2015 (10) TMI 583 - AT - Income Tax

Disallowance of discounting charges/ interest - FAA held that the assessee was not entitled to claim interest as loan was diverted to sister concern without charging interest - Held that - While deciding the appeal for assessment year 1998-99 2015 (10) TMI 581 - ITAT MUMBAI the Tribunal decided the issue stating that first letter of the assessee in the fresh proceedings by which it furnished Fund flow statement, Balance sheet and profit and loss account for the year in question and for the earlier year, details of discount charges paid, statement of account, parties in support of receipt payment of discounting charges, copies of account of parties tracing the original funds, user of funds and repayment of charges with discounting charges etc. Another letter was filed before the Assessing Officer producing complete books of account, details of finance charges paid with bifurcation of parties and rate of interest and a copy of assessment order passed by the A. O. for the preceding year in which similar deduction was allowed. The present assessment order was passed by the AO after filing of the above referred documents by the assessee. It is surprising that the Assessing Officer did not make a whisper, in the assessment order of such details having been filed by the assessee - What to talk of adversely commenting, the A. 0. even did not bother to incorporate or discuss such facts in the assessment order. On the appreciation of the entire material /evidence placed by the assessee before the A. O. in the fresh round of proceedings, the learned CIT(A) has recorded a categorical finding that these expenses were incurred during the course of business. Apart from relying on the assessment order, the learned Departmental Representative could not controvert the findings given by the learned CIT(A) in support of the grant of deduction. We, therefore, uphold the impugned order in deleting the said addition. Also see case of Delta International & East West Corporation and other group concerns wherein the Tribunal had decided the identical issue in favour of the assessee 2013 (10) TMI 919 - ITAT MUMBAI - Decided against revenue.

Summary

Issues:
1. Disallowance of discounting charges/interest by CIT(A).
2. Utilization of borrowed funds for business purposes.
3. Lack of business activity affecting deduction eligibility.
4. Disallowance of interest charges by AO.
5. Comparison with previous assessment year rulings.
6. Tribunal's decision on discounting charges issue.

Issue 1: Disallowance of discounting charges/interest by CIT(A): The assessee challenged the CIT(A)'s disallowance of the claim for discounting charges/interest, arguing that the borrowed funds were used for business purposes, entitling them to deduction under relevant sections of the Income Tax Act. The CIT(A) upheld the disallowance, leading to the appeal before the Tribunal.

Issue 2: Utilization of borrowed funds for business purposes: The CIT(A) questioned whether the borrowings were genuinely used for the appellant's business activities. The appellant contended that the funds were indeed utilized for business purposes, supported by fund flow statements. However, the CIT(A) found no substantial evidence to support this claim, leading to the disallowance.

Issue 3: Lack of business activity affecting deduction eligibility: The CIT(A) raised concerns about the lack of evident business activities by the appellant, which impacted the eligibility for claiming deductions on discounting charges/interest under the Income Tax Act. The appellant's arguments regarding previous borrowings and business activities were not deemed sufficient to support their claim.

Issue 4: Disallowance of interest charges by AO: The Assessing Officer disallowed the interest charges, emphasizing the lack of evidence to prove the genuine nature of the charges claimed as bill discounting charges. The AO highlighted discrepancies in the documentation provided by the assessee, leading to the rejection of the interest charges claimed.

Issue 5: Comparison with previous assessment year rulings: The appellant cited rulings from previous assessment years where similar claims were allowed, attempting to establish a precedent for their case. However, the FAA scrutinized the appellant's financial history and activities, ultimately concluding that the current scenario did not align with past decisions.

Issue 6: Tribunal's decision on discounting charges issue: The Tribunal referred to a previous case involving similar discounting charges, where the Tribunal had ruled in favor of the assessee. Citing the consistency in decisions, the Tribunal upheld the FAA's order, deciding the effective ground of appeal in favor of the assessee based on the precedent set by the previous case.

Overall, the judgment revolved around the substantiation of claims regarding discounting charges/interest, the utilization of borrowed funds for business purposes, and the presence of significant business activities to support deduction eligibility under the Income Tax Act. The decision was influenced by past rulings and the alignment of the current case with established legal precedents.