2016 (4) TMI 1087 - AT - Income Tax

Interest on sundry debtors - Held that - The debtor went into liquidation and the matter is pending before the BIFR. On further verification of the details submitted by the assessee, we find that the lenders have taken the possession of the assets of the company and given notice for auction. Under these circumstances, the A.O. was incorrect in charging interest on the outstanding debtor balance, when recovery of principal is in doubtful. The Assessing Officer, simply estimated the interest on the outstanding debtor balance based on the assessee own admission for the previous financial year. We do not see any merit in the contention of the Assessing Officer for the reason that the Assessing Officer cannot sit in the chair of the businessman and direct him to do business in a particular fashion. The outstanding amount due from the debtor is on account of trading liability. It is not a case of the Assessing Officer that the outstanding loan amount is a stock in trade of assessee and assessee is in the business of money lending to charge interest on the outstanding balance by following the mercantile system of accounting. Though, assessee charged interest for the last financial year, he explained the reasons for not charging the interest for the current financial year under consideration. From the perusal of the facts, it appears that the reasons given by the assessee appears to be reasonable. Therefore, we are of the opinion that charging interest on trade debtors is not correct. The CIT(A) after considering the relevant facts and circumstances of the case, deleted the additions made by the Assessing Officer. We do not see any error or infirmity in the order passed by the CIT(A). - Decided in favour of assessee.

Summary

Issues involved:
- Charging interest on outstanding debtor balance
- Assessing Officer's authority to charge interest
- Financial position of the debtor
- Mercantile system of accounting
- CIT(A)'s decision to delete additions made by Assessing Officer
- Appeal filed by the revenue

Charging interest on outstanding debtor balance:
The case involved a partnership firm engaged in trading in cotton, which declared a total loss for the assessment year 2008-09. The Assessing Officer charged interest on the outstanding debtor balance of the firm, citing the firm's previous practice of charging interest and lack of explanation for not charging interest for the current financial year. The firm argued that the debtor's financial position was weak, making recovery doubtful, and claimed no practice of charging interest on outstanding debtor balances. The CIT(A) agreed with the firm, noting the debtor's poor financial state and directed the Assessing Officer to delete the interest charges.

Assessing Officer's authority to charge interest:
The Assessing Officer believed that since the firm had charged interest in the previous year and continued business with the debtor without collecting the due amounts, interest should be charged on the outstanding balance. However, the firm argued that the financial condition of the debtor, which had gone into liquidation, made charging interest imprudent. The ITAT held that the Assessing Officer's decision to charge interest lacked merit as there was no mutual agreement or condition for charging interest on the debtor balance.

Financial position of the debtor:
The firm contended that the debtor's financial position was weak, with lenders taking possession of the company's assets and the debtor facing liquidation. The ITAT found that the Assessing Officer's decision to charge interest was incorrect given the doubtful recovery of the principal amount, and that the Assessing Officer could not dictate the firm's business practices.

Mercantile system of accounting:
The firm followed the mercantile system of accounting but argued that charging interest on outstanding debtor balances under the accrual concept would create additional income without the possibility of recovery. The ITAT agreed with the firm's reasoning and upheld the CIT(A)'s decision to delete the interest charges.

CIT(A)'s decision to delete additions made by Assessing Officer:
The CIT(A) deleted the interest charges based on the firm's explanations and the debtor's financial state. The ITAT found no error in the CIT(A)'s decision and upheld the deletion of the additions made by the Assessing Officer.

Appeal filed by the revenue:
The revenue's appeal against the CIT(A)'s decision to delete the interest charges was dismissed by the ITAT, which upheld the CIT(A)'s order and directed the Assessing Officer to delete the additions.

This detailed analysis of the judgment highlights the issues involved, arguments presented by the parties, and the reasoning behind the decisions made by the authorities.