2016 (11) TMI 206 - AT - Income Tax

Additions towards notional interest on advances given to partners and sister concerns - Held that - We find force in the arguments of the assessee for the reason that the partners have withdrawn an amount of ₹ 59,73,600/- during the financial year 2006-07, relevant to assessment year 2007-08 out of the amount standing to the credit of their capital account. Though the assessee is having borrowed funds, the borrowed funds represent the deployment of funds in the business assets in the form of stock in trade and receivables. The assessee has not diverted any interest bearing funds to its partners or sister concerns. The amount of advance given to partners and sister concerns is debited to the capital account of the partners, still there is a credit balance in the partners capital account, therefore, the A.O. was not correct in holding that the assessee has diverted its interest bearing funds to its partners and sister concerns. The CIT(A) after considering the relevant details rightly deleted additions made by the A.O. - Decided in favour of assessee. Additions towards advances turning bad - Held that - On perusal of the paper book filed by the assessee, we find that these advances were given in the normal course of business towards purchase of raw materials. When the suppliers not supplied the goods, the assessee has classified these advances under the head advances to suppliers and kept under current assets. The assessee has written off these advances in the books of accounts as bad debts. Even if these amounts are not allowed as deduction u/s 36(1)(v) of the Act, the assessee can always claim deduction u/s 37 of the Act, as the scope of section 37 of the Act is vide enough to include all such amounts paid for the purpose of business and are to be allowed unless and otherwise the advance is capital in nature. In the present case on hand, on perusal of the details available on record, we noticed that these advances are given for the purpose of purchase of raw materials. The assessee has written off these advances in the books of accounts. Therefore, we are of the view that the A.O. was erred in holding that the advances are in the nature of capital advances and hence, not allowable as deduction u/s 37 of the Act. The CIT(A) after considering the relevant details rightly deleted additions made by the A.O - Decided in favour of assessee.

Summary

Issues Involved:
Additions towards notional interest on advances given to partners and sister concerns; Advances written off of ?20,20,763/-

Analysis:

Additions towards Notional Interest on Advances:
The case involved an appeal filed by the revenue and a cross objection by the assessee against the order of the CIT(A) pertaining to the assessment year 2009-10. The Assessing Officer (A.O.) observed that the assessee had advanced interest-free funds to partners and a sister concern without charging interest, while borrowing funds on which it paid significant interest. The A.O. charged notional interest on the advances given and added it to the total income of the assessee. However, the CIT(A) held that the partners withdrew funds from their contributions, and the advances to the sister concern were in the normal course of business, not warranting interest charges. The Tribunal agreed with the CIT(A) that no interest-bearing funds were diverted to partners or sister concerns, leading to the deletion of the additions.

Advances Written Off:
Regarding the advances written off amounting to ?20,20,763, the A.O. disallowed it as capital in nature, not eligible for deduction under sections 36(1)(v) or 37 of the Act. The assessee contended that the advances were trade-related and turned bad due to non-supply of goods by the suppliers. The Tribunal found that the advances were given for the purchase of raw materials in the ordinary course of business and were written off after efforts to recover failed. The advances were appropriately classified under current assets and were eligible for deduction under section 37. The Tribunal upheld the CIT(A)'s decision to delete the additions, emphasizing that the advances were not capital in nature.

In conclusion, the Tribunal dismissed the revenue's appeal and the assessee's cross objection, affirming the CIT(A)'s order. The Tribunal found in favor of the assessee on both issues, emphasizing that the advances were not diverted interest-bearing funds and were deductible under section 37 as business expenses.