2013 (1) TMI 600 - AT - Income Tax

Disallowance of Interest income Interest free advance to group companies Commercial expediency - Held that - Assessee also taken a plea before us that though the advances made by the assessee to its sister concerns at free of interest in earlier year, however, the interest on these advances has been accounted in subsequent years. The assessee is following mercantile system as such interest has to be accounted on accrual basis. If there is a mutual transaction between the assessee and the sister concerns to whom the assessee made interest free advances then it has to be considered as advances made by the assessee on account of commercial expediency. Issue back to the file of the A.O. to consider the issue afresh. Remand back Disallowance of advances written off - creditor advances written off Held that - The assessee only furnished list of debts and the details called for by the authorities have not been furnished. The claim of the bad debts has been disallowed by considering the material on record by finding as a fact that the debt has not been proved as bad debt. Following the decision in case of Sirpur Paper Mills (1971 (12) TMI 37 - ANDHRA PRADESH HIGH COURT) that only the debt which constitutes trade debt could be claimed as bad debt if it is irrecoverable. In the present case it is observed by the lower authorities that the debts which were written off were not trade debts as seen. In favour of revenue Disallowance of advances given to employees written off - tour advance Held that - If it is an expenditure incurred in respect of its business, it should have been claimed during the relevant assessment year and if it is a debt it should have been advanced in respect of trade or business of the assessee and it should have gone to computation of income of the assessee in the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year or represents money lent in ordinary course of business The assessee is not able to lead any evidence how it has gone into computation of income of the assessee in the assessment year under consideration or in any other assessment year. Being so, we are of the opinion that findings of the lower authorities in disallowing the claim of the assessee are justified Addition u/s 68 - The A.O. called for information at the time of assessment - The assessee failed to produce the same Held that - The A.O has no occasion to examine the evidence produced before the CIT(A) by the assessee. The CIT(A) ought to have called for a remand report before deleting the addition. In the interest of justice, we remit the entire issue back to the A.O. for fresh consideration. Remand back

Summary

Issues Involved:
1. Disallowance of interest on loans given to group companies.
2. Disallowance of advances written off.
3. Disallowance of advances given to employees.
4. Addition under Section 68 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Loans Given to Group Companies:

The primary issue in ITA No. 377/Hyd/2009 was the disallowance of Rs. 2,76,68,393 out of interest debited to the Profit and Loss Account. The Assessing Officer (AO) observed that the assessee had advanced loans to group companies without charging interest while incurring significant interest expenses on borrowed funds. The AO disallowed the proportionate interest, citing that the interest-free advances affected the assessee's liability under interest. The assessee argued that the advances were made from the revenue generated from business operations, not from borrowed funds, and relied on various judicial precedents. The Tribunal noted that similar issues were decided in favor of the assessee in earlier years and remitted the issue back to the AO to verify if the advances were made on account of commercial expediency and whether mutual transactions existed between the assessee and its sister concerns.

2. Disallowance of Advances Written Off:

The assessee challenged the disallowance of Rs. 5,21,62,330 towards creditor advances written off. The AO noted that the assessee failed to provide sufficient details and evidence regarding the advances made to various parties for materials or services. The AO disallowed the claim, stating that the advances did not qualify as bad debts under Section 36(2) of the Act. The Tribunal upheld the AO's decision, emphasizing that the assessee did not furnish necessary details such as the names, addresses, and efforts made to recover the advances. The Tribunal concluded that the disallowance was justified as the advances were not trade debts and did not meet the criteria for deduction as business loss.

3. Disallowance of Advances Given to Employees:

The assessee also challenged the disallowance of Rs. 24,75,026 towards advances given to employees, which were written off. The AO disallowed the claim, noting that the assessee could have recovered the amounts from the employees' salaries or terminal benefits. The Tribunal upheld the disallowance, stating that the advances were not trade debts and the assessee failed to provide evidence that the advances were related to the computation of income in the relevant assessment year or any other year. The Tribunal confirmed the lower authorities' findings that the disallowance was justified.

4. Addition Under Section 68 of the Income Tax Act, 1961:

In ITA No. 686/Hyd/2010, the Revenue challenged the deletion of an addition of Rs. 15 crores under Section 68. The AO made the addition as the assessee failed to furnish details regarding the source of funds received from M/s. Krishnapatnam Port Co. Ltd. The CIT(A) deleted the addition, observing that the amount was received from the CMD of the company, who had sufficient funds from the sale of shares. The Tribunal remitted the issue back to the AO for fresh consideration, noting that the AO did not have the opportunity to examine the evidence submitted before the CIT(A).

Conclusion:

In conclusion, the Tribunal remitted the issues of disallowance of interest on loans given to group companies and the addition under Section 68 back to the AO for fresh consideration. The disallowance of advances written off and advances given to employees were upheld by the Tribunal. The appeals were allowed for statistical purposes.