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2015 (6) TMI 393 - ITAT AHMEDABAD

2015 (6) TMI 393 - ITAT AHMEDABAD - TMI - Excess payment of interest to the sister concern - CIT(A) deleted the addition - Held that:- The net rate charged from Kamala Associates was determined after taking into consideration all the aspects of commercial expediency, the rate difference given by Assessee were in the nature of discounts which were reduced from receipts and the net receipts were credited to Profit and Loss account and that provisions of Section 40(A(2) are applicable only in case .....

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to others for dyeing and printing activities done by it, had estimated the dyeing and printing charges that the Assessee should have earned from Kamala Associates, its sister concern. We find that ld. CIT(A) by a well reasoned and detailed order has deleted the made by A.O by holding that there was no provision in the Act to tax income which has not accrued and further it was not a case of Section 40A(2)(b). Before us Revenue has not placed any material on record to support its contentions or co .....

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om the material on record are as under. 3. Assessee is a company stated to be engaged in the business of dyeing and printing of fabrics on job work charges. Assessee filed its return of income for A.Y. 2005-06 on 29.10.2005 declaring total income at ₹ 82,03,177/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 29.12.2007 and the total income was determined at ₹ 4,20,82,167/-. Aggrieved by the order of A.O., Assessee c .....

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eciding ground no. 1,2 & 3 of Revenue s appeal. Thereafter vide order dated 29.11.2013 the appeal in ITA No. 721/A/2013 was recalled to decide the aforesaid 3 grounds. Thus before us, the 3 grounds of Revenue which were to be adjudicated reads as under:- 1. The CIT(A) has erred in law and on facts in deleting the addition made on account of excess payment of interest to the sister concern. 2. The CIT(A) has erred in law and on facts in deleting the addition made by the Assessing Officer u/s. .....

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has taken unsecured loan of ₹ 1,90,00,000/- from Varelli Fabrics Pvt. Ltd. at 18% per annum and had paid interest of ₹ 36,30,267/-. A.O was of the view that the interest paid was excessive in nature as the market rate of interest was 10% and therefore the interest expenditure to the extent of 8% was excessive and accordingly worked out the interest at ₹ 17,30,267/- as being excessive and disallowed the same. Aggrieved by the order of A.O., Assessee carried the matter before ld .....

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the AO is that the payment is excessive and without any business prudence. The A.O. has not doubted the genuineness of payment. In view of these facts being same as in A.Y. 2003-04, respectfully following the decision of ITAT dated 28.2.07 in ITA NO.2878/AHD/2006 for A.Y.2003-04, the disallowance made during the year is deleted. Hence these grounds of appeal are allowed. 5. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us. 6. Before us, ld. D.R. supported the o .....

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A.O had not doubted genuineness of payment of interest and in earlier years similar disallowance made by the A.O were deleted by Hon ble ITAT. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) nor could point out as to whether the decision of Hon ble Tribunal in earlier year in Assessee s own case has been reversed by Hon ble High Court. On the contrary we find that the Co-ordinate Bench of Tribunal in Assessee s own case for A.Y. 2002-03 in ITA .....

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has claimed rate difference provided to Kamala Associates, a sister concern of the Assessee. He also noticed that Assessee had not provided rate difference to other outside parties. The submission of the Assessee was not found acceptable to the A.O. He was of the view that the Assessee has suppressed receipt by way of charging at lesser price from group concerns. He therefore by invoking provisions of Section 40A(2)(a) worked the disallowance at ₹ 1,76,93,464/-. Aggrieved by the order of A .....

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that the appellant has made payment to Kamala Associates (KA) which the appellant has not mentioned in the Tax Audit Report and this amount is disallowable u/s40A(2)(a). The appellant has, on the other hand argued that it has not made any payment to KA. I agree with the appellant it has given discount on account of bulk job given to it by KA and issued credit notes to KA for the discount and it has received the net amount after the discount. During the financial year ended on 31.03.2005 relevant .....

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ters per party. Kamla Associate being the biggest customers having 63% share of business of the Company. The job lots provided by Kamla Associates much bigger than the other parties. The net rate charged from M/s. Kamla Associates has been determined after taking into consideration all the aspects of commercial expediency. M/s Kamla Associates was the biggest customer of the appellant company. The job work business procured from Kamla Associates contained the bigger job lots compared to the othe .....

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llowed u/s.40A(2)(a). In view of this, the discount given cannot be treated as unreasonable and it is proper as per general business practices. 8.2.6.3 Even otherwise, with respect to the comparative rates to see the comparison of rates it is seen that no single dyeing or printing job work carried out by it for outsider has been carried out for M/s. Kamla Associates and M/s. Garden Silk Mills. The assessee submitted the details before the A.O. to show that there was no quality in common processe .....

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ent for M/s kamla associates vis-a-vis outside parties. In this connection the appellant submits that there was no intention of the Company to evade tax by allowing rate difference to Kamla Associates since M/s. Kamla Associates also falls in tax bracket of Maximum Marginal Rate on the said rate difference income. The appellant during the course of assessment proceedings clearly stated that the rate difference in the nature of discount was given to Kamla Associates based on the quantum of jobs r .....

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s been made or if to be made to any specified person and Assessing Officer is of the opinion that, such expenditure is excessive or unreasonable having regard to the fair market value. Accordingly the disallowance can be made u/s.40A(2) if and only if there has been case of expenditure, else no disallowance can be made be made by invoking section 40A(2) of the Act. With reference to the facts of the case, the appellant had given credit notes for rate difference/ discount to M/s Kamla Associates .....

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that u/s.40A(2) only when the expenditure is incurred, which is found to be excessive or unreasonable in respect of which payments have been made to the sister concern and such expenditure is found by the Assessing Officer excessive or unreasonable disallowance is attracted. Since there was no expenditure incurred, the Assessing Officer was not right in making disallowance of expenditure by invoking provision of section 40A(2) of the act in view of the decision of the jurisdiction ITAT Ahmedaba .....

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e to evaluate the legitimate needs of the business at a point of time when the services were rendered and this would involve an inquiry as a business man because in times of dire need services are obtained even at higher cost, the ultimate aim being to earn profit or to maintain the business relations. According to the ITAT the AO shall have to find out what benefit is derived by the assessee and this would not necessarily confine to the year in question but shall have to take overall picture de .....

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ot be stand the test of appeal. 9. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us. 10. Before us, ld. D.R. supported the order of A.O. On the other hand ld. A.R. reiterated the submissions made before ld. CIT(A) and supported the order of ld. CIT(A). 11. We have heard the rival submissions and perused the material on record. We find that while deleting the addition, ld. CIT(A) has interalia given finding that the net rate charged from Kamala Associates was det .....

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the findings of ld CIT(A). We therefore find no reason to interfere with the order of ld. CIT(A) and this ground of Revenue is dismissed. Ground no. 3 is with respect to deletion on account of suppression of job charges received from sister concern. 12. During the course of assessment proceedings and on perusing the comparative chart of rate per meter of processing charges, AO noticed that Assessee has charge lower processing charges to its group companies as compared to the amount charged to ou .....

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of the view that Assessee was following differential yardstick in charging the job charges for sister concern. He thereafter on the basis of the average rate of printing charges charged to Garden Silk Mills, worked out the average job charges that Assessee should have charged to the Kamala Associates and accordingly estimated the suppression of receipts on account of dyeing charges at ₹ 11,45,024/- and on account of printing charges at ₹ 80,30,582/- and thus made an aggregate additi .....

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an average from Kamla Associates and ₹ 7.36 per meter from Garden Silk Mills Ltd. for the dyeing activity. In respect of printing charges, the assessee has charged ₹ 15.07 per meter on an average but it has charged ₹ 14.63 per meter from Garden Silk Mils Ltd. and ₹ 13.57 per meter from Kamla Associates. This means that the assessee has charged Kamla Associates lesser than even other sister concerns, i.e. Garden Silk Mills, leave alone outside parties. The A.O., therefore, .....

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harges, the A.O. stated that the average of outside parties and Garden Silk Mills comes to ₹ 15.04 per meter but even if the rate of Garden Silk Mills is adopted still the assessee has charged ₹ 1.06 per meter less from Kamla Associates. In value terms this comes to ₹ 80,30,582 (1.06 x 7576021). The A.O., therefore, held that even in comparison with Garden Silk Mills, the assessee has charged ₹ 91,75,606/- less from Kamla Associates even in comparison with Garden Silk Mil .....

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he same has been given during the appellate proceedings. The argument of the appellant as reproduced above is acceptable that for so many reasons the rate charged would differ from Job to job. The appellant has shown that the rates are not comparable and hence averaging cannot give the correct result. When there are hundreds of qualities comparing their rate would be similar to averaging the rate of TVs in a show room selling black and white TV. along with colour picture tube TVs of sizes varyin .....

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