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2014 (12) TMI 336 - AT - Income TaxDeletion of disallowance out of interest paid by assessee - Investment in shares Held that - There is investment in shares of sister concerns to the extent of ₹ 4,58,75,850/- including fresh investment in present year of ₹ 3,50,60,700 - there are advances recoverable in cash or in kind from sister concerns of ₹ 8,85,20,483/- including fresh advances in present year of ₹ 3,00,99,83 - even if any interest expenditure is incurred on borrowing utilized for making investment in shares, the same is allowable either u/s 36(1)(iii) of the Act, if making investment in shares is a business activity of the assessee and otherwise, the same is allowable as deduction u/s 57(iii) of the Act, because in that situation, the dividend income is taxable as income from other sources and accordingly, expenditure is allowable under section 57(iii) of the Act. Advances to sister concerns and partners Held that - It is noted by the AO in the assessment order hat on advances to sister concerns, interest has been charged by the assessee except advances to two sister concerns i.e. Kailash Auto Finance Ltd. and Kailash Moser Industries Pvt. Ltd. - The amount of advances to Kailash Auto Finance Ltd. was only ₹ 43.21 lakhs as noted by the AO and outstanding amount with other company i.e. Kailash Moser Industries Pvt. Ltd. was not indicated in the assessment order the decision in Commissioner of Income-Tax, West Bengal III Versus Rajendra Prasad Moody 1978 (10) TMI 133 - SUPREME Court supports assessee - interest expenditure for earning taxable dividend income has to be allowed irrespective of the fact that there was no dividend income earned during this year. The decision delivered by the SC in S. A. Builders Ltd. vs. CIT 2006 (12) TMI 82 - SUPREME COURT stands applicable in present case - interest on such loan will be allowable as deduction u/s 36(1)(iii), only if such loan has been advanced for purpose of business as a measure of commercial expediency - money was advanced by the assessee firm to its sister concerns and it is not a case of the AO that such money advanced by the assessee firm to the sister concerns were used by the Directors of these two companies for their personal purposes assessee claimed that money advanced by the assessee firm to these two sister concerns were used by these two companies for business purposes thus, no disallowance of interest can be made for making such interest free advances to these two sister concerns Decided against revenue. Addition of unexplained deposits u/s 68 Held that - Out of total four deposits, one deposit of ₹ 1.10 lakhs of Mr. Anand Saptak is on account of renewal of old FDRS and therefore, addition on account of this deposit is not justified at all regarding other three deposits also, the assessee has filed confirmation of these three persons also and the AO has allowed interest expenditure incurred in respect of these four depositors - regarding deposit of ₹ 1 lakh by Mrs. Asha Agarwal, since reply received from Mrs. Asha Agarwal is for confirmation of ₹ 50,000/- only, excess claim of deposit of ₹ 50,000/- has to be held as not explained - addition made by the AO is justified because when the depositor is confirming only ₹ 50,000/- out of ₹ 100,000/- shown by the assessee, it has to be accepted that balance deposit was not explained. Regarding deposit of ₹ 1.01 lakhs from Smt. Satyawati Sanghi, addition made by the AO is justified because when the depositor is confirming only ₹ 31,000/- out of ₹ 101,000/- shown by the assessee, it has to be accepted that balance deposit was not explained - in respect of Smt. Smita Agarwal of ₹ 20,000/-, AO noted that this bank certificate shows the repayment of ₹ 11,090/- against the deposit of ₹ 20,000/- claimed by the assessee - no nexus is proved between the two transactions thus, the additions made are partly upheld Decided partly in favour of assessee.
Issues Involved:
1. Deletion of disallowance of interest paid by the assessee. 2. Unexplained deposits under Section 68 of the Income Tax Act. 3. Disallowance of interest expenditure under Section 14A of the Income Tax Act. 4. Disallowance of balance written off. 5. Addition on account of low gross profit. 6. Disallowance of various business expenses. Issue-Wise Detailed Analysis: 1. Deletion of Disallowance of Interest Paid by the Assessee: The Revenue challenged the deletion of disallowance of Rs. 84,93,418/- made by the Assessing Officer (AO) on account of interest paid by the assessee. The AO argued that the interest-bearing borrowed funds were used for investments in shares of sister concerns and interest-free advances to sister concerns. The CIT(A) deleted the disallowance, citing business connection and commercial expediency. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in S. A. Builders Ltd. vs. CIT, which emphasizes commercial expediency and business purpose. The Tribunal found no evidence that the advances were used for personal benefits of directors and noted that the interest was charged at the same rate on borrowings and advances. 2. Unexplained Deposits under Section 68 of the Income Tax Act: The assessee's appeal included the issue of unexplained deposits of Rs. 2,50,000/- under Section 68. The AO made additions for four depositors, questioning the genuineness of the deposits. The Tribunal deleted the addition of Rs. 1,10,000/- for Mr. Anand Saptak, as it was a renewal of old FDRs. However, it upheld the addition for the remaining depositors due to discrepancies in confirmations and lack of evidence. 3. Disallowance of Interest Expenditure under Section 14A of the Income Tax Act: For assessment years 2004-05 and 2005-06, the Revenue's appeals challenged the deletion of disallowance of interest paid on borrowed funds used for investments in shares of sister concerns. The Tribunal noted that from assessment year 2004-05, dividend income was exempt, and thus, interest expenditure for earning such income was not allowable under Section 57(iii). The Tribunal reversed the CIT(A)'s decision, holding that the interest expenditure was not allowable under any provision of the Act, including Section 36(1)(iii) and Section 14A. 4. Disallowance of Balance Written Off: In the appeal for assessment year 2006-07, the Revenue challenged the deletion of disallowance of Rs. 4,24,106/- for balance written off. The CIT(A) had deleted the disallowance, stating that the balances written off were part of business transactions. The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere. 5. Addition on Account of Low Gross Profit: The assessee's appeal for assessment year 2006-07 included an addition of Rs. 1,45,560/- on account of low gross profit. The AO made the addition by applying a percentage of profit on sales. The Tribunal upheld the addition, noting that the assessee failed to provide satisfactory explanations for the decline in gross profit. 6. Disallowance of Various Business Expenses: The assessee's appeal also challenged disallowances under various heads, including job work charges, staff welfare, general expenses, hire charges, and commission/brokerage. The Tribunal upheld the disallowances, finding that the assessee failed to provide sufficient evidence to justify the expenses. Conclusion: The Tribunal dismissed the Revenue's appeal for assessment year 2003-04 but allowed the appeals for assessment years 2004-05 and 2005-06, reversing the CIT(A)'s decisions on disallowance of interest expenditure. The Tribunal also partly allowed the assessee's appeal for assessment year 2003-04 and dismissed the appeal for assessment year 2006-07, upholding the disallowances made by the AO.
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