE ASSOCIATE PARTIES WILL NOT INCUR SUCH EXPENSES. HE ALSO RELIED ON THE DECISION OF AM RITSAR BENCH IN THE CASE OF ITO V. BANSILAL GUPTA IN TTJ 113 (2008) 898 (ASR) WHEREIN THE TRIBUNAL HAS HELD AS UNDER:- 11. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY C ONSIDERED THE RIVAL CONTENTIONS EXAMINED THE FACTS EVIDENCE AND MATER IAL PLACED ON RECORD. WE HAVE REFERRED TO THE DECISION OF TRIBUNAL (SMC) AM RITSAR BENCH IN THE CASE OF H.S. SALES CORPN. VS. ITO (SUPRA) WHERE THE TRI BUNAL BY REFERRING TO THE EARLIER ORDER OF TRIBUNAL. AMRITSAR BENCH IN THE C ASE OF AIM FORGINS JALALDHAR VS. ASSTT. CIT HAS HELD THAT INTEREST PAID @ 24% P ER CENT WAS FAIR AND REASONABLE AND DID NOT WARRANT ANY DISALLOWANCE. WH ILE DOING SO THE TRIBUNAL FURTHER RELIED ON THE DECISION OF TRIBUNAL (SM) AMRITSAR BENCH IN THE CASE OF PARMOD KUMAR RAJ KUMAR PHAGARAM VS. ASSTT. CIT IN ITA NO.267/ASR/2005 FOR THE ASST. YR. 2001-02 WHERE IT WAS HELD AS UNDER:- 5.1 I HAVE HEARD BOTH THE PARTIES AND CONSIDERED T HE RIVAL CONTENTIONS EXAMINED THE FACTS EVIDENCE AND MATERIAL ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE HAS PAID INTEREST @ 24 PER CE NT TO PERSONS COVERED UNDER S. 40A(2)(B) I.E. AT THE SAME RATE AT WHICH INTEREST WAS CLAIMED AND ALLOWED IN THE PAST I.E. ASST. YR. 2000 -01. THERE IS ALSO NO DISPUTED ABOUT THE FACT THAT THE BORROWED AMOUNTS W ERE UTILIZED FOR THE PURPOSE OF BUSINESS. SIMILAR ISSUE CAME UP BEFORE T HE TRIBUNAL. (SMC) AMRITSAR BENCH IN THE CASE OF M/S. PARMOD KUMAR RAJ KUMAR VS. ASST. CIT. IN ITA NO.267/AST/2005 FOR THE ASST. YR. 2001-02 D T. 2 ND SEPT. 2005 AND THE TRIBUNAL DECIDED THE SAME IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY RECORDING FOLLOWING FINDINGS IN PARA 6 OF THE ORDER:- 6. I HAVE HEARD BOTH THE PARTIES AND CAREFULLY CON SIDERED THE RIVAL CONTENTIONS WITH REFERENCE TO FACTS EVIDENCE AND MATERIAL ON RECORD. THE FACT THAT THE ASSESSEE HAD CLAIMED I NTEREST @ 24 PER CENT AND WAS ALLOWED BY THE REVENUE IN THE ASST . YR. 2000- 01 HAS NOT BEEN DISPUTED BY THE REVENUE. THEREFORE PRINCIPLE OF CONSISTENCY DEMANDED THAT NO ADDITION IN RESPECT OF THE SAME SHOULD HAVE BEEN MADE FOR THE ASSESSMENT YEAR UNDER REFERENCE. BESIDES THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL (SMC). AMRITSAR BENCH IN THE CASE OF ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 8 M/S. RIMPY PROCESSORS (P) LTD; VS ASSTT. CIT. CIR.5 AMRITSAR (SUPRA) WHERE IT WAS HELD IN PARA 4 AS UNDER:- 4. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTED THAT THE A SSESSEE WAS PAYING THE INTEREST TO THESE PERSONS @ 24 PER C ENT IN THE PRECEDING ASSESSMENT YEARS AS WELL. PAGE 173 OF THE PAPER BOOK IS A CHART SHOWING INTEREST TO THESE PER SONS @ 24 PER CENT IN THE PRECEDING AND SUCCEEDING YEARS WHICH WAS ACCEPTED BY THE REVENUE. EVEN THE ASSESSMENT FOR THE IMMEDIATELY PRECEDING YEAR WAS MADE IN SCRUTINY UNDER S. 143(3) BY ACCEPTING THE PAYMENT OF INTEREST @ 24 PER CENT. ASSESSMENT ORDER FOR THE SAID YEAR HAS BEEN PLACED AT P.49 OF THE PAPER BOOK. THESE FACTS INDICATE THAT THE ASSESSEE HAD PAID INT EREST TO THESE PERSONS @ 24 PER CENT IN THE PRECEDING AS WELL AS SUCCEEDING YEARS AND THE SAME WAS ACCEPTED BY TH E REVENUE. THAT BEING THE POSITION THERE WAS NO REAS ON TO DISTURB THE FINALITY GIVEN TO THESE TRANSACTIONS BY THE DEPARTMENT ITSELF. PRINCIPLE OF CONSISTENCY REQUIRE S THAT IN THE ABSENCE OF ANY CHANGE IN THE FACTUAL OR LEGAL P OSITION A VIEW TAKEN SHOULD NOT BE ALTERED. THIS VIEW HAS B EEN RECENTLY REITERATED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF IT (EXEMPTION) VS. GURU NANAK VIDYA BHANDAR TRUST (2004) 187 CTR (DEL) 558 ; (2005) 272 ITR 379 (DEL). IN VIEW OF THESE FACTS I AM SATISFI ED THAT THE ADDITION MADE AND SUSTAINED BY ALLOWING INTERES T TO SUCH SPECIFIED THAT THE ADDITION MADE AND SUSTAINED BY ALLOWING INTEREST TO SUCH SPECIFIED PERSONS AT 18 P ER CENT ONLY WAS NOT JUSTIFIED. BY REVERSING THE IMPUGNED O RDER ON THIS SCORE I DIRECT THE DELETION OF THIS ADDITI ON. THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FA TS OF THE ABOVEMENTIONED CASE. THEREFORE RESPECTFULLY FOLLOWING THE ORDER O F THE TRIBUNAL I SET ASIDE THE ORDER OF THE CIT(A) AND DELETE THE IMPUGNED DISALLO WANCE. ACCORDINGLY THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. THIS ORDER WAS FOLLOWED BY THE TRIBUNAL AMRITSAR B ENCH IN THE CASE OF AIM FORGINGS VS. ASTT. CIT (SUPRA) FOR THE ASST. YR. 2001-02. THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS OF THE CASES ALREADY DECIDED BY THE TRIBUNAL. RESPECTFULLY FOLLOWING THE SAME THE ORDE R OF THE CIT(A) IS SET ASIDE AND THE AO IS DIRECTED TO ALLOW THE INTEREST CLAIME D BY THE ASSESSEE. HIS GROUND OF APPEAL IS ACCORDINGLY ALLOWED. 12. LD. COUNSEL FOR THE ASSESSEE FURTHER ALSO RELIE D ON THE DECISION OF THIS TRIBUNAL IN ITA NO.59/AHD/2005 DATED 03-03-2009 IN THE CASE OF SAUMIL TRADERS PVT. LD. V ITO WARD-8(1) ABD FOR ASSESSMENT YEAR 2001-02 WHEREIN THE TRIBUNAL HAS HELD IN PARA-13 AS UNDER:- ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 9 13. WE HAVE CONSIDERED THE SUBMISSIONS MADE. THERE IS NO DENIAL OF FACT THAT THE AMOUNT WAS BORROWED BY THE ASSESSEE FOR TH E PURPOSE OF BUSINESS IN EARLIER YEARS I.E. SINCE ASSESSMENT YEAR 1993-94. N O DISALLOWANCE HAS BEEN MADE IN THE PAST. THIS FACT IS NOT CONTROVERTED BY EITHER THE ASSESSING OFFICER OR THE LEARNED DR. IT IS INCORRECT TO COMPARE THAT RATE OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN WITH THE RATE OF INTERES T IN SECURED LOAN OBTAINED FROM THE BANK AND FINANCIAL INSTITUTIONS. THE AMOUN TS BORROWED FROM BANK ARE SECURED AND HENCE CARRIES LESSER RISK. THEREFORE T HE COMPARISON OF RATE OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN WIT H THE SECURED LOAN IS INCORRECT. IT IS ALSO SETTLED LAW THAT THE DECISIO N HOW THE BUSINESS SHOULD BE CARRIED ON IS THE PREROGATIVE OF THE ASSESSEE AND T HE ASSESSING OFFICER CANNOT DICTATE THE TERMS AS TO HOW THE BUSINESS SHO ULD BE CARRIED ON. WHILE CONSIDERING THE CLAIM UNDER SECTION 36(1)(III) WHAT IS TO BE EXAMINED IS WHETHER THE AMOUNT IS BORROWED FOR THE PURPOSE OF B USINESS OR NOT. SINCE THE AMOUNT IS BORROWED IN EARLIER YEARS AT A STIPULATED RATE OF INTEREST AND WHICH IS STILL UTILIZED FOR THE PURPOSE OF BUSINESS THE INT EREST RATE COULD NOT HAVE BEEN RENEGOTIATED. EVEN THE LEADING RATE BY BANKS IN RES PECT OF SECURED LOAN IS AS HIGH AS 17.5%. THEREFORE RATE OF INTEREST PAID BY THE ASSESSEE IS REASONABLE HAVING REGARD TO THE FAIR VALUE OF SUCH SERVICES. T HE ASSESSING OFFICER HAS NOT COMPARED THE RATE OF INTEREST ON UNSECURED LOANS. T HEREFORE THE ASSESSING OFFICER WAS INCORRECT IN RESTRICTING THE INTEREST P AYABLE TO THE EXTENT OF 18% ONLY. SINCE THE RATE OF INTEREST PAID BY THE ASSESS EE IS REASONABLE THE ASSESSING OFFICER IS DIRECTED TO ALLOW SAME. LD. COUNSEL FOR THE ASSESSEE ALSO ARGUED THAT THESE LOANS ARE CARRY FORWARD LOAN FROM EARLIER YEARS AND NO SUCH DISALLOWANCE WAS MAD E IN EARLIER YEARS. HE SATED THAT THESE DEPOSITS ARE SINCE ASSESSMENT YEAR 1992- 93 AND INTEREST FROM THAT YEAR IS PAID @ 22% TO THE RELATED PERSONS FROM WHOM THE LOA NS HAVE BEEN OBTAINED AND NO SUCH DISALLOWANCE IS MADE IN ANY OF THE YEARS EARLI ER. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THESE LOANS WERE BORROWED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS IN EARLIER YEARS I.E. S INCE ASSESSMENT YEAR 1992-93. NO SUCH DISALLOWANCE HAS BEEN MADE IN THE PAST. THIS F ACT IS NOT CONTROVERTED BY EITHER THE ASSESSING OFFICER OR THE LEARNED DR. IT IS A FA CT THAT THE RATE OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN VIS--VIS THE RATE O F INTEREST IN SECURED LOAN OBTAINED FROM THE BANK AND FINANCIAL INSTITUTIONS THE RATE OF INTEREST TO ASSOCIATE CONCERN IS LITTLE HIGHER BUT THE AMOUNTS BORROWED F ROM BANK ARE SECURED AND HENCE CARRIES LESSER RISK. EVEN THE BANK INTEREST IS ALMO ST AT 19.5% AND IF WE CALCULATE THE OVERHEAD EXPENSES I.E. THE REGISTRATION CHARGES ST AMP DUTY CHARGES EXPENSES TO BE INCURRED FOR SUBMITTING STOCK STATEMENTS ETC. TO THE BANK THE BANK INTEREST WILL AUTOMATICALLY INCREASE TO A CERTAIN LEVEL. THEREFOR E THE COMPARISON OF RATE OF INTEREST ITA NO.782 & 2064/AHD/2006 A.YS 02-03 & 03-04 ACIT CIR-5 ABD V. PRABHUDAS KISHORDAS TOBACCO PRODUCTS LT D. PAGE 10 PAID BY THE ASSESSEE ON UNSECURED LOAN WITH THE SEC URED LOAN IS INCORRECT. IT IS ALSO SETTLED LAW THAT THE DECISION HOW THE BUSINESS SHOU LD BE CARRIED ON IS THE PREROGATIVE OF THE ASSESSEE AND THE ASSESSING OFFICER CANNOT DI CTATE THE TERMS AS TO HOW THE BUSINESS SHOULD BE CARRIED ON. WHILE CONSIDERING TH E CLAIM UNDER SECTION 36(1)(III) WHAT IS TO BE EXAMINED IS WHETHER THE AMOUNT IS BOR ROWED FOR THE PURPOSE OF BUSINESS OR NOT. SINCE THE AMOUNT IS BORROWED IN EA RLIER YEARS AT A STIPULATED RATE OF INTEREST AND WHICH IS STILL UTILIZED FOR THE PURPOS E OF BUSINESS THE INTEREST RATE COULD NOT HAVE BEEN RENEGOTIATED. EVEN THE LENDING RATE B Y BANKS IN RESPECT OF SECURED LOAN IS AS HIGH AS 19.5%. THEREFORE RATE OF INTERE ST PAID BY THE ASSESSEE IS QUITE REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE O F SUCH SERVICES. THE ASSESSING OFFICER HAS NOT COMPARED THE RATE OF INTEREST ON UN SECURED LOANS. THEREFORE THE ASSESSING OFFICER WAS INCORRECT IN RESTRICTING THE INTEREST PAYABLE TO THE EXTENT OF 19.5% ONLY. SINCE THE RATE OF INTEREST PAID BY THE ASSESSEE IS REASONABLE THE ORDER OF CIT(A) IS CONFIRMED DELETING THE DISALLOWANCE. 14. IN THE RESULT BOTH APPEALS OF REVENUE ARE DISMISSE D. ORDER PRONOUNCED ON THIS DAY OF 30 TH APRIL 2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD DATED : 30/04/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-XI AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD