2012 (10) TMI 1057 - AT - Income Tax

Disallowance of interest u/s 36(l)(iii) of the Act - Held that - the money advanced by the assessee to M/s. Agarwal Steel was towards purchase of steel - made trade advances, which are adjusted against the purchases made during the year - it is evident that the money advanced by the assessee to M/s. Agarwal Steel is not an interest free loan, but a trade advance - Decided in favor of assessee Disallowance u/s 40a(ia) - whether TDS is applicable - Held that - The amount has been paid by the assessee during the relevant previous year - no disallowance could be made under S.40a(ia) of the Act, in view of the Special Bench decision in the case of Merilyn Shipping Transports (supra)- Decided in favor of assessee

Summary

Issues Involved:
1. Deletion of an addition of Rs. 48 lakhs disallowed under section 36(1)(iii) of the Income Tax Act.
2. Confirmation of disallowance of Rs. 4,40,218 under section 40(a)(ia) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Deletion of an Addition of Rs. 48 Lakhs:

Facts:
The assessee filed a return declaring an income of Rs. 66,35,325 for the assessment year 2008-09. During the assessment proceedings, the Assessing Officer (AO) noticed that the assessee had taken secured and unsecured loans and incurred interest expenditure of Rs. 2.39 crores. The AO observed that the assessee advanced substantial amounts to M/s. Agarwal Steel, a proprietary concern of one of the promoters of the assessee company, without charging interest. The AO questioned the commercial expediency of such advances and disallowed proportionate interest of Rs. 48 lakhs under section 36(1)(iii) of the Act.

Assessee's Argument:
The assessee contended that the advances were trade advances towards the purchase of steel from M/s. Agarwal Steel and relied on the Supreme Court decision in S.A. Builders v. CIT(Appeals) [2007] 288 ITR 1/158 Taxman 74 to support its claim.

CIT(A)'s Findings:
The CIT(A) found that the advances were indeed trade advances for business purposes and not for personal benefit. The CIT(A) noted that the AO's conclusions were based on assumptions and lacked cogent evidence. The CIT(A) relied on the Supreme Court decision in S.A. Builders Ltd. to hold that the Revenue cannot question the reasonableness of the amount advanced if it is for business purposes.

Revenue's Argument:
The Revenue argued that the AO has the power to examine the reasonableness of the expenditure and contended that the assessee failed to prove that the expenditure was for business purposes. The Revenue cited several case laws to support its position.

Tribunal's Decision:
The Tribunal observed that the assessee had regular business transactions with M/s. Agarwal Steel and the advances were adjusted against purchases. The Tribunal found no evidence to support the AO's claim that the advances were for personal benefit. The Tribunal held that the AO must bring sufficient material to prove that the advances had no nexus with the business activity. The Tribunal concluded that the advances were trade advances for business purposes and upheld the CIT(A)'s decision to delete the disallowance.

2. Confirmation of Disallowance of Rs. 4,40,218:

Facts:
The AO noticed that the assessee paid Rs. 4,40,218 towards interest to Citi Corp Finance Ltd. without deducting tax under section 194A of the Act and disallowed the payment under section 40(a)(ia). The assessee argued that the payment was towards instalments for hire purchase of vehicles and not subject to TDS.

CIT(A)'s Findings:
The CIT(A) upheld the AO's disallowance, stating that the payment was in the nature of interest and subject to TDS.

Assessee's Argument:
The assessee contended that the payments were instalments for hire purchase and not subject to TDS. Alternatively, the assessee argued that since the payments were made during the relevant previous year, no disallowance could be made under section 40(a)(ia) as per the Special Bench decision in Merilyn Shipping & Transports v. Addl CIT [2012] 136 ITD 23/20 taxmann.com 244 (Visakha).

Tribunal's Decision:
The Tribunal noted that the lower authorities did not dispute that the amount was paid during the relevant previous year. The Tribunal, without delving into whether the payment was interest or instalment, held that no disallowance could be made under section 40(a)(ia) as per the Special Bench decision in Merilyn Shipping & Transports. The Tribunal deleted the disallowance of Rs. 4,40,218.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, thereby deleting the disallowances made by the AO.