2013 (3) TMI 722 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance u/s 36(1)(iii) on account of interest on borrowed funds.
2. Addition u/s 2(22)(e) on account of deemed dividend.
3. Addition on account of excess consumption of steel.

Summary:

1. Disallowance u/s 36(1)(iii) on account of interest on borrowed funds:

The assessee challenged the CIT(A)'s confirmation of disallowance of Rs. 52,820/- u/s 36(1)(iii) made by the Assessing Officer (AO) for interest on borrowed funds. The AO noted that the assessee had diverted interest-bearing funds to group companies without charging interest. Despite the assessee's argument that investments were made from routine business funds and that no interest was paid on unsecured loans, the AO disallowed interest based on the utilization of borrowed capital not being for business purposes. The CIT(A) upheld this disallowance, stating that the assessee failed to establish the business purpose for the advances. The Tribunal, while agreeing with the CIT(A), found merit in the assessee's claim that state capital investment subsidy should be considered as interest-free funds available for making advances. The issue was restored to the AO for verification and recomputation.

2. Addition u/s 2(22)(e) on account of deemed dividend:

The AO added Rs. 17 lakhs as deemed dividend u/s 2(22)(e) since the assessee received loans from Yog Cement Products and Industries Pvt. Ltd. The CIT(A) upheld this addition but accepted that deemed dividends considered in earlier years should be reduced from accumulated profits. The Tribunal directed the AO to verify the difference in depreciation as per Income Tax Act and Companies Act and adjust the accumulated profits accordingly, following the jurisdictional High Court's decision in the case of CIT Vs. Jamnadas Khimji Kothari.

3. Addition on account of excess consumption of steel:

The AO made an addition of Rs. 2,57,089/- due to high steel consumption, which the assessee attributed to poor quality steel but failed to substantiate with evidence. The CIT(A) upheld the addition. The Tribunal, while sustaining the addition, directed that telescoping benefit should be given to the assessee against the excess stock found during A.Y. 2008-09.

Other Appeals:

For subsequent assessment years, similar issues of disallowance u/s 36(1)(iii) and deemed dividend u/s 2(22)(e) were restored to the AO for recomputation as per the directions given in the primary appeal. The addition of Rs. 2,88,375/- for excess stock in A.Y. 2008-09 was confirmed, with telescoping benefit allowed for the addition sustained in A.Y. 2002-03.

Conclusion:

The appeals were partly allowed for statistical purposes, with directions for recomputation and verification by the AO.