2014 (3) TMI 183 - HC - Income Tax

Deletion of interest expenses u/s 37 of the Act - Inter corporate deposits - Divergence between interest bearing borrowings funds to noninterest bearing ICDs - Whether the ITAT has erred in confirming the order of CIT (A) deleting the addition out of interest expenses on Inter Corporate Deposits Held that - The appellant had proved before the AO that financial position of both the sister concern to whom advances were given - The Tribunal uphold the Commissioner s exercise of revisional powers the Tribunal did not examine the contentious issues touched by the Commissioner in revisional order - The Tribunal only satisfied itself that the grounds for taking the order of Assessing Officer under revision exist thus, the Tribunal in its own order later on examining the additions on merits cannot be found fault with. CIT (A) as well as Tribunal both noted that Sunrise Fincap Limited ie., the creditor had negative growth - The income of the company was reducing day by day and the company had no concrete business plan - Both the sides have agreed that the assessee would forgo the interest, if the principal amount of Rs. 1.5 Crores is paid by the company before the specified date - the company had incurred losses - The company was not in a good condition to repay the principal and even interest and had become sick - The appellant had therefore no reason to charge interest from these two companies - It was on this count that the CIT (A) as well as Tribunal both deleted the additions on the principal and charging tax on real income there was no reason to take a different view - the assessee company had accumulated business loss which were being carried forward in future years Decided against Revenue.

Summary

Issues:
1. Interpretation of law regarding deletion of interest expenses on Inter Corporate Deposits (ICDs) by the CIT [A].
2. Validity of the Tribunal's decision in confirming the order of CIT [A] deleting the addition of interest expenses.
3. Consideration of financial position and circumstances of the creditor companies in relation to the interest charges.

Issue 1:
The case involved the interpretation of the law regarding the deletion of interest expenses on Inter Corporate Deposits (ICDs) by the CIT [A]. The Assessing Officer had made an addition of Rs. 1,10,40,296 as interest expenses on ICDs due to divergence of interest bearing borrowings funds to non-interest bearing ICDs. The CIT [A] disagreed with the assessee's contentions and directed the Assessing Officer to pass a fresh order charging interest.

Issue 2:
The Tribunal confirmed the revisional order of the Commissioner but ruled in favor of the assessee on the quantum addition of interest expenses. The Tribunal upheld that the revisional order was valid but deleted the additions made by the Assessing Officer. The Tribunal considered the financial position of the sister concerns to whom advances were given and noted that the companies were not in a good position to repay the interest or principal amount. As a result, the Tribunal dismissed the appeal of the Revenue, stating that no interference was required in the order of the CIT [A].

Issue 3:
The financial position and circumstances of the creditor companies were crucial in determining the validity of charging interest expenses. Both the CIT [A] and the Tribunal observed that the creditor companies had negative growth, reducing income, and no concrete business plan. The companies were not in a position to repay the principal and interest amounts and were considered sick. As a result, the appellant had no reason to charge interest from these companies. The Tribunal and CIT [A] both deleted the additions on the principal and tax on real income based on these considerations.

In conclusion, the High Court upheld the Tribunal's decision to dismiss the Tax Appeal, emphasizing that the financial circumstances of the creditor companies justified the deletion of interest expenses by the CIT [A]. The judgment highlighted the importance of considering the financial position of parties involved in determining the applicability of interest charges in such cases.