TMI Blog2014 (1) TMI 1352X X X X Extracts X X X X X X X X Extracts X X X X ..... 6, declining marginally to 20.50% for A.Y. 2007-08 - There is no basis to the finding of the brokerage rate at 3%, which again cannot be considered as constant in a free and competitive market - In the regime of declining interest rates, the same ought to be much lower - The reliance by the ld. CIT(A) on the order by his predecessor for A.Y. 2003-04 is thus completely misplaced - The interest rates are subject to variation over time, so that a finding in its respect would need to precede a factual examination and determination - The issue has been restored for fresh adjudication. Disallowance u/s. 40A(2)(a) in respect of purchase of building material from associate concerns - Held that:- No material had been brought on record by the Revenue to prove the claim by the Assessing Officer that the rate charged by the associate concern, M/s. Topaim Properties Pvt. Ltd., was on the higher side - Decision in Ahuja Platinum Properties(P) Ltd. Versus JCIT & ACIT [2014 (1) TMI 743 - ITAT MUMBAI] followed - Decided against Revenue. Disallowance u/s 36(1)(iii) of the Act – Relatable Interest – The CIT(A) has paased the order having been influenced by the year-end balances, also adopted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall refer to the figures for A.Y. 2005-06. The assessee claimed Rs.1,08,00,859/- by way of debit to its profit and loss account toward reimbursement of administrative/consultancy charges to two group concerns, namely, M/s. Jaigopal Consultancy Services Pvt. Ltd. (Rs.84.15 lacs) and M/s. Ahuja Resource Management (Rs.23.85 lacs). Likewise for A.Y. 2007-08, for which the total charge stood at Rs.17.23 lacs. The A.O. found the assessee's claim unacceptable inasmuch as the assessee had failed to exhibit the basis of the allotment of the expenditure stated to be incurred for group concerns, merely referring to a MOU, which again is only an internal document, applicable to the group concerns. Further, it is not shown that the firm Ahuja Resource Management, which is said to manage the man-power for the entire Ahuja group companies, so that whatever expenditure is incurred by the said firm on appointment or maintenance of the man power is shared amongst all the constituent companies, is equipped with any particular skill or a higher calibre in the relevant area, i.e., vis- -vis the assessee-company. The commercial expediency of the expenditure needs to be proved, and the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through brokers and hence, brokerage of 3% is charged over and above the rate of interest. In assessee's case, loans borrowed from outsiders were in majority of case at the rate of interest including brokerage ranging 18% to 27%. Thus, average rate of interest worked out to more than 18% as against the finding of the AO that the Assessee borrowed from outsiders/others @ 15%. Ahuja Properties has in turn borrowed funds from outsiders and has paid interest ranging from 15% to 21%. It has charged to all the group concerns at the rate of 19.5% and from the profit and loss account of Ahuja Prop., it can be seen that it has incurred expenses for maintaining the loans and after reducing the payment of interest to outsiders, has shown some profit earning on financing business and offered the same for tax and paid tax. The Assessee is a loss making company and hence, there is no avoidance of tax. In such circumstances no disallowance can be made by invoking the provisions of Sec.40A(2)(b) of the Act as laid down in the following decisions CIT vs Amrit Soap C. 308 ITR 287 (P H) DCIT vs. J.H. Finvest (P) Ltd. 21 ITR (Trib) 620 (Del). We therefore find no grounds to interfere with the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to the fair market rate (price) thereof, is misconceived and misleading, and stands rightly rejected by the A.O. In fact, the assessee's explanation itself is a tacit admission of the prevailing interest rate being lower inasmuch as it justifies the interest paid on the basis of incurring interest cost at a much lower rate of 16.60% p.a. and 13.50% p.a. for the two years respectively. 6.2 The ld. CIT(A) for A.Y. 2003-04 allowed the assessee's appeal on the basis of a factual finding of the prevailing interest rate, gross of brokerage, to be in the range of 18% p.a., so that the same is comparable with interest rate incurred, particularly considering that the interest on market loans is to be paid up-front, effectively pushing up the interest rate (cost), while in the instant case the interest has been charged in account at the year-end. These findings, as would be noted, stood confirmed by the tribunal. 6.3 Our first observation in the matter, therefore, is that there has been no factual examination of the matter by the ld. CIT(A) for the current year, who has decided the same de hors the assessee's explanation and the facts and circumstances of the case. The rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for the current years, we have already expressed our view of it being without merit. 6.4 Under the circumstances, therefore, we only consider it fit and proper to restore this issue back to the file of the ld. CIT(A) for an adjudication afresh in accordance with law, by issuing definite findings of fact, and after allowing proper opportunity of hearing to both the sides. We decide accordingly. 7. Ground No.3 of the Revenue's appeal for AY 2005-06 is in respect of a disallowance u/s. 40A(2)(a) qua purchase of building material from associate concerns, who are also in the same business of real estate development as the assessee. This issue has been considered by the tribunal in the assessee's case for A.Y. 2003-04, wherein a similar disallowance for Rs.96.79 lacs was made by the Revenue, per paras 31 to 38 of its order (supra), deciding the same vide paras 39 and 40. The tribunal found that no material had been brought on record by the Revenue to prove the claim by the Assessing Officer (A.O.) that the rate charged by the associate concern, M/s. Topaim Properties Pvt. Ltd., was on the higher side. As a reading of the relevant parts of the said order would show, it tacitly app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at. The impugned disallowance of Rs.16,53,270/- has been worked out by him by applying the interest rate of 15% p.a. on the excess of interest-free advances given (Rs.670.27 lacs) over the interest-free advances (credit) availed of by the assessee (Rs.560.05 lacs), i.e., at Rs.110.22 lacs. The ld. CIT(A) examined the assessee's case from the stand point of S. A. Builders Ltd. vs. CIT [2007] 288 ITR 1 (SC), to find that no case of commercial expediency stood made out. The relief allowed by her to the assessee is again on the same premise of availability of adequate interest-free capital, i.e., as found favour with the tribunal for A.Y. 2003-04, so that the credit to that extent was to be allowed. The assessee in fact disputes this, stating that the year-end balances are not indicative of the funds being availed of and also disbursed during the course of the year. 10.2 Clearly, firstly, no case for commercial expediency has been made out. The assessee's submission before the ld. CIT(A), reproduced at para 7.2 (pgs.9-14) of the impugned order stands perused. The avenue of the monies lent have firstly been explained only in terms of the net monies lent, i.e., net of recovery made dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd which may not be indicative of the correct fund availment obtaining during the year, even as argued by the assessee itself. Toward this, we are in agreement with the assessee that it is the average outstanding during the year and not the year-end balance that is relevant. This is as the balance may not be constant but vary from time to time. Secondly, interest, as a measure of the resource cost, would depend on the resource actually utilized. In fact, the interest incurred, a part of which is disallowed for diversion for non-business purposes, is only in terms of its average utilization. Again, as funds are generally raised only for business purposes, the assessee would need to establish non utilization of interest-free funds for business purposes as at the beginning of the year. Without doubt, however, where there is adequate application for business purposes, the presumption would be of the same being from interest bearing borrowings, with the balance funding being met by own resources or interest-free borrowings. 10.5 We, accordingly, only consider it fit and proper that the matter is restored back to the file of the first appellate authority to establish availability of su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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