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Income Tax Appellate Tribunal – Amritsar
Income Tax Officer vs Chamba Mal Roop Chand on 31 August, 2000
Equivalent citations: (2001) 70 TTJ Asr 43


G. L. Garoo, A.M.

The revenue has filed appeal against the order passed by the Commissioner (Appeals), Bhatinda, in A. No. Commissioner (Appeals)/IT/BTI/399/1991-92, dated 18-3-1992 and the assessee has filed cross-objection. The revenue has taken following grounds in their appeal :

(1) On the facts and in the circumstances of the case of learned Commissioner (Appeals) has erred in deleting the addition of Rs. 37,500 made on account of disallowance of interest under section 36(1)(iii) of the Income Tax Act.

(2). It is prayed that the order of the Commissioner (Appeals) be set aside and that of the assessing officer be restored.

2. The assessee made an advance of Rs. 11,50,000 to M/s. S. K. Fibres (P) Ltd, at interest of 12 per cent per annum in addition to amount given as share application money to the tune of Rs. 5,01,000. The assessing officer has observed in the order that no interest has been charged on the share application money advanced. He, therefore, disallowed the proportionate interest on the said advance because the assessee has raised loan from sister concerns, namely, M/s Roshan Lal Pawan Kumar and M/s Roshan Lal Raj Kumar and consequently interest to the tune of Rs, 37,500 is disallowed by the assessing officer. The assessing officer further observed that neither any dividend nor any director fee, etc. was received from M/s. S.K. Fibre (P) Ltd., Panipat. Aggrieved against the order passed by the assessing officer, the assessee filed an appeal before the learned Commissioner (Appeals) and the learned Commissioner (Appeals) has given his finding in para 2.3 of the order which is as under:

“2.3. I have given careful consideration to the arguments of the learned counsel and I am inclined to agree with him in view of the fact that loan of Rs. 3,12,550 raised from the sister concerns has in turn been given to M/s. S. K. Fibres as interest bearing loan on which interest has been charged at 12 per cent per annum and credited to the assessee’s account as is clear from the copy of account of M/s. S.K. Fibres appearing in the books of assessee. ‘The assessee has earned total interest of Rs. 1, 14,266 from M/s. S. K. Fibres and as such loan raised from the sister concerns were utilised for the purpose of business. There appears to be no justification for disallowing interest to the tune of Rs. 37,500. The assessing officer has wrongly disbelieved that assessee had not given Rs. 5,01,000 as share application money to M/s. S.K. Fibres in view of the copy of account filed of the Panipat company. As such the disallowance of interest is not justified and the same is deleted.’

3. The learned Departmental Representative relied on the order passed by the assessing officer. The learned Departmental Representative pleaded that no evidence for purchase of shares by the firm or its partners in the shape of share certificates was produced before the assessing officer. He has also observed that since the main business of the assessee-firm is that of a commission agent, dealing in purchase and sale of Sarson, Binola, Khal, tea and other foodgrains products, etc. There was no evidence that during the year under consideration, they have changed the mode of business for purchase of shares.

4. The learned counsel of the assessee has filed a certificate from the director of M/s Ess Kay Fibres (P) Ltd., and a certificate of chartered accountants, M/s. Pardeep Tayal & Co. The certificate indicates that M/s S. K. Fibbers (P) Ltd., Panipat, has received share application money for 5,000 equity shares of Rs. 100 each from M/s. Chamba Mal Roop Chand, Mansa Mandi, Manda and the same amount was outstanding in share application money as on 31-3-1991. The learned counsel also pleaded that only interest to the tune of Rs. 24,376 was debited to profit and loss account. The learned counsel has also relied on the decision of the Tribunal in the case of M/s. Madden Lal Sunder Dass v. ITO passed in ITA No. 734 (Asr)/1989, for the assessment year 1988-89, dated 12-3-1991. The learned counsel pleaded that the partners were having sufficient money to make investment in other companies. In support he filed a copy of the accounts of the partners, which is placed at page 2 of the paper book.

5. There is no evidence on record to support the stand taken by the assessing officer that advance of Rs. 5,01,000 was not on account of share application money. In fact, there was separate loan of Rs. 11,50,000 made to M/s. S.K. Fibres (P) Ltd. on which interest of 12 per cent has been charged. This clearly shows the intention of the assessee that advance of Rs. 5,01,000 was made for allotment of shares. In support of their stand, they produced a confirmation from M/s. S.K. Fibres (P) Ltd. and certificate of the Chartered Accountants. The investment in shares is for business purpose of the assessee. It is immaterial whether or not the purchase of shares is mentioned in the partnership and aims and objectives. It is mutually agreed by the partners to extend business in different areas, then there is no legal infirmity in extending business in different areas. It is mutually agreed by the partners. We, therefore, find no infirmity in the finding given by the learned Commissioner (Appeals). Consequently, the appeal of the revenue is dismissed.

C.O. No. 51(Asr) 1992

6. In the cross-objection, the assessee has taken only ground which is as under:

“That the learned Commissioner (Appeals) is not justified to uphold the disallowance of Rs. 15,870 out of total interest paid at Rs. 48,480.”

6.1. The issue involved in the C.O. relates to the disallowance of interest by the assessing officer on the payments made to close relatives. The assessing officer is of the opinion that 12 per cent is a market rate of interest because the same has been paid to M/s. Roshan, Lal Pawan Kumar, Bhikhi. He made disallowance amounting to Rs. 15,870 under section 40A(2) of the Income Tax Act, 1961. The matter was looked into by the learned Commissioner (Appeals). The learned Commissioner (Appeals) observed that the assessing officer was justified in restricting the interest to family members at 12 per cent. The learned counsel of the appellant pleaded that disallowance under section 40A(2) regarding interest has been held by the Tribunal in ITA No. 61(Asr) of 1980 for the assessment year 1978-79 in the case of Shri Anil Kumar, Jalandhar, dated 5-10-1983, to be reasonable upto 24 per cent. This Bench of the Tribunal has consistently held that market rate of interest will be reasonable upto 24 per cent. Disallowance under section 40A(2) is to be looked into from the market value of the services and not the individual action of the appellant. Even on that score the appellant has received interest at 12 per cent and the receipt of interest at 12 per cent is duly reflected in the books of Account. The assessee has paid interest to trading party as per norms of the trade at 12 per cent. So far as the individual depositors are concerned they are paid interest at 18 per cent which is equivalent to bank interest and which is less than the interest of 20 per cent which is held as reasonable by the Tribunal. Consequently the C.O. filed by the appellant is allowed.

7. In the result, the appeal filed by the revenue is dismissed and the C. O. of the assessee is allowed.


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