B.M. KOTHARI, A.M. - The assessee as well as Revenue both have preferred appeals against the order of the Commissioner (Appeals) for assessment year 1983-84. Most of the grounds raised in both these appeals involve consideration of common points. Hence these are being disposed of by this common order.

2. The first ground in both these appeals relate to assessee's claim for grant of deduction in respect of interest as business expenditure.

3. The assessees is a dealer in cloth. In the profit and loss account a sum of Rs. 3,40,930 was debited as interest as against Rs. 1,64,405 in the preceding year. Most of the deposits on which interest has been credited belong to the various family members of the partners. The ITO came to the conclusion that interest paid to these relatives at the rates ranging between 12 per cent to 24 per cent is excessive. He further therefore, restricted the deduction in respect of such interest only at the rate of 12 per cent per annum as according to him the banks used to give interest on deposits at the rate of 12 per cent in that year. He accordingly disallowed a sum of Rs. 84,950. The Commissioner (Appeals) allowed interest at the rate of 21 per cent in respect of the deposits of the various relatives of the partners and worked out the disallowable amounts only to Rs. 14,141 and granted a relief of Rs. 70,809. The assessee has challenged the disallowance of Rs. 14,141 confirmed by the Commissioner (Appeals) while the Revenue challenged the relief of Rs. 70,809 granted by the Commissioner (Appeals) out of disallowance of interest claimed.

3.1 The learned Sr. D.R. invited our attention towards detailed reasons given in the assessment order. It was submitted that the assessee itself pleaded before the ITO that it has charged interest at the rate of 18 per cent on its four advances as per the balance sheet and hence if excess interest is to be disallowed, only 1/4th of Rs. 1,13,128 being interest paid to eight relatives at the rate of 24 per cent, which comes to Rs. 25,382 could be disallowed. The Commissioner (Appeals) has therefore clearly erred in granting deduction in respect of such interest at the rate of 21 per cent per annum. He further urged that rate of interest has been increased from 12 per cent to 18 per cent and 18 per cent to 24 per cent in relation to deposits of various relatives without any commercial considerations. Such interest has been increased merely on account of personal consideration hence the same was rightly disallowed by the ITO. The learned counsel for the assessee contended that it is incorrect on the part of the ITO to contend that interest has been increased from 12 per cent to 24 per cent during the year under consideration. A chart was submitted which appears at page 1 of the paper book which shows that rate of interest on deposits in various accounts is same as in the preceding year, in some cases it has been increased from 18 per cent to 12 per cent during this year and in some other cases it has been increased from 12 per cent to 15 per cent. Interest to various persons have been paid at different rates ranging between 12 per cent to 24 per cent in the year under consideration depending upon the rate of interest mutually settled with the respective depositors. The submission made before the ITO that if at all any disallowance is to be made, that should be made only in respect of interest allowed in excess of 18 per cent per annum was only an alternative contention. However, the main contention before the ITO was that interest expenditure incurred by the assessee should be allowed in full and no part thereof can be said to be unreasonable or excessive. He pointed out that the assessee has to pay interest at the rate of 19.5 per cent to the Kalupur Commercial Co-op. Bank Ltd. This interest was paid to the bank quarterly. If interest on quarterly interest is calculated the effective rate of interest charged by the bank would work out to 21 per cent. He also invited our attention towards the decision of ITAT reported in Anil Kumar v. IAC (1986) 15 ITD 695 (Asr) in which interest rate of 28 per cent was considered to be reasonable and was allowed. He, therefore, urged that the total interest expenditure incurred by the appellant assessee should be allowed in full.

4. We have carefully considered the rival submissions made by the learned representatives and have also perused the various documents and relevant paras of the orders passed by the learned departmental authorities to which our attention was drawn during the course of hearing. Out of the eight relatives to whom higher rate of interest is said to have been paid, five of them are existing income-tax assessees and rate of tax applicable in their respective cases range between 44 per cent to 56 per cent as per details placed on page 2 of the paper book. Interest paid on most of the deposit accounts in the preceding year was at the rate of 18 per cent per annum and not at the rate of 2 per cent as mentioned in the ITO's order. The assessee has also produced various statements showing that they have earned cash discounts approximately at the rate of 2 per cent per month from Calico Mills. In order to determine the allowability of an expenditure with reference to section 40A(2) what is required to be seen is whether such expenditure is excessive or unreasonable having regard to the fair market value of the 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 accrued to the assessee therefrom. The interest rate of 24 per cent per annum allowed on the unsecured deposits of relatives lying with the assessee cannot be treated as unreasonable or excessive in the previous year relating to assessment year 1983-84. While arriving at this conclusion we derive support from the decision of the Tribunal in the case of Anil kumar v. IAC (Supra). In that case the ITAT Amritsar Bench have considered the interest rate of 28 per cent as reasonable with reference to provisions of section 40A(2) in relation assessment year 1981-82. The Tribunal Bench also relied upon an earlier decision of the Tribunal, Jebalpur Bench where market rate of 24 per cent interest was considered to be reasonable for assessment year 1975-76. Considering the ever increasing inflation, the interest rate of 24 per cent allowed by the assessee on the unsecured deposits received from various relatives in assessment year 1983-84 by no stretch of imagination can be treated as is not unreasonable or excessive. We therefore, direct the ITO to allow deduction in respect of the entire amount of interest expenditure incurred by the assessee. Thus ground No. 1 of assessee's appeal in accepted and that of the Revenue is rejected.

5. The next ground in both these appeals relate to deduction claimed by the assessee in respect of commission of Rs. 64,262. The ITO has disallowed the total amount of commission of Rs. 64,262. It has been mentioned in the assessment order that a sum of Rs. 18,501 consisting of two payments of Rs. 9,501 and Rs. 9,000 paid to Chunilal K. Shah shown as commission is in fact not commission but the same represents rent paid for gadi belonging to him in the New Cloth Market. The other instance mentioned in the assessment order to support the aforesaid disallowance relate to commission paid to Hira Agencies of Akola in cash amounting to Rs. 5,601. It was stated that the representative of the aforesaid party was in Ahmedabad for some other work and he wanted cash immediately. Since they do not have any bank account in Ahmedabad, therefore, cash was paid as required by him. The ITO after considering the arguments of the assessee mentioned in para 22 of the assessment order that the assessee has tried to incorporate payment of rent of Rs. 18,501 in commission account and also as the assessee has admitted that some commission payments have been made by cash and by adjustment entires these payments have been made in violation of section 40A (3). Hence, he disallowed the entire deduction of Rs. 64,262.

5.1 The Commissioner (Appeals) has observed that the ITO has discussed seven specific items of commission aggregating to Rs. 38,988 out of total commission of Rs. 64,262. He, thereafter, discussed all those seven specific items and came to the conclusion that only a sum of Rs. 5,610 paid to Hira Agencies is not supported by proper voucher and hence the same was rightly disallowed. The balance disallowance of Rs. 58,652 was deleted by him.

5.2 The learned D.R. contended that the Commissioner (Appeals) has erred in granting relief of Rs. 58,652. He relied upon the detailed reasons given in the assessment order. He submitted that the fact relating to the nature of expenditure amounting to Rs. 18,500 which represents expenditure incurred for rent needs verification as to whether those premises were really occupied and used by the assessee for its business. The ITO only considered the allowability thereof as commission as this amount was claimed by the assessee under the head commission. He also submitted that the other items of commission allowed by the Commissioner (Appeals) are not based on proper reasons. As regard Rs. 5,610 paid to Hira Agencies the disallowance of which was confirmed by the Commissioner (Appeals), he contended that the documents of Hira Agency now produced before the Tribunal were not produced before the ITO or the Commissioner (Appeals) and somebody has to verify the genuineness of the payments of Rs. 5,610 made to the aforesaid party. He supported the disallowance of aforesaid amount of commission made by the ITO.

5.3 The representatives of the assessee supported the order of the Commissioner (Appeals) with regard to deletion of disallowance out of commission to the extent of Rs. 58,652. He relied upon the reasons given in the order of the Commissioner (Appeals). As regards disallowance of Rs. 5,610 confirmed by the Commissioner (Appeals) it was submitted that Hira Agencies are regular brokers and commission has been paid to them in the earlier years as well as in subsequent years. The photocopy of certain offer forms as well as certain letters were submitted by the assessee pursuant to the requirement made by the Bench during the course of hearing. He, therefore, urged that the disallowance of Rs. 5,610 confirmed by the Commissioner (Appeals) should also be cancelled.

5.4 We have carefully considered the rival submissions made by the learned representatives and have also gone through the orders of the departmental authorities. The Commissioner (Appeals) has rightly mentioned that the ITO has discussed only seven items in para 18 of the assessment order while dealing with the aforesaid claim of deduction in respect of commission. Out of these 7 item Rs. 18,501 paid to Shri Chunilal K. Shah C in is the nature of payment of rent for occupying the space known as gadi in the New Cloth Market. The copy of agreement executed with Chunilal K. Shah C has also been placed on record. The payments have been made to them by cheques. In view of these facts the Commissioner (Appeals) was justified in concluding that even if these payments are taken up as rent payments and not as commission, they are admittedly business expenditure. The payment to Upendra & Co. of Rs. 2,185 is not covered by section 40A(3). No other reasons have been given by the ITO for disallowing the same. The details of commission pertaining to assessment year 1984-85 shows that the said party was paid further commission of Rs. 3,775 which was stated to have been allowed in the subsequent year. In our view the Commissioner (Appeals) was right in granting relief in respect of this amount of Rs. 2,185.

5.5 The next item of commission relates to Rs. 3,396 paid to K. Ramanlal & Sons, Pune, K to whom payment was made by draft on 15th November 1982. The commission has been paid in the subsequent year also to this party which has been allowed in the subsequent year. Similarly commission credited in the account of Khanna Textiles Rs. 6,815 and Rs. 2,481 credited in the account of R.M. Textile R represents credit allowed to regular agents as is apparent from the details of commission of the next year where commission has been paid to these two parties also. We are, therefore, of the view that the relief granted by the Commissioner (Appeals) to the extent of Rs. 58,652 out of commission is based on valid grounds. Hence, the relief granted by the Commissioner (Appeals) in this regard is confirmed.

5.6 Coming to the As regards assessee's ground relating to disallowance of Rs. 5,610 being commission paid to Hira Agencies we are of the view that this disallowance should be set aside and the matter should be restored back to the ITO for further verification. Although the assessee has established the identity of the payee Hira Agencies by producing their offer forms and correspondence but the genuineness of the payment of Rs. 5,610 paid in cash requires further verification. The assessee did not produce the cash book pertaining to the year under consideration despite specific demand to ascertain the exact date of the aforesaid payment. In the assessment order this amount is shown as paid on 25th January 1984 while during the course of hearing it was stated by the assessee that this payment was made on the last day of the accounting year. It is a strange coincidence that the representative of Hira Agencies of Akola came to Ahmedabad assessee's place on the last day of the accounting year and insisted for cash payment. The assessee has not produced confirmation of the aforesaid party confirming that they have received cash payment of Rs. 5,610 on the date shown by the assessee in its books of accounts. The matter is, therefore, restored back to the ITO with regard to the payment of Rs. 5,610 who will decide the allowability or otherwise of the aforesaid payment afresh after providing reasonable opportunity to the assessee.

6. Ground No. 3 of assessee's appeal and ground No. 5, 4 of Revenue's appeal relate to inclusion of income of Kalpesh & Sharad Trust trading in the name of Omkarmal Shreeprakash in the hands of the assessee by the ITO. The ITO was of the view that the aforesaid family trust was created with a view to evade tax. The trust purchased cloth worth Rs. 2,81,166 from the assessee and made profit of Rs. 8,772 thereon. The assessee firm made profit only of Rs. 6,041 in respect of this transaction of sales made to the trust. The Commissioner (Appeals) observed that the profit of Rs. 8,772 derived by the trust from goods purchased from the appellant can be treated as diversion of profit to the trust. He accordingly confirmed the addition to the extent of Rs. 8,772. The balance amount represents other income of the trust namely from interest which cannot be added in the assessment of the appellant firm. He, therefore, granted a relief of Rs. 9,292. Both the parties have disputed these findings, in the present appeal before us.

6.1 The learned counsel for the assessee contended that the total turnover of the assessee is more than Rs. 93 lakhs out of which the sales made to the trust was hardly of Rs. 2,81,166. The profit of Rs. 8,772 derived by the trust is a normal profit and this cannot support the conclusion derived by the ITO and the Commissioner (Appeals) that such income should be clubbed in the hands of the assessee. The trust has been validly created by trust deed dated 20th October 1976, which authorised the trustees to carry on business. The said trust has been accepted as a genuine trust by the I.T. authorities in assessment year 1981-82. The beneficiaries have also been assessed to tax in respect of their share income received from the said trust. Copies of relevant assessment orders were also submitted in the paper book. He therefore, urged that addition to the extent of Rs. 8,772 sustained by the Commissioner (Appeals) should be cancelled. He further contended that the relief of Rs. 9,292 in respect of interest income of the said trust granted by the Commissioner (Appeals) is perfectly valid as the entire income of the said trust granted by the Commissioner (Appeals) is perfectly valid as the entire income of the trust in fact as well as in law really belongs to the said trust.

6.2 The learned D.R. heavily relied upon the reasons mentioned in the assessment order and contended that the Commissioner (Appeals) ought to have considered confirmed the entire amount of addition of Rs. 18,064 in the hands of the assessee.

6.3 After hearing the parties and after going through the order of the learned departmental authorities we are of the view that income derived by Kalpesh N. Sharad Trust Cannot be included in the hands of the assessee. The profit derived by the trust in respect of goods purchased from the appellant firm represents normal trading transaction and there is no material or evidence on record to prove that such transactions done by the appellant firm with the trust are benami transactions. There is no material on records to indicate that profits derived by the trust directly or indirectly had flown in favour of the assessee firm at any point of time. The profit derived by the trust has been enjoyed by the beneficiaries and they have been taxed in respect of their respective share in the income of the said trust. Unless the Revenue discharges proves the burden of proving by bringing positive materials, and evidence on record that the said a trust is benami concern of the assessee firm, the inclusion of income derived by the said trust in the hands of the assessee cannot be sustained.

6.4 In the result the assessee's ground in this regard is accepted while the ground raised by the Revenue is rejected.

7. The only ground which now remains to be considered is ground No.3 of Revenue's appeal in which it has been contended that the Commissioner (Appeals) erred in deleting the addition of Rs. 8,460 being interest paid on old deposits. The learned D.R. invited our attention towards paras 23 and 24 of the assessment order and contended that since the assessee has not supplied proper and correct addresses of these old depositors, interest paid thereon was rightly disallowed by the ITO. The learned counsel for the assessee relied upon the order of the Commissioner (Appeals).

8. After hearing the parties we are of the considered opinion that the Commissioner (Appeals) has rightly deleted the aforesaid disallowance of interest of Rs. 8,460. It is an admitted fact that these deposits are old deposits lying in the account of Shri Abdul Salim Nazar and Azamdin. These deposits were not treated as non-genuine deposits in the year of its receipt. Interest thereon was never disallowed in the past. The assessee has furnished the available address of these depositors as mentioned in para 5 of the Commissioner (Appeals)'s order. Unless the deposits in question are validly considered as unexplained deposits in the year of its receipt, no addition disallowance in respect of interest paid thereon can be validly made. Hence, this ground of appeal taken by the Revenue is rejected.

9. In the result the Revenue's Appeal is dismissed and the assessee's appeals treated as partly allowed for statistical purposes.