Interest on borrowing not allowable u/s. 36(1)(iii) if not used for business purpose

JCIT (Asst.) Vs. M/s. Bharath Beedi Works Ltd. (ITAT Bangalore)

Objection of the AO is that  borrowing from Directors and shareholders is not for business purpose. The AO has noted that even as per the assessee’s contention, if the assessee had an intention of starting a branch in Orissa, the same appears to have remained on paper because it has not fructified till the date of passing the assessment order. Before us also, it is not shown that it has come into existence.

The AO has also noted that additional outlay which was claimed to have been necessary for opening a branch in Orissa which was according to the assessee’s own version was around Rs. 15 to 20 crores and the assessee during the relevant period had fixed deposits of more than the said amount and therefore, there was no necessity of taking additional funds at interest at more than the market rate even if it is assumed that the assessee had an intention of opening a branch in orissa.

The AO has referred to two judgments as reported in 25 ITR 265 and 5 ITR 734 as per which the term “used for the purposes of business or profession” mean that used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession. Therefore, for the purpose of allowing deduction u/s.36 (1) (iii) in respect of interest on borrowed funds, it has to be looked into that the borrowed funds were used in fact for business purpose and mere intention is not sufficient to allow deduction u/s. 36(1 )(iii) of IT Act.

The ld. CIT(A) has also noted the details of liability side and asset side of assessee as on 31.03.1998 on page no. 10 of its order and as per the same, as against borrowing of Rs. 9.05 crores from Directors/ shareholders of assessee company as on 31.03.1997, there was fixed deposits with banks of Rs. 18.49 crores on that date against unsecured loan from Directors and Shareholders of Rs. 14.26 crores as on 31.03.1998, the fixed deposits with banks as on 31.03.1998 was to the extent of Rs. 23.10 crores.

Hence, it is abundantly clear that the borrowed funds were not used for any business purpose and these were parked with banks as fixed deposit. As per the noting of CIT(A) on page no. 16 of his order, making deposits in banks is permitted by articles and memorandum of association and therefore, the assessee can have the case that the expenditure by way of interest on borrowed money is wholly and exclusively for the purpose of its business.

This is one thing that making deposits in bank is permitted by articles and memorandum of association and this is totally a different thing that making deposits in banks is business of the assessee. Even as per CIT(A) or as per the assessee, this is not the business of the assessee to make deposits in banks and therefore, merely because making deposits in banks is not debarred by articles and memorandum of association of the company, it cannot be said that making deposits in banks in such huge amount by use of the borrowed fund is for business purpose.

The CIT(A) has followed a judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Bombay Samachar Ltd. as reported in 974 ITR 723. But we find that this judgment is not applicable in the facts of the present case. In that case, it was held by Hon’ble Bombay High Court that the issue in dispute was regarding allow ability of business expenditure in the facts that the assessee did not charge any interest in respect of debit balances with some concerns.

In para no. 4 of this judgment, it is noted by Hon’ble Bombay High Court that the AO and CIT(A) were incorrect in holding that the balances due from Bombay Chronicle Pvt. Ltd. was in respect of any loans advanced by the assessee to that company. It was noted that the said balance was in respect of the common account between the parties in connection with the expenditure in relation to the business agreed to be incurred in common and allocated in respective shares at the end of the year.

In the same para, this is also noted by the Hon’ble High Court that the capital borrowed by the assessee from the outsiders on the other hand was admittedly used by the assessee for the purpose of business and it was also not disputed that no part of the borrowed capital had been utilized for the purpose of advancing loan either to Messrs. Bombay Chronicle Pvt. Ltd. or to Messrs. Cama Norton & Co. On this basis, it was held that dis allowance of interest expenditure is not justified.

In the present case, the facts are totally different. In the present case, the AO has shown by brining cogent material on record that the borrowing of fund from the Directors and shareholders is not for business purpose because against such borrowing of Rs. 9.05 crores as on 31.03.1997 and Rs. 14.26 crores as on 31.03.1998, assessee was having FD with banks of Rs. 18.49 cores and Rs. 23.10 crores respectively. Under these facts, the interest expenditure on these borrowed funds is not allowable u/s. 36(1)(iii) because the assessee could not establish that the borrowing is for business purpose.

Full Text of the ITAT Order is as follows:-

Out of these five appeals, there is one appeal of revenue for Assessment Year 1998-99 and the remaining four appeals are filed by the assessee in respect of Assessment Years 1998-99, 2000-01, 2001-02 and 2007-08.

2. History of these cases is as follow. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. All these appeals were earlier disposed of by the Tribunal in the year 2007 against which the matter was carried by the revenue in appeal before Hon’ble Karnataka High Court and as per judgment dated 17.12.2013 in Income Tax Appeal No. 800 of 2007, the matter in respect of Assessment Year 2000-01, has been restored back to Tribunal for fresh decision. Similarly as per judgment of Hon’ble Karnataka High Court dated 17.12.2013 passed in ITA No. 798/2007, the matter in respect of Assessment Year 2001-02 was also restored back to the file of Tribunal for fresh decision. It is also noted in the order sheet entry dated 25.02.2015 that similar issue was considered by Hon’ble Karnataka High Court in ITA No. 2156/2005 in Assessment Year 1998-99 and the matter was remitted back to the Tribunal for fresh consideration. The appeal for Assessment Year 1998-99 was not posted for fresh hearing because the registry was awaiting the remittance of original record for that year from the from High Court. In this manner, the appeals for Assessment Year 1998-99, 2000-01, 2001-02 were pending before the Tribunal since long and the appeal for Assessment Year 2007-08 was filed by the assessee on 11.11.2016. Even after 25.02.2015, these appeals were fixed for hearing on several dates but for one reason or other, hearing could not take place. Thereafter on 02.03.2017, these appeals were heard but the matter was released subsequently as the order could not be passed within 90 days of the hearing. Under these facts and in view of this fact that these appeals are very old appeals, both sides agreed that these appeals may be taken as heard and both sides will file written submissions and on that basis, these appeals may be disposed of after considering written submissions by both sides. Accordingly, both have filed written submissions before us. The same are reproduced herein below. The written submissions filed by ld. AR of assessee are as under.

“Assessee’s Appeal for AY 1998-99, ITA No. 237/01

Ground No. 1 to 7 is relating to Excise duty included in closing stock

It is submitted that CIT(A) erred in confirming the addition made by the Ld. AO to the income of the appellant being excise duty payable on labeled and unlabelled beedies in closing stock without appreciating the submission of the appellant that excise duties were paid before filing the return of income. A copy of same is enclosed as ANNEX URE A. Further, the CIT(A) also failed to appreciate that if the closing stock is increased, the opening stock also has to be revised to avoid distortion in presentation of accounts. Further it is submitted that the process of manufacturing is complete only when the beedies are labeled, packed and cleared from the factory. Incidence of excise duty arises only when the manufactured beedies are cleared from the factory either to market or to duty paid godwn and not before that. Further, it is to be noted that section 43B cannot be invoked unless the specified amounts in the section are provided for in the accounts are outstanding in the balance sheet.

Ground No. 8, 9, 10, 11 & 12

Restricting interest to 18% as against 21%

It is submitted that the AO has disallowed 3% interest p.a. stating that the rate of interest is excessive as compared to interest charged by commercial bank which was estimated at 18% p.a. by the Assessing officer without appreciating that the same was paid as per the board resolution, copy of which is enclosed as ANNEXURE B (page 11). Further, all deposits were brought from earlier year on which interest @ 21% was paid and allowed by the Department and there are no fresh facts or change in situation in allowing interest at lower rate since consistency has to followed by Department. Further it is also submitted that interest charged by commercial bank is not a bench mark to indicate the prevailing interest rate payable on borrowing from non banking sources such as NDFC’s individual lenders etc. Further, it is a well known fact that bank credit is freely not available and it is saddled with prescribed procedures, further commercial banks charge interest on quarterly rest, which works out to be higher rate on annual basis. Further, by considering all the costs attached to bank it works out to be more than 23%. It is also brought to record that deposit received were unsecured and unencumbered and as such expensive procedure of providing security and mortgage of property doesn’t arise. Hence interest of 21% on such deposit was reasonable justified. Even the Income Tax Act itself provides interest on capital @18% p.a. Therefore the interest charged at 21% is reasonable and justified and should be allowed.

We further submit that the Ld A O is not justified in traveling beyond his scope of assessment and assuming the shoes of the management and thereby presuming the need of borrowal and timing of the borrowal that the assesse ought to have followed, without understanding the nature assessee ‘s business. We beg to submit that, The assesse need to have sufficient liquid funds in the form of Bank FD ‘s etc in the business, as major part of the cost is labour/wages payment, yearly procurement of the raw materials, and volatile fluctuations in raw material prices etc. These facts have been completely overlooked by the Ld A O and also Ld. CIT(A) business

Departmental Appeal for the AY 1998-99

Ground No. 2 — Restricting Interest @ 18% when the borrowings are not relating to assessee’s business.

The finding for the above issue is on Page 14, paragraph 12 of CIT(A) order.

It is submitted that interest paid on capital borrowed was for the purpose of business only and the appellant has gone on record to establish the purpose for which the additional amount was borrowed and the same is ought to be allowed u/s 36(1)(iii) of the Act as held by the Hon’ble Supreme Court in the case of S.A. Builders reported in 288 ITR 01(SC), 2006. Further, the AO has not discharged the onus of proving or established the fact that incremental borrowings has been diverted by the appellant to an activity other than activity of the appellant. Further, the CIT(A) only after having satisfied the same the CIT(A) restricted the interest @ 18% as against 21% claimed by the assessee. (paragraph 14, page 17 of CIT(A) order), Department has accepted the same in written submissions and hence Department cannot step into shoes of Assessee.

Ground No .3 — Unexplained cost of Construction.

It is submitted that when the valuation made by DVO and cost of construction as declared by the assessee in his book is meager, the actual cost of construction has to be considered since it is an audited books of accounts and books are audited and not rejected by the AO. Further, the same has been appreciated by the CIT(A) in paragraph 17, page 17 of CIT(A) order. Further we would also like to place reliance on Delhi High Court decision in the case of CIT vs Ambience Developers and Infrastructure Pvt ltd. Copies enclosed

ASSESSEE’S APPEAL FOR AY 2000-2001, ITA NO 3442/04

Ground No. 2 – Restricting interest to 18% as against 21% (same as 1998-99)

Ground No. 3 – 14A

The above ground is not pressed by the assessee

Ground No. 4 and 5 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed

It is submitted that, the appellant runs lorries on hire to take bazaar loads of cargo from various places and collected lorry hire amounts and the income earned on such lorry hire was accepted by the Department as business income. CIT(A) also did not dispute the fact that appellant has carried on the business of running the motor lorries on hire. In preceding years in similar situations the appellant had claimed the depreciation @ 40% which was allowed and hence a copy of the assessment order of the previous year which is 1998-99 and 2006-07 and the same is enclosed as ANNEX URE — D for your reference.

Further, the assessing officer has to follow the consistency in this issue while concluding the assessment as held by various judicial precedences.

(i) ITO vs Sri Dev Enterprise — 192 ITR 165

(ii) CIT vs South India Corporation (Agencies) Ltd — 293 ITR 237

ASSESSEE’S APPEAL FOR AY 2001-2002, ITA NO 3769/04

Ground No. 2, 3 & 4 – Restricting interest to 18% as against 21% (same as 1998-99)

Ground No 5 — Penalty on delay in payment of entry tax The assessee has not pressed the above ground.

Ground No. 6 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed (same as 2000-2001)

ASSESSEE’S APPEAL FOR AY 2007-2008 , ITA NO 1903/2016  Ground No. 1 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed

Ground No. 2

Part of arrears of wages disallowed u/s 43 B

The assessing officer has disallowed a sum of Rs 1,99,23,883/- as excess claim of provision u/s 43B of the Act. It is submitted that the arrears of wages were made as per tri- party agreement enclosed which elaborates the method calculating back wages payable to workers who are in service from 1.11.1996 and remaining in service upto 5.10.2006, hence it is a contractual payment as per tri- party agreement and sec 43B does not apply as per the decision of Kolkata Tribunal in the case of Spencer Retail Ltd vs PCIT 2. Further, the agreement does not specify the modus of competition of back wages to such beedi workers who had only worked for part of the year specified in table given below, hence the appellant reasonably estimated a sum of Rs. 42, 55, 235/- as wages payable from such workers who has worked for past 10 yrs and included the same aggregating a sum of Rs. 16,90,98,179/- provided in the account. Hence the arrears of wages is calculated accurately and has become crystallized liability during the year. The table explains the following:

The CIT(A) failed to appreciate the fact that observation by the Assessing officer that back wages including bonus is not correct since as per paragraph 5, clause 1 of part 1 of terms of settlement of tripartite agreement, the back wages include 16.43 statutory benefit. The agreement does not specify statutory benefit as bonus. The liability of bonus arises only on payment of wages, hence in appellant’s case provision made tantamount to arrears of wages but not bonus as alleged by assessing officer. Hence assessing officer is not justified in splitting the arrears of wages in different component based on the facts subsequent to the event after the provision made in the books of accounts which is duly accounted. It is to be noted that the section 43B is applicable only to statutory Bonus not to other statutory benefits. The memorandum of understanding (tripartite agreement) is clearly state that the wages agreed upon therein to be paid in arrears.

Hence it is prayed that, after considering the submission the appeal maybe allowed.”

3. The written submissions filed by the revenue are as under.

“1. On addition made on expenditure not related to business.

The instant case the assessment was completed by making a dis allowance on interest payment as expenditure not relating to business. The assessee company borrowed from its director and shareholders and claimed deduction at 21%. The reason adduced for the borrowing is for the expansion of business which did not materialize, The AO disallowed the claim relying on the apex court decision in the case of The Liquidators of Pusa Ltd vs CIT (25 ITR 265). And Central Provinces Manganese Ore Co. Ltd Vs CIT ( 5 ITR 734). The CIT(A) upheld the addition of interest at 18% and deleted the balance. In this connection kind reference is invited to Para 14 at page 16 of order of CIT(A). There in the CIT(A) gave a clear finding that there was no need to borrow funds for assessee own business, However holding that making deposit in bank is permitted by articles and memorandum of association, the CIT(A) has erred in not considering the fact making deposits in banks out of surplus amount is only an ancillary object of the assessee company and the same cannot be construed as for the purpose of business.

2. On addition made under section 69B

Based on the valuation report filed by the assessee, the AO made an addition under section 69B. The CIT(A) deleted the addition accepting the contention of the assessee, the expenditure cannot be same as the actual expenditure. The CIT(A) has not given any specific finding for deleting the addition made. Reliance is placed on decision of Uttarakhand High court in the case of Smt. Kiran Lata (177 TAXMANN 420) wherein it is held that it does not mean that whatever has been shown by the assessee must be taken as a gospel truth. It is also to be noted that in instant case the valuation report was filed by the assessee without any explanation for the difference.”

4. First we take up the appeal of the revenue for Assessment Year 1998-99 in ITA No. 233/Bang/2001. The grounds raised by the revenue are as under.

“1. The order of Commissioner of Income Tax (Appeal) is opposed to law and facts of the case.

2. The CIT(A) has erred in law in directing the Assessing Officer to disallow only so much of interest paid in excess of 18% on the borrowals not relating to the assessee ’s business, even after being satisfied on facts that there was no need to borrow funds for its business of manufacturing and sale of beedies.

3. The CIT(A) erred in deleting Rs. 1,41,892/- which represented the unexplained cost of construction on the ground that the estimate cannot be the same as actual expenditure.

4. The CIT(A) has failed to appreciate the fact that the addition towards unexplained cost of construction is based on the assessee’s own estimate supported by valuer’s report.

5. For these and such other grounds that may be urged at the time of hearing, it is prayed that the order of CIT(Appeals) be set aside and that of the Assessing Officer restored.”

5. Regarding the first issue i.e. dis allowance of interest paid in excess of 18% on the borrowed funds, the objections of the AO are noted in para no. 6.3 and 6.4 of the assessment order which are reproduced herein below for the sake of ready reference.

“6.3 The assessee’s contention that it had an intention of starting a Branch in Orissa appears to have remained on paper as the same has not fructified till date. Moreover, the additional outlay which was claimed to have been necessary for opening a branch in Orissa was according to the assessee’s own version was around Rs.15 to 20 crores. The assessee during the relevant period had fixed deposits of more than the said amount. Therefore, there was no necessity of taking additional funds at more than the market rate even if it is assumed that the assessee had an intention of opening a branch at Orissa. In view of this, the expenditure that has been incurred in respect of theses additional deposits cannot he said to be for the purpose of business.

The Supreme Court held the words “used for the purposes of business or profession” obviously mean “used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession”. In other words, the machinery or plant must be use, in whatever sense that word is taken, for the purpose of that business which is actually carried on and the profits of which are asses sable, at least for a part of the accounting year concerned. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under this section in respect of them [The Liquidators of Pusa Ltd Vs CIT (25 ITR 265).

The expression ‘used for the purposes of the business’ in these provisions means ‘used for the purposes of the business during the accounting year’ and not merely that the machinery etc. must have been used for other purposes (Central Provinces Manganese Ore Co. Ltd. Vs CIT) (5 ITR 734).

6.4 In view of the above, the learned Authorized Representative’s contention that the interest paid/payable in respect of these loans are allowable as a business expenditure cannot be accepted as these amounts were not used for the purpose of business during the accounting year. As the deduction cannot be allowed while computing the business income under section 28 to 37 of the Income tax Act, the claim of the assessee will be disallowed.”

6. When the assessee carried the matter in appeal before CIT(A) on this issue, this issue was decided by CIT(A) as per para no. 14 of its order which is reproduced herein below for the sake of ready reference.

“14. While discussing issue no.2, the case of dis allowance of interest u/s.40A(2), I have made a fairly detailed analysis of the financial position of the assessee as on 31-3-1997 and 31-3-1998 and pointed out that there was no need of the funds borrowed from shareholders and directions there was no need to borrow funds for its business of manufacture and sale of beedies. That observation is applicable in respect of the additional borrowals also.

But this is a closely held company, and if the people who are controlling the affairs of the company, borrow funds from themselves who are the shareholders and directors paying high interest and utilizing it only for investment in fixed deposits and current account in bank and other deposits and investments which yield low return, they can also find reasons, for the borrowal, which suit them. Whether the reasons are genuine or made up, it can contend that it is not for the Assessing Officer to decide how its business is to be conducted.

The position being that the money borrowed was not used for non-business purposes (making deposit in banks is permitted by articles and memorandum of association), the assessee can have a case that the expenditure by way of interest on borrowed money was wholly and exclusively for the purpose of its business. I would, in the circumstance, consider it to be not a very fruitful exercise to deal with the claim of the assessee as of interest on borrowal for non-business purposes.

However, the observations made in the context of issue no.2 in the context of dis allowance of interest on opening balance of similar borrowals is applicable here also. If the assessee took loan on the security of the huge fixed deposits it had in banks, the banks would have charged only 1% or so higher than the interest that is given to the assessee on the fixed deposits as is customary i.e., at best the assessee would have had to incur only about 13% or 14% interest on similar borrowal if made from banks. If it invited deposits from public and availed deposits from public also, the interest payable would have been only 14% or so. Considering these it is quite clear that the market value of the facilities i.e. availability of borrowed funds would have been only around 14% or slightly higher (including other costs if the assessee went from borrowing from public) in the circumstance. The Assessing Officer has considered 18% as fair market value of the facilities while dealing with interest on opening balance of borrowals from the shareholders and directors. I have held that this is quite fair while dealing with issue no.2. I would follow the finding here also, and hold that the case is for estimating the fair market value of the facility at 18% per annum on the additional borrowals during this year and for disallowing the excess applying sec.40A(2) of the I.T. Act.”

7. From reading of the relevant para of the order of CIT (A) reproduced from the assessment order and from the order of CIT(A) in respect of this issue, we find that the objection of the AO is this that this borrowing from Directors and shareholders is not for business purpose. The AO has noted that even as per the assessee’s contention, if the assessee had an intention of starting a branch in Orissa, the same appears to have remained on paper because it has not fructified till the date of passing the assessment order. Before us also, it is not shown that it has come into existence. The AO has also noted that additional outlay which was claimed to have been necessary for opening a branch in Orissa which was according to the assessee’s own version was around Rs. 15 to 20 crores and the assessee during the relevant period had fixed deposits of more than the said amount and therefore, there was no necessity of taking additional funds at interest at more than the market rate even if it is assumed that the assessee had an intention of opening a branch in orissa. The AO has referred to two judgments as reported in 25 ITR 265 and 5 ITR 734 as per which the term “used for the purposes of business or profession” mean that used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession. Therefore, for the purpose of allowing deduction u/s.36 (1) (iii) in respect of interest on borrowed funds, it has to be looked into that the borrowed funds were used in fact for business purpose and mere intention is not sufficient to allow deduction u/s. 36(1 )(iii) of IT Act. The ld. CIT(A) has also noted the details of liability side and asset side of assessee as on 31.03.1998 on page no. 10 of its order and as per the same, as against borrowing of Rs. 9.05 crores from Directors/ shareholders of assessee company as on 31.03.1997, there was fixed deposits with banks of Rs. 18.49 crores on that date against unsecured loan from Directors and Shareholders of Rs. 14.26 crores as on 31.03.1998, the fixed deposits with banks as on 31.03.1998 was to the extent of Rs. 23.10 crores. Hence, it is abundantly clear that the borrowed funds were not used for any business purpose and these were parked with banks as fixed deposit. As per the noting of CIT(A) on page no. 16 of his order, making deposits in banks is permitted by articles and memorandum of association and therefore, the assessee can have the case that the expenditure by way of interest on borrowed money is wholly and exclusively for the purpose of its business. This is one thing that making deposits in bank is permitted by articles and memorandum of association and this is totally a different thing that making deposits in banks is business of the assessee. Even as per CIT(A) or as per the assessee, this is not the business of the assessee to make deposits in banks and therefore, merely because making deposits in banks is not debarred by articles and memorandum of association of the company, it cannot be said that making deposits in banks in such huge amount by use of the borrowed fund is for business purpose. The CIT(A) has followed a judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Bombay Samachar Ltd. as reported in 974 ITR 723. But we find that this judgment is not applicable in the facts of the present case. In that case, it was held by Hon’ble Bombay High Court that the issue in dispute was regarding allow ability of business expenditure in the facts that the assessee did not charge any interest in respect of debit balances with some concerns. In para no. 4 of this judgment, it is noted by Hon’ble Bombay High Court that the AO and CIT(A) were incorrect in holding that the balances due from Bombay Chronicle Pvt. Ltd. was in respect of any loans advanced by the assessee to that company. It was noted that the said balance was in respect of the common account between the parties in connection with the expenditure in relation to the business agreed to be incurred in common and allocated in respective shares at the end of the year. In the same para, this is also noted by the Hon’ble High Court that the capital borrowed by the assessee from the outsiders on the other hand was admittedly used by the assessee for the purpose of business and it was also not disputed that no part of the borrowed capital had been utilized for the purpose of advancing loan either to Messrs. Bombay Chronicle Pvt. Ltd. or to Messrs. Cama Norton & Co. On this basis, it was held that dis allowance of interest expenditure is not justified. In the present case, the facts are totally different. In the present case, the AO has shown by brining cogent material on record that the borrowing of fund from the Directors and shareholders is not for business purpose because against such borrowing of Rs. 9.05 crores as on 31.03.1997 and Rs. 14.26 crores as on 31.03.1998, assessee was having FD with banks of Rs. 18.49 cores and Rs. 23.10 crores respectively. Under these facts, the interest expenditure on these borrowed funds is not allowable u/s. 36(1)(iii) because the assessee could not establish that the borrowing is for business purpose. Hence on this issue, we reverse the order of CIT(A) and restore that of the AO. Accordingly ground no. 2 of the revenue’s appeal is allowed.

8. Regarding ground no. 3 of the revenue’s appeal, we find that on this issue, it is noted by the AO in para no. 7 of the assessment order that the assessee constructed a building at an admitted cost of Rs. 33,10,592/- which was claimed to have been completed during the year and on the request of the AO, the assessee filed valuation report about the cost of construction as per which the cost was estimated at Rs. 34,52,484/-. The AO made addition of Rs. 1,41,892/- being the difference in these two figures u/s. 69B of the IT Act. This addition was deleted by CIT(A) on this basis that there is no much difference in the cost admitted by the assessee which is on the basis of the accounts and the cost estimated by the approved valuer. We also find that the difference is less than 5% of the admitted cost. For such a small difference between the actual cost as per books of accounts and estimated cost as per the valuer, no addition is We, therefore, decline to interfere in the order of CIT(A) on this issue. Ground no. 3 is rejected.

9. In the result, the appeal of the revenue for Assessment Year 1998-99 is partly

10. Now we take up the appeal of the assessee for Assessment Year 1998 – 1999 in ITA No. 237/Bang/2001.

11. The grounds raised by the assessee are as under.

“1. The order of the C.T.T. (A) is opposed to facts of the case and principles of law.

2. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the addition made by the A. O to the income of your Appellant a sum of Rs. 14,14,061/- being the excise duty payable on labeled and unlabeled beedies in closing stock.

3. The learned CIT(A) erred in not considering the contention of the appellant that if the value of closing stock of a year is increased the opening stock of the year also needs to be revised on the same basis in order to avoid distortion in the profits of the year.

4. The learned CIT(A) erred in rejecting the contention of your appellant that the process of manufacture in the case of beedies is complete only when they are labelled, packed moved from the factory to the go down and at that point alone excise duty is payable.

5. The learned CIT(A) erred in upholding the action of the AO in treating duty payable on labeled and unlabeled beedies as part of the cost of valuing the closing stock of the year.

6. On the facts and in the circumstances of the case the CIT(A) erred in rejecting the contention of the appellant that a method of accounting regularly employed by the appellant for the past many year cannot be disturbed arbitrarily.

7. The CIT(A) further erred in rejecting the contention of your appellant that only on item debited to manufacturing and Trading Account can be reckoned as part of cost for valuing closing stock on cost basis.

8. On the facts and in the circumstances of the case the CIT(A) erred in holding that interest paid by an Appellant on moneys borrowed from its directors and share holder in excess of 18% p.a. is unreasonable and upholding dis allowance by the A/O of such excess.

9. On the facts and in the circumstances of the case the CIT(A) erred in holding that the interest calculated at 21% paid by the appellant on moneys borrowed by it from its directors and shareholders is excessive as compared to interest charged by commercial banks which was about 18% p.a.

10. On the facts and in the circumstances of the case the CIT(A) erred in holding that the interest paid to its directors and shareholders in excess of 18% p.a. is unreasonable as the appellant could have mobilized deposits from general public at 14% p.a.

11. On the facts and in the circumstances of the case, the CIT(A) erred in holding that the interest paid to its directors and shareholders in excess of 18% p.a is unreasonable as the appellant could have raised loans on the security of its fixed deposits at the rate of about 12% to 13%.

12. On the facts and in the circumstances of the case, the CIT(A) erred in confirming the view of the AO that interest paid on the loans raised by the appellant in the year of account from its directors and shareholders in excess of 18% p.a. is unreasonable.

13. The learned CIT(A) erred in confirming the levy of interest u/s 234A & B of the IT. Act, 1961.

14. The Appellant. craves leave to add to amend, alter or delete any of the foregoing grounds.”

12. Ground no. 1 is general. Regarding ground nos. 2 to 7 in respect of addition of Rs. 14,14,061/- on account of excise duty payable on labeled and unlabeled beedies in closing stock, it has been submitted by ld. AR of assessee that the CIT(A) has confirmed this addition without appreciating the submission of the assessee that excise duty were paid before filing the return of income. In this regard, we find that it is noted by CIT(A) on page no. 7 of is order that it does not have the details of payment of excise duty in the months following previous year 1997-98 and therefore, he has not given categorical finding on this aspect regarding allowability of deduction u/s. 43B of the IT Act and he directed the assessee to produce evidence before the AO to show that the excise duty was paid on or before 30.11.1998 and on same, the AO should examine the same and allow deduction u/s. 43B. We find no infirmity in this direction of CIT(A) and hence, on this issue, we decline to interfere in the order of CIT(A).

13. Ground nos. 8 to 12 are in respect of restricting the interest expenditure to 18% as against 21% claimed by the assessee. On this issue, this is submitted by ld. AR of assessee in written submissions that interest of 21% was paid as per Board Resolution, copy of which is available on page no. 11 of written This was also submitted that all these deposits were brought forward from earlier year on which interest of 21% was paid and allowed by department and there is no fresh fact that change in situation in respect of allowing interest on earlier rate and since consistency has to be followed by department, the dis allowance is not justified. It is submitted that bank credit is not freely available and it is saddled with certain procedures. It is also submitted that commercial banks charge interest on quarterly rest, which works out to be higher rate on annual basis. This is also submitted that the AO is not justified in traveling beyond his scope of assessment and assuming the shoes of the management and thereby presuming the need of borrowal and timing of the borrowal that the assessee ought to have followed, without understanding the nature of assessee’s business. It is also submitted that assessee needs to have sufficient liquid funds in the form of Bank FD’s etc. in the business, as major part of the cost is labour / wages payment, yearly procurement of the raw materials, and volatile fluctuations in raw material prices etc. and these facts have been completely overlooked by the AO and CIT(A) and therefore, the dis allowance should be deleted. The ld. DR of revenue supported the orders of authorities below.

14. We have considered the rival submissions. We find that as per para no. 11 of the order of CIT(A), it is stated by him that when the assessee is having sufficient FDs with banks, the banks provide loan against such FDs at an interest rate of 1% higher than interest allowed on FD and therefore, interest payment of 21% is excessive. This is not the case of the assessee that to the extent of money borrowed from the Directors and shareholders, the assessee was not having FDs with banks, this is also not the case of the assessee that against FDs with banks, loan is not easily available at an interest rate which is only 1 % above the interest paid by the banks on FDs. This is also not the case of the assessee that interest paid by the banks on FD is 20% and therefore, if any money is borrowed from banks, banks will be charging interest at a rate of 21% i.e. interest being paid on FD + 1%. Considering these facts, we find no infirmity in the order of CIT(A) in this issue also because if this aspect is considered strictly that any interest payment to relatives in excess of interest received on FD plus 1% is unreasonable then the dis allowance would have been much more because interest being paid by banks on FDs is never more than 12% to 13% even during that period and hence, the interest payable to bank on borrowing from bank against FD will be maximum 14% per annum as noted by CIT(A) on page no. 14 of its order and the AO has held that reasonable rate of interest is 18% which is 4% higher than this rate of 14% which will be payable to bank if money is borrowed against security of FD lying with banks. Hence on this issue, we decline to interfere in the order of CIT(A). These grounds are also rejected.

15. The remaining ground no. 13 is consequential because this is regarding charging of interest u/s. 234A and 234B of the IT Act.

16. In the result the appeal filed by the assessee for Assessment Year 1998-99 is

17. Now we take up the appeal of the assessee for Assessment Year 2000-01 in ITA No. 3442/Bang/2004. The grounds raised by the assessee are as under.

“1. The order of the learned C.I. T. (Appeals), Mangalore in so far as against the appellant is opposed to the facts of the case and principles of law.

2. On the facts and circumstances of the case, the learned C.I.T. (A) erred in holding that interest paid by the appellant on monies borrowed from the Directors and Shareholders in excess of 18% p.a. is unreasonable and upholding the dis allowance by the AO. to that extent.

3. On the facts and circumstances of the case, the learned C.I.T. (A) erred in upholding the dis allowance of expenditure to the extent of Rs. 15,000/- as alleged to pertain to exempted income.

4. On the facts and circumstances of the case, the learned C.I.T.(A) erred in confirming the allowance of depreciation on trucks to 25% as against 40% claimed by the appellants.

5. On the facts and circumstances of the case, the leamed C.I.T(A) erred in restricting the depreciation on lorries purchased and put to use in business during 1^st day of October 1998 and 31^stMarch, 1999 in accordance with third proviso to Sec. 32(1)(ii).

6. Your appellants crave for leave to add, to amend, alter or delete any of the forgoing grounds.

7. For these grounds and such other grounds as are advanced at the time of hearing, your appellant pray that the appeal be allowed.”

18. It was agreed by both sides that ground no. 1 is general. Regarding ground no. 2, it was agreed by both sides that issue involved is identical to issue involved in ground nos. 8 to 12 in Assessment Year 1998-99 and the same may be decided in similar line. In Assessment Year 1998-99, we have decided this issue against assessee and in the present year also, the ground no. 2 of the assessee’s appeal is rejected on similar lines.

19. Regarding ground no. 3, it is submitted by ld. AR of assessee that this ground is not pressed and accordingly, this ground is rejected as not pressed.

20. Ground nos. 4 and 5 are in respect of allow ability of depreciation on trucks which has been restricted by AO to 25% as against 40% claimed by the assessee, it is submitted by ld. AR of assessee that assessee runs lorries on hire to take bazaar loads of cargo from various places and collected lorry hire amounts and the income earned on such lorry hire was accepted by the department as business income and therefore, depreciation is allowable at the rate of 40%. The ld. DR of revenue supported the order or authorities below.

21. We have considered the rival submissions. On page no. 8 of his order, CIT(A) has followed the judgment of Hon’ble Karnataka High Court rendered in the case of Veneer Mill Vs. CIT as reported in 201 ITR 764 wherein it was held that assessee should be engaged in business of running the vehicles on hire and if the assessee is mainly in the business of manufacturing and hiring, assessee is not entitled for higher rate of depreciation. On this issue, it is noted by AO in para no. 6 of the assessment order that as per the assessee, the vehicles in question were used for carrying goods of others also on return journeys after delivery of assessee’s own goods at distant places and earned income from it as appearing in P & L account. From these facts narrated by the AO in the assessment order which is not controverted by the ld. AR of assessee before us, it comes out that user of trucks on hiring is not on regular basis but on ad hoc basis and therefore, this judgment of Hon’ble Karnataka High Court rendered in the case of Veneer Mill Vs. CIT (supra) is squarely applicable and therefore, respectfully following the same, we decline to interfere in the order on CIT(A) on this issue. Before parting, we would like to discuss two judgments of which reliance has been placed by ld. AR of assessee in written submissions filed before us. These judgments are

1. CIT Vs. Sri Dev Enterprises

2. CIT Vs. South India Corporation (Agencies) Ltd.

22. The first judgment cited is judgment rendered in the case of CIT Vs. Sri Dev Enterprises as reported in 192 ITR 165. In this case, the substantial question raised before Hon’ble Karnataka High Court was this as to whether the Tribunal was right in law in holding that since no additions have been made in earlier years, the opening debit balance cannot be considered during the current year and that the enquiry has to be limited to the increase in the current year only. The dispute in that case was regarding allow ability of interest on borrowed In the present case, the dispute is regarding the allow ability of depreciation at higher rate and the same is depending on user in the present year and in that case, the decision was dependent on user of borrowed funds after borrowing in earlier year I.e. year of borrowal. Hence, in our considered opinion, in the facts of the present case, this judgment cited by ld. AR of assessee is not applicable.

23. The second judgment cited before us is the judgment of Hon’ble Madras High Court rendered in the case of CIT VS. South India Corporation (Agencies) Ltd. as reported in 293 ITR 237. In that case also, this was the dispute as to whether there can be dis allowance of interest in respect of funds borrowed in earlier year when there was no dis allowance of interest in the earlier year and there was no fresh borrowing. Hence, for same reasons, this judgment is also not applicable in the present case because dis allowance of interest is dependent on user of borrowed funds after borrowing in earlier year i.e. year of borrowal. In the present case, the dispute is regarding the allow ability of depreciation at higher rate and the same is depending on user in the present year. Hence it is seen that facts and disputes in that case was different and therefore, this judgment is also not applicable in the present case.

24. In view of the above discussion, this issue is also decided against the assessee.

25. In the result, the appeal of the assessee for Assessment Year 2000-01 is also

26. Now we take up the assessee’s appeal for Assessment Year 2001-02 in ITA No. 3769/Bang/2004. The grounds raised by the assessee are as under.

“1. The order of the learned C.I.T. (Appeals), Mangalore in so far as against the appellant is opposed to the facts of the case and principles of law.

2. On the facts and circumstances of the case, the learned C.I.T (A) erred in law in sustaining the dis allowance u/s 40A(2)(a) and restricting the allowable interest to 17% p.a. as against 18% allowed in the preceding year of account.

3. On the facts and circumstances of the case, the learned C.I. T. (A) erred in holding that the interest paid by the appellant on monies borrowed from the Directors and shareholders in excess of 17% p.a. as unreasonable and in sustaining the dis allowance by the Assessing Officer to that extent.

4. The learned C.I.T. (A) has erred in sustaining the dis allowance of simple interest in excess of 17% p. a. on the deposits from Directors and Shareholders u/s 40A(2)(a) ignoring the fact that the interest at 18% p.a. was allowed as reasonable in the immediate preceding year of account.

5. The learned C.I.T. (A) has erred in restricting the allowance of entry tax penalty to 50% of the sum ignoring the fact that it is in the nature of interest for the delay in payment.

6. The learned C.I.T. (A) has erred in sustaining the restriction of depreciation on lorries to 25% as against 40% claimed by the

7. Your appellant crave for leave to add, alter or amend these grounds of appeal.

8. For these grounds and such other grounds as are advanced at the time of hearing, your appellant pray that the appeal be allowed.”

27. It was agreed by both sides that ground no. 1 is general and regarding ground nos. 2, 3 and 4, it was agreed that this issue is same as raised by the assessee as per ground nos. 8 to 12 in Assessment Year 1998-99 and ground no. 2 in Assessment Year 2000-01 and the same may be decided in the present year also on similar line. This issue was decided against the assessee for Assessment Year 1998-99 and 2000-01 and therefore, on the similar line, in the present year also, this issue is decided against assessee. Accordingly ground nos. 2, 3 and 4 are rejected.

28. Regarding ground no. 5, it was submitted by ld. AR of assessee that this ground has not pressed and accordingly this ground is rejected as not pressed.

29. Regarding ground no. 6, it was submitted in the written submissions that this issue is identical to ground nos. 4 and 5 raised in Assessment Year 2000-01 and the same may be decided on similar line. In Assessment Year 2000-01, this issue was decided against the assessee and therefore, in the present year also, this issue is decided against the assessee.

30. In the result, the appeal of the assessee for Assessment Year 2001-02 is also dismissed.

31. Now we take up the appeal of the assessee for Assessment Year 2007-08 in ITA 1903/Bang/2016. The grounds raised by the assessee are as under.

“I. The order of the learned Commissioner of Income tax (Appeals), Mangaluru is opposed to law and on facts of the case.

II. Restriction of depreciation claimed on Lorries:

a) The learned CIT(A), Man galuru has erred in law in confirming the additions made by the Assessing Officer amounting to Rs.8,95,595/- by restricting the depreciation claimed on lorries at 15% of WDV as against at 30% claimed by the appellant by relying on the following decisions, which are not at all applicable to the appellant’s case.

i) CIT Vs. Gupta Global Exim (P) Ltd. (17 Taxman 474) (SC)

ii) Veeneer Mills Vs. CIT (201 ITR 764) (Kar)

b) The learned CIT(A), Man galuru has failed to comprehend the fact that, the higher rate of depreciation were allowed for the preceding past several years, which were allowed and hence, ought to have following consistency as held by various courts.

III Dis allowance under section 43B – provision for prior period wages:

a) The learned CIT(A), Mangaluru has erred in law in confirming the dis allowance made section 43B amounting to Rs.l,99,23,884/- by the AO, being part of the provision made for arrears of wages.

b) The learned CIT(A), Mangaluru has erred in law in holding that, no evidence on the record to support the fresh claim of the appellant, by grossly ignoring the tripartite agreement and detailed written submissions made.

IV. The Appellant craves leave to add, amend or alter any of the forgoing grounds.

V. For these and any other grounds that may be urged before the Hon’ble ITAT, it is prayed that the Hon’ble ITAT may allow the appeal with cost.”

32. It was agreed by both sides that ground no. 1 is general and the issue involved in ground no. 2 is same which was raised by the assessee in Assessment Year 1998-99 as per ground nos. 8 to 12, in Assessment Year 2000-01 in ground nos. 4 and 5 and in Assessment Year 2001 -02as per ground no. 6 and the same may be decided on similar line. In all the earlier years, this issue has been decided by us against assessee and therefore, in the present year also, this issue is decided against assessee. Ground no. 2 is rejected.

33. The next issue is regarding dis allowance u/s. 43B in respect of provisions for prior period wages. On this issue, it is submitted by ld. AR of assessee that the AO has disallowed a sum of Rs. 1,99,23,883/- as excess claim of provision u/s. 43B of IT Act. It is also submitted that arrears of wages were provided as per third party agreement enclosed which elaborates the method of calculating back wages payable to workers who are in service from 01 .11.1996 and remaining in service up to 05.10.2006 and therefore, it is a contractual payment as per three parties agreement and section 43B does not apply as per the decision of Kolkata Tribunal in the case of Spencer Retail Ltd. Vs. PCIT 2. She also submitted that the agreement does not specify the mode of competition of back wages to such beedi workers who had only worked for part of the year specified in table given in the written submissions and therefore, the assessee reasonably estimated a sum of Rs. 42,55,235/- as wages payable to such workers who has worked for past 10 years and included the same aggregating a sum of Rs. 16,90,98,179/- provided in the account. It is also submitted that as per para no. 5 of clause 1 of part 1 of terms of settlement of tripartite agreement, the back wages include 16.43% statutory benefit and the agreement does not specify the statutory benefit as bonus. It is also submitted that liability of bonus arises only on payments of wages and therefore, in the provision made is for arrears of wages and not bonus as alleged by the AO. She also submitted that section 43B is applicable only to statutory bonus and not to other statutory benefits and therefore, the dis allowance made by the AO is not justified. The ld. DR of revenue supported the orders of authorities below.

34. We have considered the rival submissions. In this regard, we find that on page no. 4 of the assessment order, complete details are noted by the AO in respect of statutory benefit of 16.43% as per the agreement. As per the AO, it includes leave with wages of 3.1%, National and Festival Holiday wages of 5% and bonus of 8.33%. Moreover we find that as per terms of tri party agreement, submitted along with written submissions, it is specified that out of Rs. 4,500/- payable to each worker, 16.43% will be treated as statutory benefit and 20% were remaining wages payable shall be to PF authority concerned for the respective employees and hence, it is seen that as per terms of the agreement, no PF is deductible from the statutory benefit. If the statutory benefit is in the form of wages and salary, then it cannot be excluded from the applicability of PF deduction. This also goes to show that statutory benefit is not in the form of wages and salary. This is also very important to note that as per the payment of Bonus Act, 1965, payment of bonus at the rate of 8.33% is a must even if the assessee is running into losses and therefore, the bifurcation of 16.43% statutory benefit noted by AO on page no. 4 of the assessment order has to be accepted as correct. It is also worth noting that even if this bifurcation is not correct as contended by the learned AR of the assessee, the assessee should have brought on record the correct bifurcation of statutory benefit of 16.43% which has not been done by the assessee. Considering all these facts and in view of above discussion, we find no infirmity in the order of CIT(A) on this issue also. Accordingly this ground is also rejected.

35. In the result, the appeal of the assessee for Assessment Year 2007-08 is also dismissed.

36. In the combined result, the appeal of the revenue for Assessment Year 1998-99 is partly allowed whereas all the four appeals of the assessee are dismissed.

Order pronounced in the open court on the date mentioned on the caption page.