2012 (9) TMI 249 - AT - Income Tax

Disallowance u/s. 40(a)(ia) - non deduction of TDS on interest payment - Held that - As decided in ITO v. Parag Mahasukhlal Shah 2011 (6) TMI 148 - ITAT, AHMEDABAD that a payment which has direct link and immediate nexus with the trading liability being connected with the delayed purchase payments will not fall within the category of interest as defined in section 2 (28A) - as the interest paid by assessee is not for any loan or debt incurred by the assessee but for the delay in payment of bills for purchases effected cannot be termed as interest as defined u/s. 2 (28A) - no disallowance could be made u/s. 40 (a) (ia) - in favour of assessee. Disallowance of interest paid by the assessee on borrowals - Held that - No addition of proportionate interest on interest free advance can be called for on the self same interest free advance made - in favour of assessee.

Summary

Issues:
1. Disallowance of Rs. 3,12,600 under section 40(a)(ia) of the Income Tax Act.
2. Addition of Rs. 1,85,982 in relation to interest-free advance.

Issue 1: Disallowance of Rs. 3,12,600 under section 40(a)(ia) of the Income Tax Act:
The appellant challenged the disallowance of Rs. 3,12,600 under section 40(a)(ia) by the Assessing Officer, contending that the amount paid was interest on overdue bills and not subject to TDS deduction. The CIT(A) upheld the disallowance, stating that the definition of interest under section 2(28A) of the Act includes amounts payable on overdue bills. However, the appellant argued that the payment was part of trade payment and not interest as defined in the Act. Citing a decision by the ITAT Ahmedabad Bench, the appellant asserted that the payment did not fall under the category of interest for TDS purposes. The Tribunal agreed with the appellant, ruling that the payment for delayed purchase payments did not constitute interest as defined in the Act. Additionally, the Tribunal noted that even if the payment was considered interest, no disallowance could be made under section 40(a)(ia) as the entire amount was paid within the relevant previous year.

Issue 2: Addition of Rs. 1,85,982 in relation to interest-free advance:
Regarding the addition of Rs. 1,85,982 in relation to an interest-free advance, the Assessing Officer disallowed the interest paid on borrowings by estimating interest at 18% on the outstanding amount due from a party. The CIT(A) upheld the disallowance but directed the Assessing Officer to limit the proportionate interest based on the average rate of borrowings by the assessee. The appellant argued that similar issues had been addressed in previous assessment years before the ITAT, resulting in no addition of proportionate interest. The Tribunal observed that in earlier assessment years, the ITAT had directed the Assessing Officer not to make such additions, which was duly followed. Consequently, the Tribunal directed the Assessing Officer to delete the addition of Rs. 1,85,982 in this case as well.

In conclusion, the Tribunal allowed the appeal of the assessee, directing the Assessing Officer to delete both the disallowance of Rs. 3,12,600 under section 40(a)(ia) and the addition of Rs. 1,85,982 related to an interest-free advance.