2021 (7) TMI 826 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest had been charged on the funds given out and that as to why the interest on funds diverted for non business purpose should not be disallowed - HELD THAT - In the present case, the contention of Assessee that the assessee company was having sufficient interest free funds available with it which would be said to have been used in making interest free advances to M/s GDPL requires verification at the level of the A.O. therefore this issue is set aside to the file of the A.O. to be adjudicated afresh in accordance with law after providing due and reasonable opportunities of being heard to the assessee. Addition of interest - assessee had taken term loan for purchase of machinery, he asked the assessee to explain as to why the interest pertaining to loan taken for purchase of machinery should not be disallowed and capitalized to be included as cost of machinery, as and when the same was purchased and put to use - HELD THAT - Similar issue was a subject matter of the assessee s appeal 2019 (4) TMI 1990 - ITAT CHANDIGARH the matter is required to be restored to the file of the Assessing officer to duly consider the aforesaid contention of the assessee, examine the details of the finances available with the assessee vis-a-vis amount capitalized by the assessee and decide the issue afresh in the light of the decision in the case of CIT (LTU) Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT - The orders of the lower authorities are set aside and the matter is remanded to the Assessing officer to decide the issue afresh as per the observations made above. In the result, the appeal of the assessee is treated as allowed for statistical purposes. Addition invoking the provisions of Section 41(1) - sundry creditors were outstanding for more than three years, so it was liable to be taxed under section 41(1) of the Act as cessation of liability - HELD THAT - In the present case it appears that the facts that payments were made in certain cases after passing of the assessment order and few were written back as per the practice of the assessee company were not brought to the knowledge of the A.O. and the Ld. CIT(A) is also silent on those facts. We therefore deem it appropriate to set aside this issue back to the file of the A.O. to be adjudicated afresh in accordance with law after providing due and reasonable opportunities of being heard to the assessee. Appeal of the Assessee is allowed for statistical purposes.

Issues Involved:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.
2. Capitalization of interest on loan taken for purchase of machinery.
3. Addition of outstanding balances of sundry creditors under section 41(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The primary issue revolves around the disallowance of ?26,81,157/- made by the Assessing Officer (A.O.) under section 36(1)(iii) of the Income Tax Act, 1961. The A.O. observed that the assessee had given funds to an associated concern, M/s G. Drugs and Pharmaceuticals Ltd. (GDPL), without charging interest, while the assessee itself was paying interest on borrowed funds. The assessee argued that GDPL had merged with the assessee company retrospectively from 01.04.2010 as per a BIFR order, and thus, disallowance of interest was not justified. However, the A.O. did not accept this explanation due to the absence of an amalgamation order from the Punjab & Haryana High Court.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, noting that the assessee failed to demonstrate the commercial expediency of the interest-free loan to GDPL and did not provide documentary evidence of sufficient interest-free funds at the time of extending the loan.

Upon appeal, the Tribunal noted that the assessee's claim of having sufficient interest-free funds requires verification. Therefore, this issue was remanded back to the A.O. for fresh adjudication after verifying the availability of interest-free funds.

2. Capitalization of Interest on Loan for Machinery:
The second issue pertains to the capitalization of interest amounting to ?51,41,705/- and ?1,80,694/-. The A.O. noticed that the assessee had taken a term loan for purchasing machinery and capital work in progress. The A.O. disallowed the interest and capitalized it as part of the cost of machinery, as per the proviso to section 36(1)(iii) of the Act, which mandates capitalization of interest till the asset is put to use.

The CIT(A) sustained the disallowance, emphasizing that the interest should be capitalized until the asset is ready for use. The assessee argued that the interest had already been capitalized in the books of accounts as per their accounting policy.

The Tribunal, referencing a similar issue in the assessee's earlier appeals, set aside this issue to the A.O. for fresh consideration. The A.O. was directed to examine the details of finances and decide the issue in light of the Supreme Court's decision in CIT (LTU) Vs. Reliance Industries Ltd.

3. Addition of Outstanding Sundry Creditors under Section 41(1):
The third issue involves the addition of ?35,60,870/- under section 41(1) of the Act, made by the A.O. on the grounds that certain sundry creditors had been outstanding for more than three years, implying cessation of liability. The assessee contended that these balances were periodically reviewed and were outstanding due to pending disputes or settlements.

The CIT(A) upheld the addition, noting that the assessee failed to provide satisfactory evidence of the liabilities being outstanding or any steps taken to settle them. The assessee's claim of payments made after the assessment order and legal suits filed against some creditors were not substantiated with documentary evidence.

The Tribunal decided to remand this issue back to the A.O. for fresh adjudication. The A.O. was instructed to verify the assessee's claims regarding payments made and balances written back, and to provide due opportunities for the assessee to present their case.

Conclusion:
The Tribunal remanded all three issues back to the A.O. for fresh adjudication, emphasizing the need for verification of facts and providing the assessee with a reasonable opportunity to present evidence. The appeal was thus allowed for statistical purposes.

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