2015 (8) TMI 315 - AT - Income Tax

Addition on Interest income - accrual of interest on the money advanced - Held that - This issue is squarely covered by the decision of State Bank of Travancore Vs. CIT 1986 (1) TMI 1 - SUPREME Court wherein Hon ble Court had accepted the preposition that if the financial condition of the debtor had deteriorated and from the history of its accounts, the recovery of the principal amount had become improbable and extremely doubtful rendering the sticky advances and as such interest thereon though debited to them following accrual system of accountancy, the alleged interest income would not be taxable in the hands of the assessee because it is a hypothetical income and not a real income. In the light of this decision, if we examine the facts of the present case, then it would reveal that as far as loan given to M/s. S.S Industries Ltd are concern, these were given in the year 1990. The debtor has paid interest upto 1992, but thereafter stopped payment. The assessee has not recognized interest income from assessment year 1997-98, by that time more than three years have already been expired. Thus, alleged interest income cannot be assumed and deserves to be deleted As far as loan given to M/s. Khaitan Hostombe Spinels Ltd is concern, this loan was given on 08-07-1996. It is also in the same assessment year. The evidence produced by the assessee relates to the AY 2003-04. In AY 1997-98, it cannot be assumed that recovery of the principal amount was doubtful. Therefore, the assessee ought to have recognized the interest income on this loan. The ground of assessee regarding challenging of addition on account of interest on loan given to M/s. Khaitan Hostombe is concern, this ground is rejected in both years. The order of the ld.CIT(A) on this issue is confirmed. Disallowance of depreciation - no manufacturing activity was carried out in the asssessee s factory premises - Held that - AO has not brought any evidence on record suggesting that the assessee has closed down its business during the years under consideration. If there is temporary suspension in the manufacturing activity, then depreciation on the factory building cannot be denied. Therefore, we allow this ground of the appeal in both years and delete this addition of ₹ 20,321/- and ₹ 18,992 towards claim of depreciation - Decided in favour of assessee. Disallowance of travelling & conveyance - Held that - merit in this ground raised by the assessee because the assessee has failed to establish that this expenditure were incurred only and exclusively for the purpose of the business of the assessee. This issue of assessee s appeal is liable to be dismissed. - Decided against assessee.

Summary

Issues: Appeals against Ld. CIT(A) orders for assessment years 1997-98 and 1998-99; Disallowances on interest income, depreciation, and travelling & conveyance expenses.

Interest Income Disallowance - M/s. S.S Industries Ltd:
The AO made additions to the assessee's income for interest income on advances made to M/s. S.S Industries Ltd. The AO's decision was based on an inspector's report stating the company existed until 2003-04 and the assessee recognized the loans in its books. However, the Tribunal found that the interest income was not taxable as the debtor's financial condition deteriorated, making recovery improbable. Citing the State Bank of Travancore case, the Tribunal ruled the interest income was hypothetical, not real income, and deleted the additions for both assessment years.

Interest Income Disallowance - M/s. Khaitan Hostombe Spinels Ltd:
The AO disallowed interest income accrued on advances to M/s. Khaitan Hostombe Spinels Ltd, as the company stopped interest payments and faced legal action. The Tribunal held that as of the assessment year 1997-98, recovery of the principal amount was not doubtful, and the interest income should have been recognized. The Tribunal rejected the assessee's challenge to the addition for both years, upholding the Ld. CIT(A)'s decision.

Depreciation Disallowance:
The AO disallowed depreciation claiming no manufacturing activity took place in the factory premises during the years under consideration. The Tribunal found no evidence of business closure and allowed the depreciation claim, stating that temporary suspension of manufacturing activity does not warrant disallowance of depreciation on the factory building. The additions of depreciation for both years were deleted.

Travelling & Conveyance Expenses Disallowance:
The AO disallowed a portion of travelling & conveyance expenses related to exploring new business activity at Muradabad Plant. The Tribunal upheld the disallowance as the assessee failed to prove the expenses were solely for business purposes, and the new business activity's connection to the existing business was not established. The assessee's appeal on this ground was dismissed.

In conclusion, the Tribunal partly allowed the appeals, deleting the additions for interest income disallowance on advances to M/s. S.S Industries Ltd and depreciation, but upholding the disallowance of travelling & conveyance expenses related to the new business activity. The judgment was pronounced on 6.5.2015.