ACIT,CIR - 34,KOLKATA., KOLKATA vs. M/S BERRY & CO., KOLKATA

This appeal of the revenue arises out of the order of the Learned CIT(A)-XX, Kolkata in Appeal No. 311/CIT(A)-XX/Range-34/2011-12/Kol dated 05-11-2012 for the Asst Year 2009-10 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

1.1 The ground no.1 raised by the revenue is general in nature and does not require any adjudication.

2.1. The brief facts of this issue is that the assessee is a partnership firm dealing primarily in cotton fabrics specially finished / processed fabrics and denim fabrics. It also supplies fabrics directly to large and medium sized garment manufacturing units. The assessee borrowed unsecured loans from various parties as on 31.3.2009 to the tune of Rs. 21,85,58,853/-. The interest rates on these loans vary from 9% to 15% per annum. Some of the parties who had advanced monies to the assessee include related parties of the assessee. The Learned AO observed that 9% rate of interest is to be held reasonable and any rate in excess of 9% was found to be excessive or unreasonable and invoked the provisions of section 40A(2)(b) of the Act in respect of interest paid to related parties of the assessee. The assessee had borrowed loans from unrelated parties at the interest rates ranging from 12 to 15 % per annum. The Learned AO observed that 9% rate of interest is reasonable for loans from unrelated parties also and any rate in excess of 9% was also disallowed by the Learned AO without mentioning any section under which the disallowance was made by him. Out of total interest paid on unsecured loans by the assessee to the extent of Rs. 59,46,279/- during the asst year under appeal, a sum of Rs. 14,40,595/- was disallowed by the Learned AO.

2.2. On first appeal, the Learned CITA duly appreciated the contentions of the assessee that most of the loans borrowed by the assessee are only brought forward loans from earlier years and during the assessment year under appeal, the assessee had borrowed loan from Sarvapratham Investments Ltd at the interest rate of 12% per annum. Moreover, the Learned CITA found that the party wise details of unsecured loans and interest paid thereon together with the respective rate of interest was furnished before the Learned AO and maximum interest rate was ranging from 9 to 15% per annum and loans were borrowed from related parties and from unrelated parties. The Learned CITA also observed that even the bank loans borrowed by the assessee were at an interest rate of 12.5% to 14% per annum. Accordingly, the Learned CITA deleted the addition made in this regard. Aggrieved, the revenue is in appeal before us on the following ground:-

“2 Ld. CIT(A) has failed to appreciate the fact that the interest rate being excessive the AO applied the lowest available rate of 9% at which the loan has been taken from sister/group concerns against all the loans taken. Further the assessee has claimed higher rate of interest on unsecured loans inspite of the fact that there was huge fund/capital available with the assessee which has ultimately been advanced to some parties interest free.

2.3. The Learned DR vehemently relied on the order of the Learned AO. In response to this, the Learned AR reiterated the factual submissions made by him before the lower authorities and argued that the Learned AO had adopted 9% rate of interest as reasonable interest in respect of loans from unrelated parties without mentioning the section under which he is disallowing the interest paid. The Learned AR argued that even otherwise an addition is to be made, it cannot be made u/s 40A(2)(b) of the Act in respect of interest paid to unrelated parties. Hence he argued that in any case, the disallowance of interest paid to unrelated parties to the extent of Rs. 7,75,135/- cannot be made at all. He further argued that in respect of interest paid to related parties, the Learned AO had adopted the least of the borrowing rates and had considered that to be the reasonable rate of interest without bringing any material on record with regard to the fair market rate of interest. He further argued that even the secured loans were borrowed from bank by the assessee at an interest rate ranging from 12.5% to 14% and hence in these circumstances, the interest paid on unsecured loans to related parties at the rate of 9 to 12 % is very reasonable and hence the provisions of section 40A(2)(b) of the Act cannot be applied in this case.

2.4. We have heard the rival submissions and perused the materials available on record. We find that the Learned CITA had given categorical findings with regard to the entire factual matrix of the case in his appellate order. For the sake of brevity, the facts stated thereon are not reiterated herein. We find that the action of the Learned AO in adopting the lowest rate of interest on unsecured loans from related parties at the rate of 9% is not appreciated for the simple reason that even the secured loans received from bank by the assessee was borrowed at the interest rates of 12.5% to 14%. Hence logically the unsecured loans are normally supposed to be borrowed at higher rate of interest. But in the instant case, the situation is reverse. The Learned CITA held that the loans borrowed were genuine loans and were borrowed for the purpose of business and held that the Learned AO had not brought any material on record to establish that the prevailing market rate of interest on unsecured loan is lower than what the assessee had paid. Moreover, the intention behind introduction of section 40A(2)(b) of the Act is only to ensure that the assessee should not take away the profits of the business by paying business expenditures to related parties in order to avoid tax liability. But we find that this intention is totally absent and the assessee had actually conducted its business in the situation completely favourable to the revenue and hence there cannot be any disallowance of interest u/s 40A(2)(b) of the Act or any other section in the Income Tax Act in the facts and circumstances of the case.

2.4.1. We also find that the assessee’s case was selected for scrutiny in Asst years 2007-08 & 2008-09 and no disallowance was made by the Learned AO in this regard even though the majority of the loans are only brought forward from earlier years. It is not in dispute that the assessee had borrowed loan during the year only from one party i.e Sarvapatham Investments Ltd at the interest rate of 12%. We hold that when the loans were borrowed for the purpose of business on which fact there is absolutely no dispute, then there cannot be any disallowance of interest, more so, in the facts and circumstances of this case where the interest paid on unsecured loans is less than interest paid to bank on secured loans.

2.4.2. We also find that the Learned AO had adopted even the interest paid on unsecured loans to unrelated parties as excessive or unreasonable without appreciating the fact that the provisions of section 40A(2)(b) of the Act itself would not be applicable thereon.

2.4.3. We also find that the one of the reasons for reaching to the conclusion that the interest paid on unsecured loans is excessive or unreasonable by the Learned AO is that the asseseee had given interest free loans and advances. From the perusal of details available on record, we find that these advances represent staff advance, security deposits, income tax refundable and trade advances to business parties. It is not even the case of the Learned AO that the borrowed funds were diverted for advancing interest free advances to related concerns. We find that even majority of these advances were made by the assessee in the earlier years.

In view of the aforesaid facts and circumstances, we hold that the Learned CIT(A) had dealt with this issue elaborately and we find no infirmity in his order and accordingly, the ground no.2 raised by the revenue is dismissed.

3.1. The brief facts of this issue is that the assessee debited repairs and maintenance and coolie and cartage expenses to the extent of Rs. 5,19,376/- and Rs. 37,70,167/- in its profit and loss account and claimed the same as deduction. The Learned AO mechanically proceeded to make disallowance at the rate of 15% of the aforesaid expenditure on an estimated basis as the vouchers are only self made and hence the possibility of inflation of expenditure could not be ruled out. On first appeal, the Learned CITA restricted the disallowance to 10% for the same reason. Aggrieved, the revenue is in appeal before us on the following grounds:- 3. The ld.CIT(A) has erred in restricting the disallowance on account of repairs and maintenance to 10% without considering the fact that the assessee has completely failed to produce/furnish all bills/vouchers and could not produce the genuineness of expenses to the extent of Rs.5,19,376/- and when according to his opinion expenses on account of repairs and maintenance were supported by self made vouchers where there is every possibility to inflate the expenditure.

4. The CIT(A) has erred in restricting the disallowance on account of coolie and cartage to 10% without considering the fact that the assessee has completely failed to produce/furnish all bills/vouchers and could not produce the genuineness of expenses to the extent of Rs.31,71,626/- and when according to his opinion expenses on account of coolie and cartage were supported by self made vouchers where there is every possibility to inflate the expenditure.”

3.2. The Learned DR vehemently supported the order of the Learned AO. In response to this, the Learned AR vehemently supported the order of the Learned CIT(A). 3.3. We have heard the rival submissions and perused the materials available on record. We find that both the lower authorities had come to a conclusion that the possibility of inflating the expenditures by way of self made vouchers cannot be ruled out which fact is not refuted by the Learned AR. Hence in these facts and circumstances, we find to meet the ends of justice, disallowance made by the Learned CITA is reasonable and hence we do not find any reason to interfere with his order. Accordingly, the ground nos. 3 & 4 raised by the revenue are dismissed.