2020 (8) TMI 676 - AT - Income Tax

Disallowance of interest on loan since interest free advances given to the parties - HELD THAT - CIT(A) did not accept the assessee s contention by observing that however, no corroborative evidences have been filed by the appellant in respect of the advances. We are unable to appreciate the view point of the CIT(A). Here, the assessee is contending that the amounts were recoverable out of sales made during the year. Once sales have been stated to be made, there could have been no further evidence to corroborate the same, unless the contention of the assessee of having made sales was faulted with. CIT(A) simply rejected the contention of having made sales to these parties without showing as to how the same was not correct. Once it is held that the amount was outstanding out of sales made, the business purpose is automatically established and there can be no question of disallowance in respect of outstanding amount for business purpose. We therefore, order to delete the addition. Disallowance on account of rate difference - AO observed that the assessee purchased entire raw material in the form of Ingots/billets from its sister concern - rate difference was worked out on the basis of excess credit period allowed than the normal payment of one week - HELD THAT - Considering the fact that the assessee uncontrovertedly contended to have availed excess credit period from Mauli Steels Pvt. Ltd. during the last six months of the financial year in contrast to normal credit period of one week during the first half, the contention of assessee for excess small payment for purchases made during such period cannot be rejected. Relevant to note that the authorities below have tried to make out a case that the assessee made purchases at excessive rate from its sister concern. Impliedly, the provisions of section 40A(2) have been invoked, though specific reference to the same is absent. If the authorities were satisfied that the assessee made purchases at excessive rate, then it was upon them to bring on record some material to indicate that the purchase rate was excessive in comparison with some comparable case or the market rate of the goods purchased. As nothing has been done in this regard, we are of the considered opinion that the assessee deserves to succeed on this ground. This ground is allowed. Outstanding under the head Sundry Creditors - Addition invoking the provisions of section 41(1) AO made disallowance on the ground that the assessee could not show that the liability was existing - HELD THAT - It can be seen from the impugned order that the assessee specifically stated that sum was unsecured loan. Such a finding has been recorded which has not been controverted by the ld. CIT(A). If it was a case of unsecured loans coming from the A.Y. 2005-06 onwards, there could have been no addition u/s 68 of the Act in the year under consideration, namely, A.Y. 2011-12. If we go with the AO s point of view that the amount of ₹ 69.55 lacs was on account of sundry creditors, then section 41(1) was attracted, but still no addition could have been made because the liability was existing, which was discharged in later years by means to passing journal entries. Viewed from any angle, the addition of ₹ 69.55 lacs cannot be sustained and the same is directed to be deleted. Enhancement of disallowance - HELD THAT - Simply because there is a difference in closing balances of a creditor in the books of the assessee and the assessee s account in the books of the creditor, it cannot, automatically, lead to the addition for the differential amount. One needs to verify the transaction for the year. It is only if certain transactions for the year have been suppressed/overstated by the assessee that the enquiry initiates in the direction of disallowance. Such a difference is the beginning and not the end of the road for making any addition. If the difference arises only on account of opening balances and the transactions for the year tally, there can be no addition to the income of the assessee for the year on that score. Since such necessary details are not available on record, we deem it fit to set aside the impugned order on this issue and restore the matter to the file of AO. The assessee is directed to produce proper reconciliation of accounts before the AO for enabling him to reach a positive conclusion about the sustainability or otherwise of the addition.

Summary

Issues involved:
1. Disallowance of interest on advances
2. Disallowance on account of rate difference
3. Addition under 'Sundry Creditors'
4. Enhancement of disallowance amount
5. Charging of interest

Issue 1: Disallowance of interest on advances
The appeal concerned the disallowance of interest on advances made by the assessee to various parties. The Assessing Officer disallowed a portion of the interest paid by the assessee, which was contested before the CIT(A) and subsequently the Tribunal. The Tribunal noted that the assessee contended the advances were made for business purposes, supported by sales made during the year. The CIT(A) rejected the contention due to lack of corroborative evidence. However, the Tribunal disagreed, stating that once sales were shown to have been made, the business purpose was established, and disallowance was unwarranted. Consequently, the addition was deleted.

Issue 2: Disallowance on account of rate difference
The second issue revolved around the disallowance of a specific amount on account of rate difference. The AO disallowed the amount due to lack of explanation and alleged diversion of income. The CIT(A) upheld the disallowance. The Tribunal, after considering the submissions, found that the rate difference was justified due to an extended credit period offered by the supplier. The Tribunal noted that the authorities failed to provide evidence of excessive purchase rates, leading to the allowance of the assessee's claim and disallowance reversal.

Issue 3: Addition under 'Sundry Creditors'
Regarding the addition under 'Sundry Creditors,' the AO disallowed a significant amount, alleging non-existence of the liability. The CIT(A) upheld this disallowance. However, the Tribunal observed that the amount was shown as payable to a related party and was later settled through journal entries in subsequent years. The Tribunal concluded that the liability existed and was discharged, leading to the deletion of the addition.

Issue 4: Enhancement of disallowance amount
The next issue involved the enhancement of a disallowance amount by the CIT(A) compared to the AO's original disallowance. The Tribunal noted discrepancies in accounts with other parties, leading to the disallowance. The assessee claimed the differences were due to errors by the other parties, not the assessee. The Tribunal emphasized the need to verify transactions before making additions and directed the matter back to the AO for proper reconciliation.

Issue 5: Charging of interest
The final issue pertained to the charging of interest, which was deemed consequential. The Tribunal partly allowed the appeal, emphasizing the need for proper reconciliation of accounts before making any additions. The Tribunal's decision was pronounced in open court on 25th August 2020.

This comprehensive analysis covers the key issues addressed in the legal judgment delivered by the Appellate Tribunal ITAT PUNE, providing detailed insights into each aspect of the case and the Tribunal's rulings on the matters at hand.