MANILAL JETHALAL SONI,AHMEDABAD vs. INCOME TAX OFFICER, WARD-5(2)(3), AHMEDABAD

In the first ground of appeal, the assessee has raised the following grievance:

The relevant material facts are like this. The assessee before me is a very senior citizen, in his late 70s, and is engaged in the business of gold, bullion and silver bars and jewellery. The assessee is carrying out business with the help of employees engaged by him, including some relatives. During the course of scrutiny assessment proceedings, the Assessing Officer disallowed a large portion of salaries so paid to the close relatives. He had noted that as against salary payment of Rs.7,54,526/- in the immediately preceding year, the salary payment in the current year was Rs.15,94,526/- even though the increase in turnover was only marginal

I have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

As far as salary of Rs.2,40,000/- paid to Smt. Harshaben Soni is concerned, I find that she is wife of the assessee, herself an aged lady and does not possess any qualifications so as to justify the salary payment for doing accounting work. I, therefore, uphold the disallowance to that extent. However, as regards the remaining persons, I have noted that the disallowance is only a partial disallowance and no reasonable justification is given for quantification of the disallowance. Having perused the details filed by the learned counsel and bearing in mind the submissions made by him, I do agree that the basis for partial disallowance is merely surmises and conjectures – something which cannot meet a judicial scrutiny. Once it is accepted that these persons have rendered the services, as is implicitly accepted in this case, disallowance cannot be made unless it is clearly established that the payment is excessive or unreasonable. In my considered view, there is no cogent material to justify such a conclusion. In view of these discussions and bearing in mind entirety of the case, I uphold the disallowance only to the extent of Rs.2,40,000/- and the balance amount of disallowance of Rs.6,26,000/- is thus deleted.

Ground no.1 is thus partly allowed.

In ground no.2, the assessee has raised the following grievance:

The disallowance has been made as the assessee had paid interest @18% to the relatives, whereas according to the Assessing Officer, interest @ 12% was fair market price of the borrowings. The basis of the market price was short term borrowings by the assessee from outsiders. It was in this backdrop that interest payment of Rs.1,44,862/- was disallowed. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. Not satisfied, the assessee is in further appeal before me.

Having heard the rival contentions and having perused the material on record, I find that borrowings @18% p.a. cannot be said to be at excessive or unreasonable interest. The fact that the assessee has been able to borrow @12% for some short period cannot be put against him, because unless the interest @18% is held to be excessive or unreasonable, even if assessee is able to borrow at a lower interest rate from unrelated parties, disallowance under section 40A(2)(b) cannot be made. That, however, is precisely the case here. In view of thee discussions, I uphold the plea of the assessee and delete the impugned interest disallowance of Rs.1,44,862/-.

Ground no.2 is thus allowed.

In the result, the appeal is partly allowed in the terms indicate above. Pronounced in the open Court on this 14th day of February, 2018. Sd/- Pramod Kumar (Accountant Member) Dated: Ahmedabad, the 14thday of February, 2018.