Case Law Details
IN THE ITAT DELHI BENCH ‘G’
DCIT v. Sports Station (India) (P.) Ltd.
IT Appeal Nos. 2936, 3256 & 3262 (Delhi) of 2011
[Assessment Years 2007-08 & 2008-09]
MARCH 30, 2012
ORDER
A.N. Pahuja, Accountant Member
These three appeals – cross appeals for the AY 2007-08 filed on 3rd June, 2011 by the assessee and on 16th June, 2011 by the Revenue against an order dated 28th February, 2011 of the ld. CIT(A)-XII, New Delhi and appeal filed by the Revenue for the AY 2008-09 against an order dated 9th March, 2011 of the ld. CIT(A)-XII, New Delhi, raise the following grounds:-
I.T.A. No. 3262/D/2011-Revenue [AY 2007-08]
“1(a) On the facts and circumstances of the case, the ld. CIT(A) erred in law and merit of the case in deleting the addition of Rs. 8,35,40,000/- out of total addition of Rs. 9,57,40,000/- made by the Assessing Officer on account of unexplained cash credits.
(b) On the facts and circumstances of the case the ld. CIT(A) erred in law and merit of the cash in deleting the disallowance made by the AO of Rs. 78,37,586/- out of total addition of Rs. 81,80,651/- on account of interest payable.
2. On the facts and circumstances of the case the ld. CIT(A) erred in law and merit of the case in deleting the disallowance of interest amounting to Rs. 5,47,596/- made by the AO u/s 40A(2)(b) of the Income-tax Act, 1961.
3. he appellant craves to amend, modify, alter, add or forgo any ground of appeal at any time before or during the hearing of the appeal.”
I.T.A. No. 2936/D/2011-Assessee [AY 2007-08]
“1. The assessee having furnished confirmations and related documents in respect of such persons and trade creditors from whom it has raised loans aggregating to Rs. 8,52,40,000/-, the CIT(A) erred in not accepting the total confirmations filed and further erred in disallowing confirmations aggregating to Rs. 17,00,000/- and the consequential interest of Rs. 18,559/- in respect thereof.
2. That the CIT(A) erred in rejecting confirmations aggregating to Rs. 17 lacs merely because the related parties failed to mention their respective PAN No. with complete disregard to the fact that the assessee could not be penalized for the default of such persons for their non compliance of provision of sub-section (5A) of section 139A of the Act in respect of which Assessing Officer could have initiated action u/s 272B of the Act.
3. That the order of the authorities below being contrary to the facts and circumstances of the case and in law the appeal be allowed.”
I.T.A. No. 3256/D/2011-Revenue [AY 2008-09]
“1. On the facts and circumstances of the case, the learned CIT(A) erred in law and merit of the case in deleting the addition of Rs. 10,64,461/- made by the Assessing Officer on account of excessive interest payment to persons covered u/s 40A(2)(b) of the Income-tax Act.
2. On the facts and circumstances of the case, the learned CIT(A) erred in law and merit of the case in deleting addition of Rs. 1,27,558/- made by the Assessing Officer on account of depreciation on computer accessories.
3. The appellant craves to amend, modify, alter, add or forgo any ground of appeal at any time before or during the hearing of this appeal.”
2. Adverting first to ground no.1 in the appeal of the Revenue and ground nos. 1 & 2 in the appeal of the assessee for the AY 2007-08, facts, in brief, as per relevant orders are that return declaring loss of Rs. 10,15,51,540/- filed on 14th November, 2007 by the assessee, engaged in the business of trading in Footwear, Apparel, accessories & equipment and skin care products, after being processed on 14.08.2008 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act) was selected for scrutiny with the service of a notice issued u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee raised substantial unsecured loans during the year. Accordingly, a notice dated 23rd January, 2009 u/s 142(1) of the Act was served upon the assessee by the AO, seeking details of all unsecured loans, confirmations and copies of the bank account of the said creditors. However, the assessee did not respond to this notice. Subsequently, on 10th September, 2009, the assessee was again requested to furnish complete details, evidence and genuineness of transactions in fresh unsecured loans and the case was adjourned to 22nd September, 2009. However, none appeared on the said date. Later, a letter dated 07.10.2009 was filed on 23rd November, 2009, wherein the assessee submitted as under:-
“As regards unsecured loans we enclose statement of unsecured loan account. In respect of unsecured loan from trade deposit and shareholders we enclose confirmation received.”
2.1 On perusal of the details, the AO pointed out that a list showing opening and closing balance in respect of 44 parties was filed whereas confirmations from three parties namely The classic, K.B. Mathur and Meera Mathur were filed from whom no fresh unsecured loans were taken during the year; rather only interest was credited. No confirmation or other document in respect of remaining 41 parties was filed. Since the assessee did not establish genuineness of the credits, the AO again reminded the assessee vide order-sheet entry dated 23.11.2009 and the case was adjourned to 30th November, 2009. Despite seeking further adjournment, the assessee did not establish genuineness of the creditors even until 14th December, 2009 ,when the assessee merely stated as under:-
“1. Detailed statement of unsecured loans is enclosed. As regards loans received from the following person their confirmations are enclosed: Mrs. Roma Khanna (Rs. 25,43,362), Mrs. Neera Sehgal (Rs. 20 lacs). The Classic (Rs. 4,71,677/-), Mr. K.B. Mathur (Rs. 9,43,680/-) and Mrs. Meera Mathur (Rs. 9,43,680/-) are enclosed. The other confirmations are awaited and will be filed in due course.”
2.2 Since sufficient opportunity had already been allowed and the assessee did not establish genuineness of the credits nor even submitted confirmations of all the unsecured creditors, the AO added an amount of Rs. 9,57,40,000/- in respect of the following fresh creditors:-
| S.No. | Name | Particulars of amount [In Rs.] | Total Amount [In Rs.] | Amount of interest [In Rs.] |
| 1 | Sh.A.P. Sehgal | 12.07.061,00,00,000
04.09.06 1,00,00,000 |
2,00,00,000 | 2204110 |
| 2 | Sh.Amit Mathur | 03.10.0625,00,000 | 25,00,000 | 1,85,188 |
| 3 | Anjum | 29.11.062,90,000 | 2,90,000 | 14,808 |
| 4 | Anshul Kumar | 01.10.062,00,000 | 2,00,000 | 18,959 |
| 5 | Arvind Kr. HUF | 1.10.065,06,000 | 5,60,000 | 71,978 |
| 6 | Sh. Ashok Mathur | 10.06.061,00,00,000 | 1,00,00,000 | 12,11,301 |
| 7 | B.G. & G’s | 27.09.063,00,000 | 3,00,000 | 9,173 |
| 8 | Esha Mathur | 12.02.072,00,000 | 2,00,000 | 3,945 |
| 9 | Hooda Enterprises | 27.06.062,00,000
22.09.06 3,00,000 |
5,00,000 | 18,559 |
| 10 | Jyoti Kumar | 14.08.0612,40,000 | 12,40,000 | 1,10,446 |
| 11 | Kanchana enterprises | 30.09.063,50,000 | 3,50,000 | 26,250 |
| 12 | Malhotra Enterprises | 04.04.067,00,000
06.05.06 3,77,765 10.05.06 1,22,235 |
12,00,000 | 0 |
| 13 | Oriental Eccentrics P. Ltd. | 01.02.0720,00,000
29.03.07 25,00,000 |
45,00,000 | 40,000 |
| 14 | Rajesh Sehgal | 12.07.061,00,00,000
04.09.06 3,00,00,000 |
4,00,00,000 | 37,81,643 |
| 15 | Ridhi enterprises | 10.04.06.5,00,000
19.07.06 1,25,000 21.09.06 1,25,000 20.11.06 1,25,000 28.02.07 1,25,000 |
9,00,000 | 1,11,498 |
| 16 | Roma Khanna | 13.02.0725,00,000 | 25,00,000 | 48,287 |
| 17 | S.K. Trading | 05.07.065,00,000 | 5,00,000 | 0 |
| 18 | Sehgal Enterprises P. Ltd. | 30.11.0650,00,000
04.01.07 25,00,000 |
75,00,000 | 2,25,342 |
| 19 | Shreenat Fabrics | 30.03.074,00,000 | 4,00,000 | 0 |
| 20 | Star Shoppers | 05.02.072,50,000
10.03.07 2,50,000 |
5,00,000 | 2,219 |
| 21 | Tags Global | 08.01.075,00,000 | 5,00,000 | 6,740 |
| 22 | Amit Khanna | 05.09.0610,00,000 | 10,00,000 | 90,205 |
| 9,57,40,000 | 81,80,651 |
2.3 Besides, the AO disallowed interest of Rs. 81,80,651/- in relation to the aforesaid creditors.
3. On appeal, the learned CIT(A) reduced the addition to Rs. 17 lacs in the following terms:
“5.2 At the appellate stage the appellant moved an application under Rule 46A and furnished the confirmation from 16 persons out of the 22 persons on account of whom addition were made as ‘unexplained cash credit’. These 16 person are mentioned here under:
| S.No | Name | Nature | Total Amt. | Total interest | Remarks | |
| 1 | Sh.A.P. Sehgal | Unsecured loan | 20,000,000 | 22,04,110 | Confirmation attached | |
| 2 | Sh. Amit Mathur | Unsecured loan | 25,00,000 | 1,85,188 | Confirmation attached | |
| 3 | Anjum | Unsecured loan | 2,90,000 | 14,808 | Confirmation attached | |
| 4 | Anshul Kumar | Unsecured loan | 2,00,000 | 18,959 | Confirmation attached | |
| 5 | Arvind Kr. HUF | Unsecured loan | 5,60,000 | 71,978 | Confirmation attached | |
| 6 | Sh.Ashok Mathur | Unsecured loan | 1,00,00,000 | 12,11,301 | Confirmation attached | |
| 7 | BG&G’s | Trade deposit | 3,00,000 | 9,173 | Confirmation attached | |
| 8 | Esha Mathur | Unsecured loan | 2,00,000 | 3,945 | Confirmation attached | |
| 9 | Hooda Enterprises | Trade deposit | 5,00,000 | 18,559 | Confirmation attached | |
| 10 | Jyoti Kumar | Unsecured loan | 12,40,000 | 1,10,446 | Confirmation attached | |
| 11 | Kanchana Enterprises | Trade deposit | 3,50,000 | 26,250 | Confirmation attached | |
| 12 | Malhotra Enterprises | Trade deposit | 12,00,000 | – | Confirmation attached | |
| 13 | Oriental Eccentrics P. Ltd. | Trade deposit | 45,00,000 | 40,000 | Confirmation attached | |
| 14 | Rajesh Seghal | Unsecured loan | 4,00,00,000 | 37,81,643 | Confirmation attached | |
| 15 | Ridhi Enterprises | Trade deposit | 9,00,000 | 1,11,498 | Confirmation attached | |
| 16 | Roma Khanna | Unsecured loan | 25,00,000 | 48,287 | Confirmation attached | |
| Total | 85240000 | 78,56,145 |
5.3 These were sent to the Assessing Officer for investigation and further comments vide office letter dated 13/01/2011. The Assessing Officer in reply to the remand report vide her letter dated 02/02/2011 has stated as follows:
“In this case, the assessee has filed confirmation from 18 parties in respect of unsecured loans. I have gone through the confirmation filed by the assessee. The confirmation filed by the assessee are only photocopy of statement of account of various persons from whom unsecured loans were taken in the books of the accounts of the assessee. These photocopies of confirmation are counter signed by the persons who have provided unsecured loans. During the course of assessment proceedings, on various occasions, the assessee was asked to file the confirmation of these unsecured loans, which the assessee has failed to do. If the assessee has filed the confirmation during the course of assessment proceedings, the genuineness of the same would have been verified. At this stage, it is not possible to verify the genuineness of the transaction of unsecured loans, the creditworthiness of the person etc by perusing the confirmation filed. Further, at this stage also, the assessee has submitted that they have sent letter for confirmation and the same is still awaited which shows that the assessee is not able to obtain the confirmation from the persons from whom unsecured loans were taken. This shows doubt in the genuineness in the unsecured loans. In view of this, the addition needs to be sustained. In respect of other additions, the Assessing Officer given detailed finding in the assessment order and therefore, the same also needs to be sustained”
5.4 The submission given by the Assessing Officer has been perused and the contention that had the assessee filed the confirmation during the course of assessment proceedings the genuineness of the same would have been verified is not acceptable for if the assessee could manage all the confirmations during the assessment proceedings there was no necessity of filing them as additional evidence under Rule 46A at the Appellate Stage. Since these confirmations are crucial to the adjudication of the appellant proceedings they are admitted on the ground that it took the appellant sometime to collect the confirmation.
5.5 Moreover, nothing prevented the Assessing Officer from carrying out the necessary verification since, the appellant had filed 16 confirmations. However, it is seen that two of the confirmation filed by the appellant do not mention the PAN No or the address. In the absence of the PAN No. and the address it is not possible to carry out the necessary verification.
5.6 It is seen that the appellant has not furnished the necessary details in the following confirmations.
| S.No | Name of the assessee | Deficiency | Amount | Interest | |
| 1 | Hooda Enterprises | No PAN & address | 5,00,000 | 18.559 | |
| 2 | Malhotra Enterprises | No address | 12,00,000 | – | |
| Total | 17,00,000 | 18,559 |
5.7 Thus, out of the total confirmation filed by the appellant amounting to Rs. 8,52,40,000/- the confirmations which do not mention the PAN and address amounting to Rs. 17,00,000/- is being disallowed. Thus, the valid confirmation filed by the appellant comes to Rs. 8,35,40,0001- (8,52,40,000-17,00,000), the consequential interest payable on this comes to Rs. 78,37,586/- (78,56,145 -18,559). Hence the amount of credit balance which is treated as explained comes to Rs. 8,35,40,000/-and the amount of interest on this which comes to Rs. 78,37,586/- is regarded as genuine.
5.8 The Assessing Officer had made an addition of Rs. 9,57,40,000/ as ‘Unexplained cash credit’ and he made a further disallowance of Rs. 81,80,651/- on account of interest on it. As the assessee has given confirmations amounting to Rs. 8,35,40,000/-an addition of Rs. 1,22,00,000/- is confirmed on account of incomplete confirmation in some cases and absence of confirmation in other cases. The consequential disallowance of interest on this works out to be Rs. 3,43,065/- (81,80,651 – 78,37,586). Thus a disallowance of Rs. 1,22,00,000/- on account of ‘Unexplained cash credit’ and Rs. 3,43,0651- on account of interest payable on it is confirmed.
5.9 Thus, out of the above confirmations filed by the appellant which contain both the details i.e. the PAN and the address of the creditors are only allowed and the above mentioned creditors who have filed the confirmation at the appellate stage but have not filed their PAN and address is being disallowed.”
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A),deleting the addition of Rs. 8,35,40,000/ on account of unsecured credits besides interest of Rs. 78,37,586/- thereon while the assessee is in appeal before us, in respect of confirmation of addition of Rs. 17,00,000/- and interest of Rs. 18,559/- thereon. The ld. DR while carrying us through the impugned order contended that the assessee did not establish either creditworthiness of the aforesaid creditors or genuineness of the transactions. Even the ld. CIT(A) while reducing the addition did not record any findings on the creditworthiness of the creditors and genuineness of the transactions. While referring to decision in CIT v. Biju Patnaik [1986] 160 ITR 674/26 Taxman 324 (SC), the ld. DR argued that the AO was not confronted with the confirmations filed before the ld. CIT(A).
5. On the other hand, the ld. AR on behalf of the assessee while carrying us through the impugned order and page 18 of the paper book, contended that the assessee filed confirmation of M/s Malhotra Enterprises, reflecting their PAN. Therefore, the ld. CIT(A) was not justified in upholding the addition in respect of amount received from Malhotra Enterprises.
6. We have heard both the parties and gone through the facts of the case as also the aforesaid decision relied upon by the ld. DR. Indisputably, the amount of Rs. 9,57,40,000/- was received from new creditors by way of unsecured loans/trade deposits and the assessee paid interest thereon of Rs. 81,80,651/-. There is no dispute before us in respect of addition of Rs. 1,22,00,000/- and disallowance of interest thereon. The only dispute raised by the Revenue before us is in respect of deletion of addition of Rs. 8,35,40,000/- and interest of Rs. 78,37,586/- thereon while the assessee is in appeal against upholding of addition of Rs. 17,00,000/- and interest of 18,559/-. Despite various notices issued u/s 142(1) of the Act by the AO, asking the assessee to establish the genuineness of fresh creditors, the assessee did not furnish all the confirmations or any evidence in support of genuineness of the transactions with the aforesaid unsecured creditors. Even when the AO repeatedly asked the assessee to submit confirmations of the various persons, the assessee did not comply. As a result, addition of Rs. 9,57,40,000/- u/s 68 of the Act was made besides disallowance of interest of Rs. 81,80,651/-. On appeal, the ld. CIT(A) deleted the addition of Rs. 8,35,40,000/- and interest of Rs. 78,37,586/- only on the basis of confirmations from 14 parties, without recording any findings on the creditworthiness of these fourteen creditors or even genuineness of the transactions. The ld. CIT(A) also did not record any finings in respect of creditworthiness of the two creditors of Rs. 17 lacs and genuineness of the transactions with them while upholding the said addition. There is nothing to suggest that the ld. CIT(A) undertook any independent enquiries relating to the said 16 creditors in order to ascertain their creditworthiness. The ld. CIT(A) did not elaborate by analyzing facts of each of the creditor nor referred to any material as to how creditworthiness of these creditors and genuineness of the transactions, is established when neither sources of their income or copies of their bank accounts were submitted before the AO and nor even these creditors were produced before the AO. This approach of the ld. CIT(A) is not in accordance with law. It is well established that onus is on the assessee to establish identity and creditworthiness of the creditors apart from genuineness of the transactions. Merely establishing the identity of the creditor is not enough as held in Shankar Industries v. CIT [1978] 114 ITR 689 (Cal.); C. Kant & Co. v. CIT [1980] 126 ITR 63/[1981] 5 Taxman 64 (Cal.); Prakash Textile Agency v. CIT [1980] 121 ITR 890/4 Taxman 323 (Cal.); Oriental Wire Industries (P.) Ltd. v. CIT [1981] 131 ITR 688 (Cal.); CIT v. United Commercial & Industrial Co. (P.) Ltd. [1991] 187 ITR 596/56 Taxman 304 (Cal.); and CIT v. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (Cal.). Even mere filing of confirmatory letters does not discharge the onus that lies on the assessee as held in Bharati (P.) Ltd. v. CIT [1978] 111 ITR 951 (Cal.); CIT v. W.J. Walker & Co. [1979] 117 ITR 690 (Cal.) and CIT v. United Commercial & Industrial Co. (P) Ltd. [1991] 187 ITR 596/56 Taxman 304 (Cal). Moreover, mere furnishing of the particulars or payment by account payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine as concluded in CIT v. Precision Finance Co. (P.) Ltd. [1994] 208 ITR 465/[1995] 82 Taxman 31 (Cal.); Nizam Wool Agency v. CIT [1992] 193 ITR 318/[1991] 59 Taxman 187 and CIT v. United Commercial & Industrial Co. (P.) Ltd. [1991] 187 ITR 596/56 Taxman 304 (Cal.). Hon’ble Apex Court in CIT v. P. Mohanakala [2007] 291 ITR 278/161 Taxman 169 (SC) observed that :
“A bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by an assessee; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the books; or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income-tax as the income of the assessees of that previous year. The expression “the assessees offer no explanation” means where the assessees offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessees. It is true the opinion of the Assessing Officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.”
6.1 Hon’ble jurisdictional High Court in Indus Valley Promoters Ltd. v. CIT [2008] 305 ITR 202/174 Taxman 516 (Delhi) held as under:
“It is well-settled that the assessee must discharge the burden of proving the identity of the creditors and also to give the source of the deposits. In other words, the creditworthiness of the depositors must be established to the satisfaction of the Assessing Officer. Where there is an unexplained cash credit, it is open to the Assessing Officer to hold that it is income of the assessee and no further burden lies on the Assessing Officer to show that income in question comes from any particular source.”
6.2 In the instant case, the assessee did not care to submit even confirmations of the sixteen creditors before the AO and there is no material on record, establishing creditworthiness of these creditors or genuineness of transactions nor the ld. CIT(A) recorded any findings on these aspects. In the light of view taken in the aforesaid decisions and considering the facts and circumstances in the instant case before us, a mere glance at the impugned order reveals that the order passed by the ld. CIT(A), without even analyzing as to how the creditworthiness of each of the sixteen creditors or genuineness of the transactions with them, is established particularly when despite sufficient opportunity allowed by the AO, the assessee did not even care to submit their confirmations. The impugned order on the issue involved, is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Hon’ble Delhi High Court in their decision in Vodafone Essar Ltd. v. Dispute Resolution Panel-II [2011] 196 Taxman 423 held that when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair procedure. The requirement of recording of reasons by the quasi-judicial authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. We may reiterate that a ‘decision’ does not merely mean the ‘conclusion’. It embraces within its fold the reasons forming basis for the conclusion. [Mukhtiar Singh v. State of Punjab [1995] 1 SCC 760]. As is apparent, the impugned order of the ld. CIT(A) suffers from lack of reasoning and is not a speaking order. In view of the foregoing, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issues raised in the ground no. 1 in the appeal of the Revenue and ground nos. 1 & 2 in the appeal of the assessee, afresh in accordance with law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above and of course, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, bringing out clearly as to how creditworthiness of each of the sixteen creditors and genuineness of the transactions with them, is established. With these observations, ground no. 1 in the appeal of the Revenue and ground nos.1 & 2 in the appeal of the assessee are disposed of.
7. Ground no. 2 in the appeal of the Revenue for the AY 2007-08 and ground no. 1 in their appeal for the AY 2008-09 relate to disallowance u/s 40A(2)(a) of the Act. During the course of assessment proceedings for the AY 2007-08, the AO noticed that the assessee paid interest @ 15% per annum on the borrowings from the persons covered u/s 40A(2)(b) of the Act. To a query by the AO as to why the interest paid @ 15% paid be not considered as excessive and unreasonable, the assessee replied that rate of interest was reasonable since the Citi bank at the relevant time granted working capital, carrying interest @ 14.5% per annum while the unsecured loan carried higher risk element. However, the AO did not accept these submissions of the assessee and disallowed an amount of Rs. 5,47,596/- in terms of provision of section 40A(2)(a) of the Act, considering interest @ 12% as reasonable in the AY 2007-08.
8. Similarly, in the AY 2008-09, the AO disallowed an amount of Rs. 10,64,461/- in terms of provision of section 40A(2)(a) of the Act, considering interest @ 12% as reasonable.
9. On appeal, the learned CIT(A) deleted the disallowance in the AY 2007-08 in the following terms:-
“6.3 The submission given by the appellant and the objections of the Assessing Officer have been considered. In order to make a disallowance u/s 40A(2)(b) it is necessary that the Assessing Officer should establish that the benefits given to the related parties are more than the fair market value. If the appellant is making payments to other persons @ 15% then there is no special favour which is being given to the related parties. Further, the Assessing Officer has not been able to establish as to what was the market rate of interest. It is further seen that the appellant has paid an interest of 14.5% to the bank, thus, there is no justification in making a disallowance of Rs. 5,47,596/- u/s 40A(2)(b) the addition of Rs. 5,47,596/- is hereby deleted.”
10. Similarly in the AY 2008-09, the ld. CIT(A) deleted the disallowance, holding as under:-
“4.3 The submission given by the appellant and the objections of the Assessing Officer have been considered. In order to make a disallowance u/s 40A(2)(b) it is necessary that the Assessing Officer should establish that the benefits given to the related parties are more than the fair market value. If the appellant is making payments to other persons @ 15% then there is no special favour which is being given to the related parties. Further, the Assessing Officer has not been able to establish as to what was the market rate of interest. It is further seen that the appellant has paid a interest of 14.5% to the bank and this being an unsecured loan will certainly command a higher rate of interest thus’, there is no justification in making a disallowance of Rs. 10,64,4611- u/s 40A(2)(b). The addition of Rs. 10,64,4611- is hereby deleted.”
11. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A).
12. We have heard both the parties and gone through the facts of the case. As is apparent from the impugned order, we find that the AO did not bring any material on record for holding that the payment of interest @ 15% per annum to unsecured creditors was excessive and how interest @ 12% pa was reasonable or represented fair market value for the services and facilities. Before proceeding further, we may refer to the provisions of section 40A(2)(a) of the Act, the relevant portion of which reads as follows :
“40A(2)(a). Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing, to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.”
12.1 A mere glance at the aforesaid provision reveals that the expenditure mentioned therein is in relation to any person referred to in clause (b) of the sub-section and the expenditure has to be considered in relation to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to the assessee therefrom. Hon’ble Gujarat High Court observed in Coronation Flour Mills v. Asstt. CIT [2010] 188 Taxman 257 that in relation to the disallowance under the provisions of section 40A(2)(a) of the Act, a plain reading of the provision reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause (b) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed, which are independent and alternative to each other. All the three requirements need not exist simultaneously. In a given case, if any one condition is shown to be satisfied the provision can be invoked and applied, if the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Publishing House (P.) Ltd. v. CIT [1979] 117 ITR 569/1 Taxman 365 (SC). In the instant case, there is nothing to suggest that the AO found the payment of interest excessive having regard to either (a) fair market value of the services or facilities; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. Not a whisper has been made by the AO in respect of any of these three ingredients in his assessment orders. There is nothing to suggest that the AO ever brought any material on record on this aspect before concluding that interest @ 15% was excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the interest on unsecured loans. In view the foregoing, especially when there is no material on record to hold that payment of interest @ 15% pa to unsecured creditors was excessive, we have no hesitation in upholding the findings of the ld. CIT(A). Therefore, ground no. 2 in the appeal of the Revenue for the AY 2007-08 & ground no.1 in their appeal for the AY 2008-09 are dismissed.
13. Ground no. 2 in the appeal of the Revenue for the AY 2008- 09, relates to disallowance of depreciation of Rs. 1,27,558/-on computer accessories like printer & scanner. During the course of assessment proceedings, the AO noticed that the assessee claimed depreciation @ 60% on printer, scanner and UPS purchased for 3,58,761/-. Since these equipments were not part of computer, the AO restricted the depreciation @ 15% and disallowed the excessive claim of Rs. 1,27,558/-.
14. On appeal, the CIT(A) allowed the claim in the following terms:
“5.1 The appellant on the other hand has stated that Printer and Scanners are integral part of the computer and therefore claimed depreciation @ 60%. The submission given by the appellant has been considered, printer and scanners are integral part of the computers and the appellant is allowed to claim depreciation @ 60%. Reliance is placed on the following two decisions.
ITO v. Samiran Majumdar (208 ITR [AT] 74) (TKol) and ACIT v. Container corporation of India (ITA No 2859 and 36801 De1. l07).
5.2 It is further seen that the appellant has purchased UPS and has claimed depreciation @ 60%, though depreciation on Printers and Scanners is allowable @ 60%. UPS is not an integral part of the computer system as observed by Hon’ble Tribunal in the case of Nestle India Ltd. v. DCIT (ITAT, Del) 111 TTJ 498. Therefore the appellant is entitled to depreciation on computer peripherals except UPS @ 60%.Thus, this ground is decided as above.”
15. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied on the decision of Hon’ble Jurisdictional High Court in CIT v. BSES Yamuna Powers Ltd. [I.T. Appeal No.1267/Delhi/2010 dated 31-8-2010].
16. We have heard both the parties and gone through the facts of the case. We find that the Hon’ble Delhi High Court in the case of BSES Rajdhani Powers Ltd. (supra), in their decision dated 31-8- 2010 while adjudicating a similar issue, held as under:
“We are in agreement with the view of the Tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60 per cent.”
16.1 Earlier Kolkata Bench in the case of ITO v. Samiran Majumdar [2006] 98 ITD 119, held that the printer and scanner are integral part of the computer system and, therefore, entitled to higher rate of depreciation @. 60 per cent. A similar view was taken by the Delhi Bench in their decision in the case of Container Corpn. of India Ltd. v. Asstt. CIT [2009] 30 SOT 284. In the light of view taken in the aforesaid decisions, especially when the Revenue have not placed before us any contrary decision nor any other material so as to enable us to take a different view in the matter, we have no hesitation in upholding the findings of the ld. CIT(A). Therefore, ground no. 2 in the appeal of the Revenue for the AY 2008-09 is dismissed.
17. Ground no. 3 in the appeal of the assessee, being general in nature, does not require any separate adjudication while no additional ground having been raised before us in terms of residuary ground no.3 in the two appeals of the Revenue,, accordingly, all these grounds are dismissed.
18. No other plea or argument was made before us.
19. In the result, appeal of the Revenue for the AY 2007-08 is partly allowed while appeal of the assessee for the AY 2007-08 is allowed, but both for statistical purposes while the appeal of the Revenue for the AY 2008-09 is dismissed.
