2022 (10) TMI 25 - AT - Income Tax

D is allowance of interest u/s 36(1)(iii) on the ground that the interest bearing funds had been diverted for the purpose of making loans and advances to the sister concerns or related parties - AO was of the opinion that the appellant company had diverted the interest bearing funds for the purpose of advancing interest free loans to the promoters and directors or related parties, therefore, the AO had resorted to the proportionate disallowance of interest u/s 36(1)(iii) - HELD THAT - We find from material on record that the interest free funds available with the appellant company as on 31.03.2012 stood at Rs.55,08,18,101/- as against the interest free loans made to related parties at Rs.24,34,86,276/-. Therefore, the presumption has to be drawn that the interest free loans were made out of the interest free funds in terms of the law laid down in the case of CIT vs. Prem Heavy Engg. Works (P.) Ltd. 2005 (4) TMI 32 - ALLAHABAD HIGH COURT and case of CIT vs. Tin Box Co. 2002 (11) TMI 75 - DELHI HIGH COURT - Thus, once the presumption is drawn that the appellant made interest free loans to the related parties, no disallowance of interest u/s 36(1)(iii) is warranted. We direct the Assessing Officer to delete the addition made u/s 36(1)(iii) of the Act. Accordingly, the grounds of appeal no.2 and 3 filed by the appellant stand allowed. Exclusion of a sum shown in the Profit Loss Account as part of sales, offered to tax, on the ground that this income does not belong to the appellant - HELD THAT - Keeping in view the principle that no income can be taxed, even if the income was offered to tax by mistake, the additional ground of appeal is admitted. However, we remand this additional ground of appeal to the file of the Assessing Officer with the direction that the same may be deleted in the hands of the appellant on due verification, it is found that the same income was offered to tax in the hands of Mr. Kruti Jain and income had not accrued to the appellant. Thus, the additional ground of appeal filed by the assessee stands partly allowed. Addition on account of difference in valuation of closing stock - HELD THAT - The value of advance given for purchase of land was never claimed as deduction. There is no bar under law to correct the state of affairs to real picture. The Hon ble Supreme Court in the case of CIT vs. British Paints India Ltd. 1990 (12) TMI 2 - SUPREME COURT held that there is no estoppel on the part of the Assessing Officer to follow the method in the earlier years and further held that it is not only the right but duty of the Assessing Officer to consider whether or not books of account disclosed true state of accounts and correct income can be deduced therefrom. Therefore, the action of the Assessing Officer by bringing to tax the amount by altering the valuation of the closing stock alone is against the settled principle of law and accounting principles. We are of the considered opinion that there is neither suppression of income nor distortion of chargeable taxable income for the year under consideration on account of omission to include the value of advance given to purchase of land as a part of closing inventory for the reason stated above. We reverse the findings of the lower authorities on this issue and direct the AO to delete the addition on account of alleged difference valuation of closing stock - Decided in favour of assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of interest on account of interest-free funds advanced to sister concerns.
3. Disallowance under Section 41(1) of the Income Tax Act.
4. Disallowance of commission expenditure.
5. Exclusion of income wrongly included in sales.
6. Addition on account of difference in valuation of closing stock.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appellant requested condonation of a 393-day delay in filing the appeal, attributing the delay to an error by an Accounts Assistant. The Tribunal, referencing the Supreme Court's decision in N. Balakrishnan v. M. Krishnamurthy, condoned the delay, emphasizing that the delay was not deliberate and that substantial justice should be prioritized.

2. Disallowance of Interest on Account of Interest-Free Funds Advanced to Sister Concerns:
The Assessing Officer disallowed Rs. 3,65,22,941/- under Section 36(1)(iii) of the Income Tax Act, reasoning that interest-bearing funds were diverted for interest-free loans to sister concerns. The Tribunal found that the appellant had sufficient interest-free funds amounting to Rs. 55,08,18,101/- against the interest-free loans of Rs. 24,34,86,276/-. Citing precedents from the Allahabad High Court (CIT vs. Prem Heavy Engg. Works (P.) Ltd.) and the Supreme Court (South Indian Bank Ltd. vs. CIT), the Tribunal directed the deletion of the disallowance, concluding that the interest-free loans were presumed to be made from interest-free funds.

3. Disallowance under Section 41(1) of the Income Tax Act:
The appellant did not press this ground during the hearing, and thus, it was dismissed as not pressed.

4. Disallowance of Commission Expenditure:
Similarly, the appellant did not press this ground during the hearing, leading to its dismissal as not pressed.

5. Exclusion of Income Wrongly Included in Sales:
The appellant sought to exclude Rs. 42,38,000/- from its income, arguing it was wrongly included as sales and actually belonged to Ms. Kruti Jain. The Tribunal admitted this additional ground, remanding the issue to the Assessing Officer for verification. If verified that the income was indeed taxed in the hands of Ms. Kruti Jain and did not accrue to the appellant, the amount should be excluded from the appellant's income.

6. Addition on Account of Difference in Valuation of Closing Stock:
For the assessment year 2013-14, the Assessing Officer added Rs. 16,60,06,720/- to the appellant's income due to a negative balance in work-in-progress. The Tribunal found that the advance for land should not be included in the inventory until the purchase materializes. The Tribunal reversed the lower authorities' findings, directing the deletion of the addition, emphasizing that altering the closing stock valuation alone without corresponding adjustments distorts the taxable income.

Conclusion:
Both appeals by the assessee were partly allowed. The Tribunal condoned the delay in filing the appeal, deleted the disallowance of interest under Section 36(1)(iii), and directed the exclusion of wrongly included income upon verification. It also reversed the addition related to the valuation of closing stock, ensuring that the correct taxable income is reflected.

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