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Income Tax Appellate Tribunal, MUMBAI BENCHES “B”, MUMBAI
Before: SHRI R.C. SHARMA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 14/10/2013 passed by the Ld. CIT(Appeals)-35, Mumbai, for the assessment year 2009-10, whereby the Ld. CIT(A) partly allowed the appeal of the assessee preferred against assessment order dated 19.12.2011 passed u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’).
2. Brief facts of the case are that the assessee firm engaged in manufacturing and trading of diamond jewellery, filed its return of income declaring the total income of Rs. 1,14,540/-. The return was processed and after scrutiny assessment order was passed u/s 143(3) of the Act, determining 2 Assessment Year: 2009-10 the total income at Rs.6,45,211/- after making disallowance of Rs. 2,86,434/-, Rs. 1,09,242/- and Rs. 1,35,000/- as interest expenditure, commission expenses and labour charges respectively claimed by the assessee. The assessee challenged the assessment order before the Ld. CIT(A). The Ld. CIT(A) after hearing the assessee deleted the disallowed made against the claim of labour charges and sustained the remaining disallowances.
Still aggrieved, the assessee is in appeal before the Tribunal on the following effective grounds:-
1. “On the facts and circumstances of the case the Ld. AO and the Learned Commissioner of Income Tax (Appeals) are not justified in confirming the disallowance of a sum of Rs. 2,86,434 out of Interest Expenses debited to Profit & Loss account by merely correlating the loans taken and loans given without appreciating the fact that appellant is possessed with substantial interest free funds in the form of own capital.”
The Ld. AO and the Learned Commissioner of Income Tax (Appeals) failed to appreciate the fact that loans received are less than loans given, which itself indicates the availability of surplus fund with appellant firm.”
“On the facts and circumstances of the case the Ld. AO and the Learned Commissioner of Income-Tax (Appeals) are not justified in confirming the disallowance of the entire sales commission of Rs. 1,09,242 paid to Mr. Narinder Tharwani (being an employee) and ignoring the details filed during the assessment proceedings.
The Ld. AO and the Learned Commissioner of Income-Tax (Appeals) has failed to appreciate that the commission is paid as an incentive to employee, on the basis of agreed percentage of sales affected by him to prospective customer, which is normal practice to earn higher due to increased sales.
3 Assessment Year: 2009-10
So far as the first ground of appeal is concerned, the Ld. Counsel for the assessee submitted that the Ld. CIT(A) has wrongly confirmed the disallowance of Rs. 2,86,434/- out of interest debited to P & L account by merely co-relating the loans taken and loans given by the assessee without appreciating the fact that the assessee was in possession of substantial interest free funds in the form of own capital. The AO has wrongly calculated the average rate of interest at 14% in respect of loan taken from the parties. Similarly, the average rate of interest has wrongly been calculated @ 8.38% in case of loan given to the parties concerned. Therefore, the AO has wrongly applied the difference of 5.16% on the outstanding loan taken to disallow the interest expenditure. The assessee has produced documentary evidence to prove the genuineness of transaction of giving/obtaining loan to/from the parties concerned. The Ld. Counsel further submitted that the assessee has produced evidence to prove the amount of interest paid and received to/from the parties concerned. Without prejudice to the above the Ld. Counsel further submitted that the assessee had sufficient interest free funds available in the form of capital.
5. On the other hand the Ld. departmental representative relied upon the findings of the Ld. CIT(A).
Having heard the rival submissions in the light of the material placed before us, we are of the considered opinion that there is merit in the contention of the Ld. Counsel for the assessee. The assessee had given loans to various parties and erred interest income of Rs. 7,65,316/-. The actual rate of interest for loan given was @ 9% in respect of two parties and 12% in respect of other two parties, whereas the AO has calculated the average rate of interest at 8.39% which is lower than the actual rates. Similarly, the actual rate of interest paid to Shri Harsh Parwani was 10.5% and to Mrs. Sunita Thawar was 12% whereas the AO has calculated the average rate of interest at 14.09% 4 Assessment Year: 2009-10 which is higher than the actual rates. Therefore, the average rate of interest calculator by AO at 14.09% in the assessment order on loan taken is incorrect and not true. Perusal of balance sheet as on 31.03.2009, at page 13 of the paper book reveals that the assessee firm had sufficient funds available in the form of partnership capital amounting to Rs. 1,83,82,497/- to advance loans to the parties concerned. From the aforesaid fact, inference can be drawn that the loan taken from the two persons were utilized for the purpose of business and not for granting loans and advances. The fact that the total amount of loans advanced was more than the loans taken by the assessee firm further strengthens the assessee’s contention. As regards breakup of working of interest paid on loans and received, the assessee has already submitted the details before the authorities below. There is no evidence on record on the basis of which it can be inferred that the assessee had advanced the loans in question to the parties concerned out of the loan taken from other parties. Further there is no evidence to establish that the loan taken by the assessee firm was not utilized in connection with the business of the assessee. We, accordingly, set-aside the findings of the Ld.CIT(A) and allow this ground of appeal of the assessee.
7. Second ground pertains to disallowance of Rs. 1,09,242/-paid to Mr Narendra Tharwani as commission. Before us, the Ld. counsel for the assessee submitted that the firm had paid commission of Rs. 1,09,242/-to Mr Narendra Tharwani an employee of the assessee firm. The commission was paid at the rate of 3% on sale of Rs. 36,41,382/- effected through him. The assessee had also deducted TDS on such payments and such income has been offered by Mr. Narendra Tharwani to tax.
5 Assessment Year: 2009-10
On the other hand the Ld. DR submitted that since the assessee has failed to prove the service rendered by Mr Narendra Tharwani, the CIT(A) has rightly confirmed the disallowance made by the AO.
We notice that during the course of assessment proceedings the assessee filed the details and working of commission paid to Mr Narendra Tharwani. The assessee also submitted party wise detail of sales effected by him. AO has failed to point out any discrepancy in the details submitted by the assessee. The AO has not pointed out any fact which falsifies the contention of the assessee. Moreover, to pay commission, on sale as an incentive or with the motive to increase the sale is not prohibited by the law. In the absence of any contrary evidence it cannot be concluded that the commission incentive was either not paid in this case or not incurred exclusively for the purposes of business. Under these circumstances, confirmation of 100% disallowance of commission paid to Mr Narendra Tharwani, is not justified. We therefore, set- aside the findings of the Ld. CIT(A) and allow this ground of appeal of the assessee. In the result, appeal filed by the assessee for the assessment year 2009-2010 is allowed.