2015 (10) TMI 1064 - AT - Income Tax

Suppression of sales - electricity expenses are on higher side - CIT(A) deleted the addition - Held that - Assessing Officer has committed a mistake in adopting the sale of ice at Noida factory only, whereas the majority of sales have been reported at Shakarpur Head Office, besides there is no evidence what so ever to suggest any sale out of books, more so when the books of account of the assessee are not rejected. In view of the facts and circumstances of the case, we see no infirmity in the order of CIT (A) - Decided against revenue. Addition on the account of interest disallowed u/s 36(1)(iii) - CIT(A) deleted the addition - Held that - It is not been disputed that the assessee received an amount of ₹ 38,50,000/- as interest free loans from various parties and the interest free advances have been given to a lesser extent of ₹ 32,30,000/-. There is no allegation that the loan bearing funds were directly diverted to sister concern. In these circumstances, we see no infirmity in the order of CIT (A) which is upheld - Hon ble Delhi High Court judgment in the case of Bharti Televenture 2011 (1) TMI 326 - DELHI HIGH COURT is applicable to assessee s case and factually there being no diversion of interest bearing funds - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of electricity expenses on the grounds of possible suppression of sales.
2. Disallowance of interest on interest-free loans given to related parties.

Analysis:

Issue 1: Disallowance of electricity expenses
The Assessing Officer disallowed &8377; 8,32,821 of electricity expenses, suspecting suppression of sales as the expenses seemed disproportionate to sales at the Noida unit. However, the CIT (A) found merit in the appellant's argument that sales were made at both Noida and the head office, leading to higher electricity expenses. The CIT (A) noted that the factory premises were transferred to the appellant's name, and the electricity bills were in the name of the previous owner due to this transfer. The CIT (A) observed that the Assessing Officer erred in comparing electricity charges only with sales at the Noida unit, neglecting sales from the head office. The disallowance was deemed arbitrary, and the addition was deleted.

Issue 2: Disallowance of interest on interest-free loans
The Assessing Officer disallowed &8377; 4,17,780 of interest on bank accounts, alleging diversion of borrowed funds as interest-free loans to related parties. However, the appellant had raised interest-free funds of &8377; 38,50,000 and advanced &8377; 32,30,000 in interest-free loans, showing no diversion of funds to related parties. The CIT (A) agreed with the appellant, stating that no disallowance should be made when interest-free funds exceeded interest-free advances. The order of the CIT (A) was upheld, citing precedents like S.A Builders and Bharti Televenture. The judgment dismissed the Revenue's appeal, emphasizing the absence of diversion of interest-bearing funds and the applicability of relevant case law.

In conclusion, the ITAT Delhi upheld the CIT (A)'s decision to delete the additions of electricity expenses and interest on interest-free loans, dismissing the Revenue's appeal. The judgment highlighted the importance of considering all sales locations for expense analysis and the necessity for a clear link between borrowed funds and related party transactions to justify disallowances.