2016 (5) TMI 1370 - AT - Income Tax

Disallowance of part of proportionate interest u/s 36(1)(iii) - Held that - CIT(Appeals) was not justified in directing to charge interest on advance given to M/s DLF International Ltd. from January, 2005 to March,2005 in assessment year under appeal. CIT(Appeals) held that advance of ₹ 1.28 Cr given to M/s DLF International Ltd. was business advance, therefore, no disallowance under section 36(1)(iii) of the Act should be made against the assessee. There is no departmental appeal against these findings of the ld. CIT(Appeals). Therefore, no disallowance remained under section 36(1)(iii) of the Act against the assessee. CIT(Appeals) directed to charge interest on account of delay in supplying the goods to the assessee. The ld. CIT(Appeals) noted in his findings that as per agreement, the delivery date for goods was between January,2005 to May,2005 which fact itself is mentioned in the agreement, copy of which is also filed at page 17 of the Paper Book. Therefore, M/s DLF International Ltd. could have delivered goods to the assessee during January,2005 to May,2005. Thus, no cause of action arises in favour of the assessee for charging any interest in financial year under appeal i.e. from January,2005 to March,2005. The findings of ld. CIT(Appeals) are absolutely incorrect and would not survive for making any addition on account of charging any interest during the financial year unless May,2005 has ended. The assessee could not charge any interest from M/s DLF International Ltd. till May,2005. Further, the ld. CIT(Appeals) has changed the whole complexion of the addition as made by the Assessing Officer because Assessing Officer made disallowance under section 36(1)(iii) of the Act by disallowing proportionate interest. Thus, the ld. CIT(Appeals) enhanced the assessment in this way by making independent addition against the assessee in the impugned order. It is not clarified from the impugned order whether ld. CIT(Appeals) has given any notice for enhancing the assessment as per Section 251(2) before issuing direction in this regard on new and independent issue. Therefore, in the absence of giving any opportunity to the assessee for making enhancement to the assessee, no addition could be made against the assessee. - Decided in favour of assessee.

Summary

Issues:
Challenge to disallowance of proportionate interest under section 36(1)(iii) of the Act.

Analysis:
The appeal was filed against the order of the ld. CIT(Appeals)-II Ludhiana for the assessment year 2005-06. Initially, the appeal was dismissed for default, but later it was recalled, and the appeal was fixed for hearing on merit. The assessee challenged the disallowance of part of proportionate interest under section 36(1)(iii) of the Act. The Assessing Officer disallowed a portion of the interest based on the judgment of the Hon'ble Punjab & Haryana High Court. The assessee argued that the advance to the sister concern was for business purposes and no disallowance should be made. The CIT(Appeals) found that the advance was indeed a business advance, and directed to charge interest for the delay in supplying goods from January 2005 to March 2005.

The Tribunal disagreed with the CIT(Appeals) and held that no disallowance should be made under section 36(1)(iii) of the Act against the assessee as the advance was a business advance. The Tribunal noted that there was no cause of action for charging interest during the financial year under appeal, as the goods could have been delivered between January 2005 to May 2005. The Tribunal found the CIT(Appeals) findings incorrect and set aside the direction to charge interest on the advance. It was also highlighted that the CIT(Appeals) had changed the nature of the addition made by the Assessing Officer without giving notice to the assessee for enhancement, which was deemed incorrect.

Therefore, the Tribunal allowed the appeal of the assessee, setting aside the direction to charge interest on the advance, and deleting the findings of the CIT(Appeals). The Assessing Officer was directed not to make any addition on this issue, ultimately partly allowing the appeal of the assessee.