2017 (3) TMI 1551 - HC - Income Tax

Expenditure allowable as deduction as per the explanation to section 37(1) - interest paid to M/s IFCI Ltd. - Held that - No substantial question of law arises on these two issues. The amount of ₹ 15,25,685/- could not in the circumstances have attracted the mischief under the explanation to Section 37 (1) as it was the interest paid for late repayment of advance to M/s IFCI Ltd, even as far as the amount written off, i.e., ₹ 70,44,023/- is concerned. The Court notes that the sole rationale for disallowance by the AO was that the assessee had stopped its business. The assessee had claimed the said amount as the value of old stock written off. Admit the appeal so far as the following question of law is concerned - Whether the ITAT erred in deleting the addition of ₹ 22,90,00,000/- made by the Assessing Officer on account of amount transferred to capital reserve ignoring the fact that the said amount was a revenue receipt in the hands of the assessee and therefore the provision of Section 41 (1) of the Act was applicable?

Summary

Issues:
1. Whether the ITAT erred in deleting the addition of ?15,25,685 made by the Assessing Officer on account of 'interest paid to M/s IFCI Ltd.'?
2. Whether the ITAT erred in deleting the addition of ?70,44,023 made by the Assessing Officer on account of amounts written off?
3. Whether the ITAT erred in deleting the addition of ?22,90,00,000 made by the Assessing Officer on account of amount transferred to capital reserve?

Analysis:

1. The High Court found that no substantial question of law arose regarding the addition of ?15,25,685 made by the Assessing Officer for interest paid to M/s IFCI Ltd. The Court determined that this expenditure was not disallowable under the explanation to Section 37(1) of the Income Tax Act, as it was interest paid for late repayment of advance. The Court held that this amount did not attract the provisions of Section 37(1).

2. Similarly, the Court held that no substantial question of law was involved in the deletion of the addition of ?70,44,023 made by the Assessing Officer for amounts written off. The Assessing Officer disallowed this amount on the grounds that there was no business during the relevant year and, therefore, these amounts could not be considered as business expenditure. However, the Court noted that the assessee had claimed this amount as the value of old stock written off, and the cessation of business did not impact the allowability of this claim.

3. The Court decided to admit the appeal concerning the addition of ?22,90,00,000 made by the Assessing Officer on account of the amount transferred to capital reserve. The question of law in this regard was whether the ITAT erred in deleting this addition, considering it as a revenue receipt in the hands of the assessee. The Court observed that the provision of Section 41(1) of the Act might be applicable in this case. Notice of the appeal was issued to the respondent/assessee for further proceedings on the specified date.

In conclusion, the High Court addressed and resolved the issues raised by the Revenue regarding the additions made by the Assessing Officer, providing detailed reasoning for each decision and outlining the legal implications of the disputed amounts in accordance with the provisions of the Income Tax Act.