2022 (4) TMI 493 - AT - Income Tax

Addition on account of interest paid on overdraft - As per AO interest expenditure was not included by the assessee in its closing stock of Work-in-Progress (WIP) of its projects - HELD THAT - When the assessee had recovered the entire amount of interest that was charged by the bank on the amount which was advanced by it to its sister concern, therefore, as stated by the ld. AR, and rightly so, the claim for deduction of interest expenditure stood nullified in the backdrop of the corresponding interest income that was received from the sister concern. We find that a similar alternate disallowance of interest expenditure that was made by the Assessing Officer in the case of the assessee for the immediately preceding year i.e. A.Y. 2012-13 2016 (11) TMI 1713 - ITAT PANAJI was vacated by the Tribunal, and the said order had thereafter been approved by the Hon ble High Court of Bombay. Backed by our aforesaid observations we find no merit in the aforesaid grievance of the revenue that the CIT(Appeals) had erred in not sustaining the alternate disallowance - The Ground of appeal raised by the revenue is dismissed in terms of our aforesaid observations. Trading liability which had ceased within the meaning of section 41(1) - HELD THAT - Ceased liability can be added u/s. 41(1) of the Act only in the year, when some benefit in respect of trading liability i.e., by way of remission or cessation thereof, had been obtained by the assessee. As such, the addition of a trading liability which had ceased can only be made in the previous year, in which, some benefit in respect of such trading liability by way of remission or cessation thereof, had been obtained by the assessee. In our considered view, the Assessing Officer in the case before us had though pointed out that there is a cessation of liability but had failed to place on record any material which would irrefutably evidence that such cessation had taken place during the year in question i.e. A.Y. 2013-14, and as a result thereof, the consequential benefit by way of remission or cessation thereof had been obtained by the assessee during the said year itself. We, thus, in terms of our aforesaid observations not being able to persuade ourselves to the summarily dubbing of the aforesaid amount as the assessee s ceased liability for the year under consideration vacate the same - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) on account of interest paid on overdraft.
2. Alternative disallowance of interest on account of interest-bearing funds diverted to sister concerns at a lower rate of interest.
3. Addition made by the AO under Section 41(1) of the Income-tax Act, 1961 for ceased liabilities.

Detailed Analysis:

1. Deletion of Addition on Account of Interest Paid on Overdraft:
The revenue challenged the deletion of an addition of ?1,61,56,414/- made by the AO on account of interest paid on overdraft. The AO observed that the interest expenditure was not included in the closing stock of Work-in-Progress (WIP) and added the entire amount to WIP. The CIT(A) deleted this addition, following a similar decision for the preceding assessment year (A.Y. 2012-13), which was upheld by the Tribunal and the Bombay High Court. The Tribunal reiterated that the interest cost should not be added to WIP as per Accounting Standard AS-2, which states that interest and other borrowing costs are usually not included in the cost of inventories. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground.

2. Alternative Disallowance of Interest on Diverted Funds:
The AO alternatively disallowed ?1,11,30,410/- on the grounds that the assessee borrowed funds at a higher interest rate (15.38% p.a.) and advanced them to sister concerns at a lower rate (4.78% p.a.). The CIT(A) did not sustain this disallowance, and the Tribunal affirmed this decision. The Tribunal noted that the assessee had recovered the corresponding amount of interest charged by the bank on the advanced funds, nullifying the claim for deduction of interest expenditure against the interest income received. This approach was consistent with the preceding year's assessment, which was also upheld by the Tribunal and the High Court. The Tribunal found no merit in the revenue's grievance and dismissed this ground of appeal.

3. Addition under Section 41(1) for Ceased Liabilities:
The AO added ?7,62,165/- as ceased liabilities under Section 41(1) of the Act. The CIT(A) partially vacated this addition, acknowledging that the assessee had discharged liabilities amounting to ?5,60,566/-, but sustained the addition for the remaining ?2,01,609/-. The assessee, in its cross-objection, contested this sustained addition. The Tribunal found that there was no evidence to show that the cessation of liability occurred during the relevant assessment year (A.Y. 2013-14). The Tribunal vacated the addition of ?2,01,609/-, aligning with the principle that a ceased liability can only be added in the year when the benefit of remission or cessation is obtained by the assessee. This view was supported by a decision from the ITAT, Amritsar in a similar case.

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, concluding that:
- The addition of interest paid on overdraft to WIP was correctly deleted by the CIT(A).
- The alternative disallowance of interest on diverted funds was rightly not sustained by the CIT(A).
- The addition under Section 41(1) for ceased liabilities was incorrectly sustained by the CIT(A) and was vacated by the Tribunal.