2013 (12) TMI 1047 - AT - Income Tax

Validity of order u/s.263 Held that - A.O. had failed to make proper inquiry - Following Malabar Industries Co. Ltd. vs. CIT 2000 (2) TMI 10 - SUPREME Court - The order of AO was erroneous and prejudicial to the interest of revenue Decided against assessee. Disallowance u/s 36(i)(iii) Interest on advances given - Held that - Interest on advances have become bad and doubtful Both the concerns to whom advances were given were financially weak and they were not in a position to repay interest Assessee has agreed to forego interest portion Decided against Revenue.

Summary

Issues:
1. Erroneous order u/s. 263 of the IT Act.
2. Disallowance of interest under section 36(1)(iii) of the IT Act.

Issue 1: Erroneous order u/s. 263 of the IT Act:
The appeals by the Assessee and Revenue stemmed from orders of CIT, Ahmedabad-III and CIT(A)-XI for the assessment year 2005-2006. The main contention was against the order u/s. 263 of the IT Act and the disallowance of interest under section 36(1)(iii) of the IT Act. The CIT found the original assessment erroneous and prejudicial to the revenue's interest due to various reasons, including bad debt allowance and long-term capital loss approval without share transfer. The CIT held that the AO failed to make proper inquiries and that the revisionary order under section 263 was valid based on the Malabar Industries Co. Ltd. vs. CIT judgment.

Issue 2: Disallowance of interest under section 36(1)(iii) of the IT Act:
The AO disallowed interest expenses amounting to Rs.1,10,40,296/- under section 36(1)(iii) for the assessment year 2005-2006. The dispute arose from the appellant not charging interest on funds advanced to two companies, resulting in a diversion of interest-bearing funds to non-interest-bearing funds. The CIT(A) allowed the appeal in favor of the appellant, stating that the AO failed to analyze the conditions required for allowable interest under section 36(1)(iii) and that the disallowance was not warranted. The Revenue contended that the appellant diverted income to a sister concern and cited legal precedents. However, the appellant provided evidence of the poor financial positions of the companies to whom the advances were given, leading to an agreement to waive interest. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and partially allowing the assessee's appeal.

In conclusion, the Tribunal upheld the validity of the revisionary order under section 263 and dismissed the Revenue's appeal regarding the disallowance of interest under section 36(1)(iii) of the IT Act, based on the financial positions of the companies involved and the agreement made to waive interest.