2012 (5) TMI 216 - HC - Income Tax

Disallowance on account of proportionate interest on advances Held that - The assessee utilized land belonging to company as a security against loan raised from the bank proved by a copy of certificate issued by the State Bank of India certifying that the property owned by party was pledged with the bank as security against loan provided to the assessee since the company had provided its land as security to the bank against loan taken by the assessee and in lieu of that the assessee deposited a sum of Rs.50 lakhs with the said company so it cannot be said that the said amount was an interest free advance or loan assessee had also given advances against purchases to other mentioned company - against revenue. Additions under the head bad and doubtful debts, balances written off and additions u/s 41 Held that - As per amendment of section 36(1)(vii) with effect from April 1, 1989 to obtain a deduction in to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable it is enough if the bad debit is written off as irrecoverable in the accounts of the assessee -As bad debts had been written off as irrecoverable in the accounts of the assessee, therefore, the Assessing Officer was not justified in making the addition against revenue. Addition out of disallowance of foreign exchange fluctuation Held that - The assessee entered into forward exchange contract through State Bank of India for purchase of 7,30,000 USD after 11 months at a fixed price to cover up the risk of upward fluctuation of the USD rate and paid fixed premium over the support rate the proportionate amount for the period falling in the assessment year was charged by the assessee in the profit and loss account - since the amount of premium paid was fixed and there was no element of speculation in the transaction, the amount so paid set to rest the possible fluctuation liability of the assessee company at the time of repayment of loan - on verification of the calculations furnished by the assessee it can be concluded that no element of speculation in the transaction exists - the transaction in question was a business transaction against revenue.

Summary

Issues:
1. Disallowance of interest on advances given to sister concerns.
2. Disallowance of bad and doubtful debts.
3. Disallowance of foreign exchange fluctuation.

Issue 1: Disallowance of interest on advances given to sister concerns
The appellant argued that the ITAT was unjustified in dismissing the disallowance of interest on advances given to M/s Standard Sulphonators Ltd. and M/s Uniflex Industries Ltd. The Assessing Officer found that the advances were made from borrowed funds and not for business purposes. However, the Tribunal noted that the assessee utilized land as security against a loan, making it a business transaction. The Tribunal also observed that the advances were related to business transactions, as evidenced by accounts and dealings with the companies. The Tribunal concluded that the Assessing Officer failed to prove that interest-bearing loans were diverted as interest-free advances. Consequently, the ITAT rightly deleted the addition, finding no error in the CIT (A)'s decision.

Issue 2: Disallowance of bad and doubtful debts
The Assessing Officer disallowed the amounts written off as bad debts, arguing that the debts were not proven to be irrecoverable. However, the Tribunal referred to a Supreme Court ruling stating that once a debt is written off as irrecoverable in the accounts, it qualifies for deduction. The Tribunal found that the bad debts were indeed written off as irrecoverable, leading to the deletion of the addition by the CIT (A). The Tribunal dismissed the Departmental appeal, emphasizing that the debts were appropriately treated as bad and doubtful debts in the accounts.

Issue 3: Disallowance of foreign exchange fluctuation
The appellant contested the disallowance related to foreign exchange fluctuation, claiming it was a speculative transaction. However, it was revealed that the assessee entered into a forward exchange contract to cover the risk of USD fluctuation, ensuring repayment at a fixed rate. The Tribunal verified the absence of speculation in the transaction and upheld the CIT (A)'s decision to delete the disallowance. The Tribunal concluded that the transaction was a business expediency to avoid extra interest payments and higher exchange rates. Consequently, the Tribunal found no legal infirmity in the order and dismissed the appeal.

In conclusion, the High Court upheld the Tribunal's decision, stating that no substantial question of law arose for consideration. The Court found no error in the Tribunal's findings on the three issues raised by the appellant, leading to the dismissal of the appeal.