BALUBHAI M SARDHARA,MUMBAI vs. JT CIT 22(1), NAVI MUMBAI

The assessee filed his return of income declaring income under the head “salary”, “business” and “other sources”. The assessee declared income from money lending business under the head “Business”. The Assessing Officer noticed that the assessee has paid interest on the loan taken by him @ 9% and 10%. However, he has charged interest from the advances made by him at varying rate like 3.25%, 4.25%, 6%, 10%, 12% and 14%. Even though, the assessee submitted that the rate of interest is charged on the loans by considering various factor like relationship, availability of funds, past performance, period and size of loan etc., yet the Assessing Officer took the view that charging of interest at a lower rates like 3.25%, 4.25%, 6% etc. is not 2 BalubhaiM. Sardhara a prudent practice followed by a prudent businessman. Accordingly the Assessing Officer took the view that interest should have been charged by the assessee @ 14% on the money advanced by him. Accordingly, the Assessing Officer, computed difference in interest income at ` 4,98,786/- by applying rate of interest @ 14% and added the same to the total income of the assessee.

The learned CIT(A) gave partial relief to the assessee by directing the Assessing Officer to compute interest on loan by adopting interest rate of 12%. Still aggrieved, the assessee has filed this appeal before us.

We have heard the parties and perused the record. The Learned AR submitted that own funds available with the assessee is in excess of advances given to various persons and hence the Assessing Officer should not have added any amount to the interest income declared by the assessee. He further submitted that the rate of interest is determined between the assessee and the borrower on various factors and hence the same should not have been disturbed by the Assessing Officer. In the alternative, the learned AR submitted that the assessee has paid interest @ 9% & 10% and hence, the learned CIT(A) should have directed the Assessing Officer to compute interest by adopting interest rate of 9% and 10%.

On the contrary, learned Departmental Representative submitted that interest rate of 3.25%, 4.25% and 6% charged by the assessee on the loans advanced by the assessee is against trade practice and is also beyond the scope of human probabilities. Accordingly, learned Departmental Representative submitted that the learned CIT(A) was justified in directing the Assessing Officer to compute differential interest by adopting interest rate of 12%.

We have heard rival contentions and perused the record. Admittedly, various reasoning given by the assessee for charging interest on loans at interest rate of 3.25%, 4.25% and 6% etc., is against trade practice and beyond the scope of human probabilities. No prudent businessman shall lend money

The Next issue contested by the assessee relates to expenditure claimed by the assessee against sale proceeds of IPR. The assessee purchased a brand name named “Ask Me”, an IPR asset. The said brand name was initially owned by two public limited companies. The assessee became one of the assignees of the brand name on 18.3.2000. Thereafter the assessee purchased full right on 22.2.2007. In the meantime, one of the ex-employee of the public limited company also applied for trade mark “Ask Me” in his name in the year 2006, but he also assigned all his right in favour of the assessee on 14.5.2008. Accordingly, the assessee became the full owner of brand name “Ask Me”. During the year under consideration, the assessee sold brand name for a sum of ` 210 lakhs. The assessee claimed a sum of ` 28.63 lakhs as expenditure

We heard the parties on this issue and perused the record. The Learned AR submitted that the question of prior period expenses does not arise in this case since the assessee has incurred expenditure over the years in acquiring full right of IPR “Ask Me” and hence all the expenses incurred relating to IPR should be allowed as revenue expenditure. He further submitted that the assessee has furnished all the details and evidence with regard to various expenses and the tax authorities have made disallowance without properly examining the evidences furnished by the assessee. Accordingly, the learned AR submitted that the matter may be set aside to the file of the Assessing Officer for examining various evidences furnished by the assessee.

We heard learned Departmental Representative on this issue and perused the record. We agree with the contentions of the assessee that concept of prior period expenses cannot be applied in the instant case, since the assessee has acquired the rights over the IPR over a period. Under revenue cost matching principle, all the expenditure incurred in acquiring IPR have to be treated as revenue expenditure irrespective of the year in which it was incurred and has to be allowed against sales revenue of IPR. With regard to the remaining disallowance, the learned AR submitted that the assessee would be in a position to satisfy the Assessing Officer with relevant evidences, if opportunity is given. We find merit in the said plea of learned AR. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with the direction to examine

In the result, appeal filed by the assessee is treated as partly allowed for statistical purposes.