By TIOL News Service

JAIPUR, MAR 25, 2016: THE issue is - Whether when assessee has taken secured and unsecured loans on different terms & conditions, it is not right for AO to apply same rate of interest for both borrowings. YES is the answer.

Facts of the case

The assessee company is engaged in the business of manufacturing of casting, alloys and mechanical spares. It had filed its return declaring total income of Rs. 20,49,550/-. The case was scrutinized U/s 143(3). AO observed that the assessee had paid interest of Rs. 4,78,314/-@ 15% on deposits to the persons covered U/s 40A(2)(b) and paid interest to the bank @ 11.75% on cash credit loan. Thus the interest in excess of 3.25% more than the bank rate was paid to the persons covered U/s 40A(2)(b). Therefore, AO gave show cause notice on this issue. The assessee also replied. After considering the assessee's reply, AO disallowed the interest at Rs. 15,545/- u/s 40A(2)(b). On appeal, CIT(A) deleted the addition by observing that the assessee has pointed out that the loans from the persons covered u/s 40A(ii)(b) were unsecured loans which are not comparable with secured loans taken from the bank. Further, for the bank loans, there are incidental charges viz. processing fees, insurance charges etc. and interest is levied by the bank on monthly basis which leads to higher rate of interest than interest rate of 11.75% mentioned by the AO.

Addition on account of expenses under various heads

AO observed that assessee debited various expenses in the P&L account i.e. power and fuel expense, travelling expenses and salaries and wages. As per AO these expenses had increased substantially compared to preceding year, therefore, he gave reasonable opportunity of being heard, which was availed by the assessee. AO had held that the assessee had failed to justify the increase in power and fuel expenses by producing documentary evidence to compare the petroleum price. The assessee had also installed new machinery to upgrade the technology. The assessee has done the same manufacturing activity as was in past. The sales has been shown decreasing from Rs. 16.26 crores to 14.99 crores compared to preceding AY. Therefore, there was no correlation between the production and expenses claimed by the assessee. Some of the expenses were incurred in cash, which was not verifiable, therefore, AO disallowed expenses under the head power and fuel expenses.

On appeal, CIT(A) allowed the appeal by observing that the assessee had paid electricity expenses at Rs. 1,27,33,946/- to AVVNL through account payee cheques. The payments were supported by bills and vouchers. CIT(A) also held that the assessee had explained that travelling expenses of Rs. 6,18,669/- were incurred for the actual fare, daily allowances, hotel bills, local conveyance, toll taxes and miscellaneous expenses and the bills and vouchers for all these expenses were produced before the Assessing Officer. Only the local conveyance expenses of Rs. 21,448/- paid for auto rickshaw, tempo charges which were evidences by claims of the employees were reimbursed to the employees. No expenditure has been found by the Assessing Officer as non-genuine and non-business purposes. Therefore, same are allowable U/s 37.

Having heard the matter, the Tribunal held that,

++ the borrowings were unsecured whereas bank borrowings were secured. The rate of interest paid to the family members were on annual basis. However, in case of bank, it was paid on the basis of monthly interest rate. There were other hide charges in the name of service also to be paid to the bank, therefore, there is no difference between rate of interest paid to the relatives. Accordingly, he prayed to uphold the order of the CIT(A). We have heard the rival contentions of both the parties and perused the material available on record. After verification of both the rate of interest hardly any difference is found in the rate of interest as the secured and unsecured loan cannot be compared as their terms and conditions are different. The finding given by the CIT(A) has not been controverted by the DR, therefore, we uphold the order of the CIT(A) on this ground;

++ the assessee had explained the reasons for increase in the expenses under all the heads and also produced the relevant bill vouchers at the time of assessment proceedings. The Assessing Officer had not found any non-genuine payment under these heads, no specific discrepancy has pointed out in the bills and vouchers maintained by the assessee. It is not necessary that increase in expenses automatically raised the sales/production. The assessee has explained the increase in the expenses on the basis of evidence, which has not been controverted by the DR. The assessee's manufacturing activities comes under the excise item and also had sales tax registration. The assessee's case is auditable in the income tax law and no qualifying remark had been made by the auditor on expenses claimed by it. AO has not brought out on record any material to substantiate his addition. Therefore, we uphold the order of the CIT(A). In the result, the revenue's appeal is dismissed.

(See 2016-TIOL-427-ITAT-JAIPUR)