2017 (10) TMI 67 - AT - Income Tax

Addition on interest expenses on the late deposit of service tax and Tax Deducted at Source (TDS) - Held that - The principle laid down by the Hon ble Supreme Court in the case of Bharat Commerce Industries Ltd. (1998 (3) TMI 2 - SUPREME Court) is not applicable in the instant facts of the case. Thus, we hold that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra). We also find that the Hon ble Supreme Court in the case of Lachmandas Mathura (1997 (12) TMI 16 - SUPREME Court ) has allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1). Addition of unexplained freight expenditure - CIT-A deleted addition admitting fresh evidences - Held that - All the necessary reconciliation in support of freight expenses were produced by the assessee before the AO at the time of assessment proceedings. There is clear finding of the ld. CIT(A) that no subsidiary ledger in respect to freight charges was maintained by the assessee though the AO made the addition on the basis of non-production of subsidiary ledger. In the absence of any additional evidence, we do not find any reason to interfere in the order of Ld. CIT(A). Hence, this ground of Revenue s appeal is dismissed. Addition on interest on sundry debtors - Held that - On the perusal of assessment order, we find that no date for the payment from the sundry debtor was brought on record. There was no information available suggesting that the assessee was entitled for interest on the outstanding amount of sundry debtors. Thus, it cannot be said that the income from interest had actually accrued to the assessee during the year under consideration. The decision for the charging the interest from the sundry debtors totally depends upon the assessee. The AO cannot sit on the arm-chair of the assessee and direct for the recovery of interest on the amount of sundry debtors which are due for payment. The assessee has to consider business expediency for charging interest from the sundry debtors which are outstanding in the books. Thus, we hold that the addition made by the AO for the interest on the amount of sundry debtors outstanding in the books of account is not sustainable. Addition on account of interest on loans and advances - Held that - Assessee was having its own capital for ₹ 8,84,73,905/- at the end of financial year under consideration. We note that the own fund of assessee was sufficient enough to make the advance of ₹ 48,13,023/- only. In this regard, Ld. DR has not brought anything contrary to the finding of Ld. CIT(A) suggesting that the borrowed has been diverted in non-business activity. Hence, we hold that there was no diversion of interest bearing fund to the non-business activities of the assessee. Accordingly we find no reason to interfere in the finding arrived by the Ld. CIT(A) Decided against revenue.

Issues Involved:
1. Deletion of disallowance of interest on service tax and TDS.
2. Deletion of addition as unexplained expenditure on account of freight payments.
3. Deletion of addition on account of interest on sundry debtors.
4. Deletion of addition on account of interest on loans and advances.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Interest on Service Tax and TDS:
The Revenue challenged the deletion of disallowance of ?15,880 and ?70,777 on account of interest expenses for late deposit of service tax and TDS respectively. The Assessing Officer (AO) disallowed these expenses based on the Supreme Court judgment in Bharat Commerce Industries Ltd. Vs. CIT, which held that interest paid for committing a default in respect of a statutory liability is not allowable as it is not incurred for the purpose of business. However, the CIT(A) distinguished this case, emphasizing that the interest on delayed payment of service tax and TDS is compensatory and not penal. The Tribunal upheld the CIT(A)’s decision, referencing the Supreme Court judgment in Lachmandas Mathura vs. CIT, which allowed the deduction of interest on sales tax arrears under Section 37(1) of the Act. Consequently, the Tribunal found no reason to interfere with the CIT(A)’s order.

2. Deletion of Addition as Unexplained Expenditure on Account of Freight Payments:
The AO observed discrepancies in the freight expenses reported in the profit and loss account, tax audit report, and under Section 40A(2)(b). Despite the assessee providing a reconciliation statement, the AO made an addition of ?45,71,900, citing non-production of subsidiary ledger accounts. The CIT(A) deleted the addition, noting that the assessee had satisfactorily reconciled the differences and that the amount was not claimed as an expenditure. The Tribunal found no evidence of additional documents being admitted by the CIT(A) in contravention of Rule 46A and upheld the CIT(A)’s order, dismissing the Revenue’s appeal.

3. Deletion of Addition on Account of Interest on Sundry Debtors:
The AO added ?13,13,396 as interest on sundry debtors outstanding for more than six months, arguing that the assessee’s interest-bearing funds were blocked. The CIT(A) deleted the addition, stating that the AO failed to establish that borrowed funds were diverted for non-business purposes. The Tribunal agreed, noting that selling goods on credit is a common business practice and that the AO had not demonstrated that the assessee was entitled to interest on the outstanding amounts. Consequently, the Tribunal upheld the CIT(A)’s decision.

4. Deletion of Addition on Account of Interest on Loans and Advances:
The AO disallowed ?4,33,172 as interest on advances of ?48,13,023, assuming that interest-bearing funds were diverted. The CIT(A) found that the advances were for business purposes and that the assessee had sufficient own funds to cover the advances. The Tribunal agreed, noting that the Revenue did not provide evidence to contradict the CIT(A)’s findings. Thus, the Tribunal upheld the CIT(A)’s order, dismissing the Revenue’s appeal.

Conclusion:
The Tribunal dismissed all grounds of the Revenue’s appeal, upholding the CIT(A)’s decisions on all issues. The interest expenses on delayed service tax and TDS payments were deemed allowable, the addition for unexplained freight expenses was deleted due to satisfactory reconciliation, and the additions for interest on sundry debtors and advances were dismissed as the AO failed to establish diversion of interest-bearing funds for non-business purposes.

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