2011 (7) TMI 1138 - AT - Income Tax

Summary

Issues Involved:
1. Relief of Rs. 31,60,273 out of disallowance made by the Assessing Officer on account of proportionate interest on advances.
2. Deletion of addition made by the Assessing Officer on account of bad and doubtful debts and balance written off.
3. Deletion of addition made by the Assessing Officer out of disallowance of foreign exchange fluctuation.

Issue 1: Relief of Rs. 31,60,273 out of disallowance made by the Assessing Officer on account of proportionate interest on advances
The Department's grievance related to the relief of Rs. 31,60,273 out of disallowance made by the Assessing Officer on account of proportionate interest on advances given to M/s Standard Sulphonators Ltd. and M/s Uniflex Industries Ltd. The assessee had borrowed money for business purposes and provided a security deposit of Rs. 50 lakhs to M/s Standard Sulphonators Ltd. for the use of land mortgaged to the State Bank of India. The Assessing Officer disallowed the interest on the security deposit and advances, totaling Rs. 31,60,273. The CIT(A) observed that the security deposit was for land mortgaged with the bank to secure loans to the assessee, and the advances were for business purposes. The CIT(A) concluded that the assessee had sufficient interest-free funds, and there was no diversion of interest-bearing funds for interest-free advances. Therefore, the addition made by the Assessing Officer was deleted. The Tribunal upheld the CIT(A)'s decision, dismissing the Department's appeal.

Issue 2: Deletion of addition made by the Assessing Officer on account of bad and doubtful debts and balance written off
The Assessing Officer disallowed Rs. 5,81,875 and Rs. 10,73,604 related to bad and doubtful debts and balance written off, respectively. The disallowance was made on the grounds that the nature of transactions could not be verified, and the assessee failed to provide sufficient details. The CIT(A) observed that the write-offs were in respect of customers' balances, settlement of claims, and disputed recoveries for business purposes. The amounts were actually written off in the books of account and debited to the profit and loss account, thus allowable under section 36(1)(vii) of the Act. The CIT(A) also noted that the liability of Rs. 4,88,038 was not written off, and there was no cessation or remission of liability, making the addition under section 41 of the Act unjustified. The Tribunal upheld the CIT(A)'s decision, dismissing the Department's appeal.

Issue 3: Deletion of addition made by the Assessing Officer out of disallowance of foreign exchange fluctuation
The Assessing Officer disallowed Rs. 5,63,427 related to foreign exchange fluctuation, considering it as speculation loss. The assessee had borrowed USD 7,30,000 from SBI and entered into a forward exchange contract to cover the risk of upward fluctuation of the USD rate. The CIT(A) observed that the transaction was for business purposes, and the premium paid was fixed, with no element of speculation. The forward contract reduced the cost of borrowings, and the proportionate premium was an allowable expenditure. The Tribunal upheld the CIT(A)'s decision, dismissing the Department's appeal.

Conclusion:
The Tribunal dismissed the Department's appeal on all grounds, upholding the CIT(A)'s decisions on the relief of proportionate interest on advances, deletion of additions related to bad and doubtful debts, and balance written off, and the disallowance of foreign exchange fluctuation. The Tribunal found no merit in the Department's grounds for appeal.