2015 (10) TMI 995 - AT - Income Tax

Disallowance of interest free advance - Held that - It is an undisputed position that interest free funds available to the assessee are far in excess of the interest free advances given by the assessee. In the documents filed before us, it is shown that the assessee had a capital of ₹ 176 lakhs and business profit of ₹ 82.45 lakhs, and both these amounts put together are far in excess of the interest free investments made by the assessee. With these undisputed facts in mind, let us take a look at the legal position laid down by Hon ble Bombay High Court, in the case of CIT Vs Reliance Utilities & Power Ltd (2009 (1) TMI 4 - HIGH COURT BOMBAY), as stated thus, The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments . On the basis of this principle, as has been consistently held by coordinate benches of this Tribunal, as long as interest free funds available to an assessee are in excess of the non business investments or interest free advances, presumption has to be that investments or interest free advances are out of interest free advances, and, accordingly, disallowance in respect of interest paid on borrowings cannot be made on the ground that the borrowed monies have not been used for business purposes. The impugned interest disallowances are, accordingly, deleted - Decided in favour of assessee. Penalty imposed under section 271(1)(c) - Disallowance of sales tax liability - Held that - The deduction was made in a transparent manner inasmuch as it was stated in the profit and loss account as Sales Tax Arrears 81-82 and as such it cannot be said to be a case of furnishing inaccurate particulars of income. It is also an undisputed position that even the tax auditor missed the disallowance in the tax audit report. There is nothing before us to indicate malafide in this action. It is also not a case of double deduction for the same amount, as the relevant previous year was the year in which payment was made. In these circumstances, even if it was an inadmissible claim, by no stretch of logic, this can be a fit case for imposition of penalty under section 271(1)(c) of the Act. Learned Departmental Representative, when confronted with these facts, did not have much to say, beyond placing his dutiful reliance on the orders of the authorities below.In view of the above discussions, and bearing in mind entirety of the case, we deem it fit and proper to delete the impugned penalty - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest on interest-free advances to family members.
2. Disallowance of interest on cash withdrawals.
3. Penalty imposed under section 271(1)(c) for inaccurate particulars of income.

Issue 1: Disallowance of interest on interest-free advances to family members:
The appeal challenged the disallowance of interest on interest-free advances made to family members. The Assessing Officer disallowed interest on advances to the daughter-in-law and another individual, citing that the interest paid was not for business purposes. The CIT(A) upheld the disallowances and increased the amount for another advance. However, the ITAT ruled that as long as interest-free funds available to the assessee exceed the non-business investments or advances, a presumption arises that investments are from interest-free funds. Referring to legal precedents, the ITAT held that the disallowances were unjustified and deleted them.

Issue 2: Disallowance of interest on cash withdrawals:
The Assessing Officer disallowed a sum on an estimated basis for cash withdrawals that increased the interest liability of the assessee. The ITAT noted that the interest-free funds available to the assessee were significantly higher than the interest-free advances made. Citing a legal principle, the ITAT ruled that as long as interest-free funds exceed non-business investments, disallowance of interest paid on borrowings cannot be made. Consequently, the ITAT deleted the disallowances related to cash withdrawals.

Issue 3: Penalty under section 271(1)(c) for inaccurate particulars of income:
The penalty pertained to a disallowance for sales tax liability for an incorrect assessment year. The Assessing Officer imposed a penalty, alleging that the assessee knowingly furnished inaccurate particulars of income. The CIT(A) upheld the penalty, stating it was a case of false claim. However, the ITAT found that the deduction was transparently disclosed and not a case of furnishing inaccurate particulars. It noted that even the tax auditor missed the disallowance, and there was no evidence of malafide intent. Consequently, the ITAT deleted the penalty, ruling that it was not a fit case for penalty under section 271(1)(c) of the Act.

In conclusion, the ITAT allowed one appeal in full and partly allowed another, overturning the disallowances of interest and deleting the penalty imposed for inaccurate particulars of income. The judgments were pronounced on June 30, 2014.