2011 (7) TMI 1190 - AT - Income Tax

Summary

Issues involved: Disallowance of interest expenses u/s.36(1)(iii) of the Income Tax Act, 1961 and disallowance on account of sale of cotton waste.

Issue 1: Disallowance of interest expenses:
The assessee challenged the disallowance of interest expenses of Rs. 7,39,120 made by the Assessing Officer u/s.36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer disallowed the amount as proportionate interest for borrowed funds utilized by the assessee for giving interest free advances. The assessee contended that interest bearing loans taken for business purposes were fully utilized for business and interest free advances to sister concerns were made due to commercial expediency. However, the CIT(A) upheld the disallowance stating that the appellant lacked surplus funds to give interest free loans and failed to provide details or reasons for such advances. The Tribunal decided to restore the issue back to the Assessing Officer for fresh adjudication based on the aspect of commercial expediency as directed by the Supreme Court in the case of S.A. Builders Ltd.

Issue 2: Disallowance on sale of cotton waste:
The Assessing Officer disallowed Rs. 29,62,078 on account of sale of cotton waste. The assessee argued that the reduced turnover affected profitability and relied on previous ITAT decisions in its favor. However, the CIT(A) upheld the addition, stating that the appellant failed to provide evidence for selling cotton waste at a lower rate than purchase rate due to contractual obligations. The Tribunal found no infirmity in the CIT(A)'s order as the assessee did not produce any evidence for the claim of entering into sale transactions in advance. The appeal was partly allowed for statistical purposes.

In summary, the Tribunal directed fresh adjudication on the disallowance of interest expenses based on commercial expediency and upheld the disallowance on sale of cotton waste due to lack of evidence provided by the assessee.