2022 (7) TMI 1527 - AT - Income Tax

Addition of interest u/s. 36(1)(iii) - interest bearing funds had been utilized for interest free advances - HELD THAT - In the present case, the balance sheet of the assessee, which was available with the ld. CIT(A) and which clearly demonstrate that the capital of the assessee was more than Rs. 4,23,30,014/- as on 31.03.2006 and moreover the profit was Rs .41.70 lacs, which is much more than the amount of interest free advances amounting to approximately Rs. 15.00 lacs. Therefore, the disallowance sustained by ld. CIT(A) is not in accordance with law and facts of the case and therefore we delete the same and allow Ground No.1 of the appeal. Disallowance out of contribution towards group gratuity scheme paid to Life Insurance Corporation of India - HELD THAT -While denying the claim to the assessee, the ld. CIT(A) has ignored various case laws which was relied on by the assessee for the proposition that the expenditure incurred by assessee towards payment for gratuity group scheme of Life Insurance Corporation of India is a deductable expenditure. We find that the assessee has made the payment to Life Insurance Corporation of India, therefore, the expenditure is an allowable expenditure in view of the judgment of The Guntur District Cooperative Central Bank Ltd. 2018 (8) TMI 192 - ITAT VISAKHAPATNAM and in view of various other case laws in favour of the assessee, which the ld. CIT(A) has noted in his order. Therefore, Ground No.2 of the appeal of the assessee is also allowed. Addition u/s 68 - assessee had received certain advances from certain customers -Before ld. CIT(A), it was claimed that such advances were received against the future sales to be made to the parties but it was not accepted by the ld. CIT(A) - HELD THAT - CIT(A) has held that only a part of advances were got adjusted against sales in the FY 2006-07. While reproducing such chart the ld. CIT(A) has ignored the sales made by the assessee during the FY 2007-08 the details of which was also filed before ld. CIT(A) and during these two years the assessee had issued various bills, whereby it has exhausted the amount - in view of these facts and circumstances, the sustainance of the addition is not justified and is deleted. Ground Nos. 3 and 4 is also allowed. Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of interest on interest-free advances
2. Disallowance of contribution towards Group Gratuity Scheme
3. Addition of advances received from customers as unexplained income
4. Disallowance of sales against advances received

Analysis:

1. Disallowance of Interest on Interest-Free Advances:
The Appellant challenged the disallowance of interest on interest-free advances under section 36(1)(iii) of the Income Tax Act. The Appellant argued that there were surplus interest-free funds available, including reserves and share capital, exceeding Rs. 4.23 crores, as evidenced by the balance sheet. The Appellant cited the judgment of Malwa Cotton Spinning & Weaving Mills Ltd. to support their claim. The Appellate Tribunal found that the Appellant's capital and profits were significantly higher than the interest-free advances, rendering the disallowance unjustified. Consequently, the disallowance was deleted, and Ground No.1 of the appeal was allowed.

2. Disallowance of Contribution towards Group Gratuity Scheme:
The Appellant contested the disallowance of Rs. 2,35,493 towards the Group Gratuity Scheme paid to Life Insurance Corporation of India. The Appellant maintained that such payments were deductible under section 37 of the Act, even without approval from the Pr. Commissioner of Income Tax. The Tribunal noted that the Appellant had submitted detailed written submissions and relied on case laws supporting the deductibility of such payments. Despite the absence of approval, the Tribunal held that the payment to Life Insurance Corporation of India was allowable. Ground No.2 of the appeal was allowed, and the disallowance was overturned.

3. Addition of Advances Received from Customers as Unexplained Income:
Regarding the addition of Rs. 15.00 lacs under section 68 of the Act as advances received from customers, the Appellant argued that the advances were against future sales, supported by bills issued to the customers. The Tribunal observed that while the ld. CIT(A) had noted only partial adjustments of advances against sales in a specific year, the Appellant had indeed utilized the advances for sales in subsequent years, as evidenced by the sales bills issued. Consequently, the Tribunal found the addition unsustainable and deleted the same, allowing Ground Nos. 3 and 4 of the appeal.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowances and additions made by the ld. CIT(A) in the original order. The judgment was pronounced in open court on 28/07/2022.