2017 (5) TMI 216 - AT - Income Tax

Disallowance u/s.36(1)(iii) - assessee has given interest free advances to the persons referred u/s.40A(2)(b) - Held that - Fom the facts of the present case and the decision of Hero Cycles (P.) Ltd. Versus CIT 2015 (11) TMI 1314 - SUPREME COURT OF INDIA essentially there has to be a commercial expediency or there has to be interest free funds with the assessee and the decision of Abhishek Industries is not a good law in view of the decision of Hon ble Apex Court referred to hereinabove. Since, the earlier year advances have been accepted in the preceding years and no interest on the same has been disallowed, therefore, no disallowance in the impugned year can be made in view of the decision of Hon ble Karnataka High Court in the case of Sridev Enterprises 1991 (1) TMI 52 - KARNATAKA High Court wherein held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequent be held by it have become bad prior to that year. - Decided in favour of assessee

Summary

Issues:
Disallowance u/s.36(1)(iii) of the Act.

Analysis:

Issue: Disallowance u/s.36(1)(iii) of the Act

The case involved the disallowance of interest amounting to &8377; 21,30,898/- attributable to interest-free advances given to certain parties under section 40A(2)(b) of the Act. The Assessing Officer disallowed this amount, leading to an appeal by the assessee. The CIT(A) upheld the disallowance, prompting further arguments by the assessee. The appellant contended that most advances were given during the year from interest-free advances, thus no disallowance was warranted. Additionally, the appellant argued that advances given in earlier years should not be subject to disallowance. However, the CIT(A) rejected these contentions, citing legal precedents and held that interest related to such advances must be disallowed. The appellant then referred to various judgments, including those of the ITAT Chandigarh, to support their case. The ITAT Delhi, after considering the arguments and relevant legal decisions, ruled in favor of the assessee. The tribunal emphasized the need for commercial expediency or interest-free funds with the assessee to justify disallowance under section 36(1)(iii) of the Act. The tribunal also highlighted the importance of consistency in tax assessments, citing relevant case laws to support its decision. Consequently, the disallowance made by the Assessing Officer was directed to be deleted, and the order of the CIT(A) was reversed, resulting in the allowance of the assessee's appeal.

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