2013 (7) TMI 36 - AT - Income Tax

Addition u/s. 40A(2)(b) - CIT(A) deleted the addition - Held that - The appellant had paid the interest in the previous year at the same rate which is not disputed by the revenue. AO has not shown any instances of diversion of funds u/s. 40A (2) to be unreasonable or excessive in the facts and circumstances of the case. The borrowing at higher rate of interest is business decision of the appellant and the expenses cannot be disallowed on the ground of payment of interest at differential rate to different depositors. It has been clarified that the surplus funds have been advanced to certain parties on short term basis recoverable on notice. The interest @ 15% has been paid on substantial deposits which were utilized by the appellant for long term business activities. Also the interest rate of 15% is not abnormal. It shows business expediency and hence does not warrant any disallowance as has been made by the AO - In favour of assessee. Disallowance of interest u/s. 36(1)(iii) - CIT(A) deleted the addition - Held that - From the accounts submitted by the appellant it is found that the appellant had surplus fund in the banks from which advances have been made to the parties @ 9% on short term basis. The bank balance with the account maintained by the appellant with Bank of Baroda as on 31/3/2007 was Rs.35,99,633 and as on March, 2006 it was 37,39,423/-. The capital account of the appellant as on 31st March was Rs.41,85,914/- whereas the opening capital as on 1/4/2006 was Rs.33,91,470/-. Therefore, the appellant had enough funds at it s disposal for advancing loan to the above parties. Therefore, the appellant had advanced only surplus funds available with it which were advanced with a lower rate and earned income which otherwise would have remained idle. Thus AO is not justified in disallowing the interest, without any specific findings - In favour of assessee.

Summary

Issues involved:
1. Addition of Rs.3,70,753/- under section 40A(2)(b) of the Income Tax Act, 1961.
2. Addition of Rs.4,56,197/- under section 36(1)(iii) of the Income Tax Act, 1961.

Analysis:

Issue 1: Addition under section 40A(2)(b) of the Income Tax Act, 1961
The appellant, a firm engaged in wholesale trading, filed its income tax return for the assessment year 2007-08. The Assessing Officer (AO) made an addition of Rs.3,70,753/- under section 40A(2)(b) for excess interest payment. The CIT(A) deleted this addition, stating that the interest was paid at a consistent rate, the borrowing decision was a business decision, and surplus funds were utilized for business activities. The Tribunal noted that the CIT(A) had considered all aspects and upheld the decision in favor of the assessee, concluding that there was no need to interfere with the order.

Issue 2: Addition under section 36(1)(iii) of the Income Tax Act, 1961
The AO disallowed Rs.4,56,197/- under section 36(1)(iii) for interest-free advances made to associate concerns. However, the CIT(A) overturned this addition, highlighting that the appellant had surplus funds available for the advances, which were made at a lower rate to reduce interest expenditure. The Tribunal agreed with the CIT(A)'s reasoning, emphasizing that the appellant had sufficient own funds for the advances and had acted prudently to minimize interest costs. Consequently, the Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeal on both issues.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO under sections 40A(2)(b) and 36(1)(iii) of the Income Tax Act, 1961. The Tribunal found the CIT(A)'s analysis thorough and justified, leading to the dismissal of the revenue's appeal.