2012 (7) TMI 726 - AT - Income Tax

Deleting the addition on account of unsecured loans by CIT(A) - AO brought to tax these loans u/s 41(1)(a) - Held that - Considering the provisions of sec. 41(1)(a)the assessee did not receive any benefit nor the amount has been transferred to profit and loss account nor even written off and thus, the amount did not become the assessee s own money - Not only that these liabilities are not trading liabilities,even otherwise there is nothing on record to establish that the aforesaid liabilities had ceased to exist or were remitted by the creditors in the year under consideration - the provisions of sec. 41(1)(a) cannot attracted - in favour of assessee. Charging of interest on the aforesaid loans - Held that - Nothing to suggest that the assessee discharged the onus laid down upon them that borrowed funds had indeed been utilized for the purpose of its business so as to entitle it to claim deduction u/s 36(1)(iii) - in case the assessee had some surplus amount which could not be repaid prematurely to its creditors, still the same were either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that these were diverted towards associate or sister concerns free of interest - this would result in not presenting the true and correct picture of the accounts of the assessee - it cannot be held that the funds to the extent diverted to associate concerns without charging any interest - against assessee. Credit of TDS & Set off of brought forward loss - Held that - CIT(A) directed the AO to allow the credit for TDS after necessary verification in terms of provisions of section 155(14) & Set off of brought forward loss but as the assessee did not make any submissions on this issue nor placed any material to enable to take a different view in the matter no infirmity in the directions of the CIT(A).

Issues Involved:
1. Deletion of addition of Rs. 28,83,480/- on account of unsecured loans.
2. Charging interest on the aforementioned unsecured loans.
3. Partial disallowance of Rs. 1,95,898/- out of interest paid.
4. Allowance of credit of TDS amounting to Rs. 31,385/-.
5. Set off of brought forward losses.

Detailed Analysis:

1. Deletion of Addition of Rs. 28,83,480/- on Account of Unsecured Loans:
The Revenue contested the deletion of the addition made by the Assessing Officer (AO) concerning unsecured loans totaling Rs. 28,83,480/-. The AO had added these loans to the income of the assessee under section 41(1) of the Income-tax Act, 1961, on the grounds that they were outstanding for more than three years and thus barred by limitation. The CIT(A) deleted this addition, stating that the loans were not trading liabilities and there was no remission or cessation of liability. The Tribunal upheld the CIT(A)'s decision, emphasizing that the provisions of section 41(1) were not applicable as there was no evidence of cessation or remission of the liability, nor were the loans written off or transferred to the profit and loss account. The Tribunal cited various judicial precedents, including decisions from the Supreme Court and High Courts, to support its conclusion that merely being time-barred does not extinguish the liability.

2. Charging Interest on the Unsecured Loans:
The Revenue argued that since the unsecured loans were treated as genuine by the CIT(A), interest on these loans should be added to the income of the assessee. However, the Tribunal noted that this issue was neither considered in the assessment order nor discussed in the impugned order. Consequently, this ground was dismissed.

3. Partial Disallowance of Rs. 1,95,898/- Out of Interest Paid:
The AO disallowed Rs. 5,41,915/- on account of interest paid, as the assessee had advanced interest-free loans to sister concerns. The CIT(A) reduced this disallowance to Rs. 1,95,898/-, considering the interest-free unsecured loans of Rs. 28,83,480/- upheld in the earlier ground. The Tribunal upheld the CIT(A)'s decision, stating that the assessee failed to demonstrate the commercial expediency for the interest-free advances and did not establish the nexus of borrowed funds used for business purposes. The Tribunal cited judicial precedents to emphasize that interest on borrowed funds diverted for non-business purposes cannot be claimed as a business expenditure.

4. Allowance of Credit of TDS Amounting to Rs. 31,385/-:
The CIT(A) directed the AO to allow the credit for TDS after necessary verification. The Tribunal found no infirmity in this direction, as the assessee did not provide any material to take a different view. Hence, this ground was dismissed.

5. Set Off of Brought Forward Losses:
The CIT(A) admitted the additional ground raised by the assessee regarding the set off of brought forward losses and directed the AO to verify the claim and allow the set off in accordance with the law. The Tribunal upheld this direction, noting that the assessee did not provide any material to challenge the CIT(A)'s conclusion. Consequently, this ground was dismissed.

General and Residuary Grounds:
The general grounds in both the Revenue's appeal and the assessee's cross-objection were dismissed as they did not require separate adjudication. No additional grounds were raised.

Conclusion:
Both the appeal filed by the Revenue and the cross-objection filed by the assessee were dismissed. The Tribunal upheld the CIT(A)'s findings on all the contested issues, emphasizing the legal principles and judicial precedents supporting the decisions.

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