TMI Blog2010 (4) TMI 1056X X X X Extracts X X X X X X X X Extracts X X X X ..... /s.80-IA is allowable. Aggrieved, Revenue is in appeal before us on this issue. 3. At the outset, Ld. Counsel for the assessee stated that this issue is squarely covered in favour of the assessee and against the Revenue in its own case by the decision of Hon ble jurisdictional High Court in the case of CIT v. Prabhudas Kishordas Tobacco Products P. Ltd. (2006) 282 ITR 568 (Guj), wherein the Hon ble jurisdictional High Court has considered the issue that tendu leaves and tobacco, which are used as inputs, do no retain their independent identity after he bidis are rolled after undergoing several process. Commercially, the final product is known in the trade as a distinct commodity and has a separate market. Furthermore, merely because an assessee gets the work done through contract workers, in other words, enters into a contract with the workers and pays them per piece the relief could not be denied. The test is whether the outside agency works directly under the supervision and control of the assessee, it being immaterial whether the processing is done by the workers employed by the assessee at a place outside the premises of the assessee. In relation to the additional reason giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of Gross Profit (GP). For this, Revenue has raised the following ground No.3:- 3. The Ld. CIT(A) XI, A bad has further erred in law and facts while deleting addition of ₹ 1,14,00,920/- on account of G.P. 6. The brief facts leading to the above issue are that the Assessing Officer during the course of assessment proceedings noticed that during the year under consideration the GP ratio is reduced to 10.54% as against GP of earlier year at 11%. Accordingly, the AO discussing the GP ratio, made addition, being the difference of GP disclosed by the assessee and estimated by him at 11%. The AO has not rejected the book results and also not invoked the provision of Section 145 of the Act and without rejecting the book results, he estimated the GP rate based on earlier year. It is the case of the assessee that the assessee-company is dealing in manufacturing of bidi for more than 30 years and maintaining full quantitative and qualitative records of raw materials, production and finished products and such quantitative and qualitative records were produced before the Assessing Officer from time to time and no defect whatsoever was found in the same. Even the accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts in deleting the addition made of ₹ 1,16,26,420/- on account of disallowance of excess interest paid to persons specified under section 40A(2)(b) of the I.T. Act, 1961. 9. The facts in both years are exactly identical, hence we will discuss the facts in ITA No.782/Ahd/2006 for assessment year 2002-03. The brief facts are that the Assessing Officer made disallowance of interest paid to the associate parties @ 22%, being unreasonable as against the loan taken from banks @ 18.25% to 19.05%. The AO disallowed the excess interest being differential of the amount of 22% minus 19.05% = 2.5% of the total interest paid to related parties u/s.40A(2)(b) of the Act. Before the Assessing Officer the assessee pleaded that to carry on the business of about ₹ 248 crores of volume, the company requires huge funds and accordingly the funds were arranged from associate concerns, who are in a position to give big loans. Majority of the borrowings are old and from shareholders of the company. The assessee stated the reason, why higher rate of interest @ 22% comparing the bank interest of 19.5% was paid by the assessee and for this the reasons were submitted as under:- the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns relied upon by the A.R and the observations of the assessing officer in the assessment order. It is seen that he deposited/loans received by the appellant are admittedly for business purposes and for which the assessing officer has not doubted and no stated any thing that the same is not utilized by the appellant for its business purposes. It is further seen that majority of the borrowers are old borrower and that too are the shareholders of the appellant company. 6.2.1 As it could be seen from the reply filed by the appellant, during the course of assessment proceedings that all the persons to whom the appellant company had paid interest are paying tax at maximum marginal rate and copy of acknowledgement of return filed by such depositors are filed before the assessing officer. This shows that there is no loss of revenue with regard to tax liability. Further, the assessing officer has not given any adverse comments in this regard. It is further seen that the appellant is paying interest payment at 22% since last ten years and its claim is consistently allowed by the assessing officer. 6.6.2 As it could be seen from the submission of the A.R., if the appellant had to borro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Jalaldhar vs. Asstt. CIT, has held that interest paid @ 24% per cent was fair and reasonable and did not warrant any disallowance. While doing so, the Tribunal further relied on the decision of Tribunal (SM) Amritsar Bench, in the case of Parmod Kumar Raj Kumar, Phagaram vs. Asstt. CIT in ITA No.267/Asr/2005 for the asst. yr. 2001-02, where it was held as under:- 5.1 I have heard both the parties and considered the rival contentions, examined the facts, evidence and material on record and gone through the orders of the authorities below. The undisputed facts of the case are that the assessee has paid interest @ 24 per cent to persons covered under s. 40A(2)(b) i.e. at the same rate at which interest was claimed and allowed in the past i.e. asst. yr. 2000-01. There is also no disputed about the fact that the borrowed amounts were utilized for the purpose of business. Similar issue came up before the Tribunal. (SMC) Amritsar Bench in the case of M/s. Parmod Kumar Raj Kumar vs. Asst. CIT. in ITA No.267/AST/2005 for the asst. yr. 2001-02 dt. 2nd Sept. 2005 and the Tribunal decided the same in favour of the assessee and against the Revenue by recording following findings in para 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the CIT(A) and delete the impugned disallowance. Accordingly, the grounds of appeal of the assessee are allowed. This order was followed by the Tribunal, Amritsar Bench, in the case of AIM Forgings vs. Astt. CIT (supra) for the asst. yr. 2001-02. The facts of the present case are similar to the facts of the cases already decided by the Tribunal. Respectfully following the same, the order of the CIT(A) is set aside and the AO is directed to allow the interest claimed by the assessee. His ground of appeal is accordingly allowed. 12. Ld. Counsel for the assessee further also relied on the decision of this Tribunal in ITA No.59/Ahd/2005 dated 03-03-2009 in the case of Saumil Traders Pvt. Ld. v ITO Ward-8(1) A bd for assessment year 2001-02, wherein the Tribunal has held in para-13 as under:- 13. We have considered the submissions made. There is no denial of fact that the amount was borrowed by the assessee for the purpose of business in earlier years i.e. since Assessment Year 1993-94. No disallowance has been made in the past. This fact is not controverted by either the Assessing Officer or the learned DR. It is incorrect to compare that rate of interest paid b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carries lesser risk. Even the bank interest is almost at 19.5% and if we calculate the overhead expenses i.e. the registration charges, stamp duty charges, expenses to be incurred for submitting stock statements etc. to the bank, the bank interest will automatically increase to a certain level. Therefore, the comparison of rate of interest paid by the assessee on unsecured loan with the secured loan is incorrect. It is also settled law that the decision how the business should be carried on is the prerogative of the assessee and the Assessing Officer cannot dictate the terms as to how the business should be carried on. While considering the claim under section 36(1)(iii) what is to be examined is whether the amount is borrowed for the purpose of business or not. Since the amount is borrowed in earlier years at a stipulated rate of interest and which is still utilized for the purpose of business, the interest rate could not have been renegotiated. Even the lending rate by banks in respect of secured loan is as high as 19.5%. Therefore, rate of interest paid by the assessee is quite reasonable having regard to the fair market value of such services. The Assessing Officer has not co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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