2012 (10) TMI 562 - AT - Income Tax

Interest on Cash Credit - diversion of funds - sister concerns - Held that - If the work-in-progress is diverted by way of corresponding journal entries, it cannot be considered as funds diverted and interest paid on loan cannot be disallowed - set aside this issue to the file of the AO to examine whether the assessee diverted the funds or work-in progress and decide the issue afresh in accordance with law. Interest on hire purchase loans - Held that - As this loan is availed for the purpose of acquiring the asset for the purpose of business, interest on the same should be allowed - AO is directed to examine the issue whether the asset on which loan is availed for the purpose of business or not and decide the issue accordingly. Disallowance Interest on TDS - restored to the file of the AO with a direction to examine whether the assessee itself added back the said amount while filing the return of income or not and decide the same in accordance with law after giving reasonable opportunity of hearing to the assessee in the matter - appeal of the assessee is treated as allowed for statistical purposes.

Summary

Issues:
1. Disallowance of interest on cash credit
2. Disallowance of interest on hire purchase loan
3. Disallowance of interest on TDS

Issue 1: Disallowance of interest on cash credit

The appellant challenged the disallowance of interest on cash credit by arguing that the funds were not diverted but work-in-progress was transferred to a sister concern. They contended that the transfer was reflected in the assets side of the balance sheet, resulting in a nil account. The appellant cited legal precedents to support their claim, emphasizing that the transfer was dictated by commercial expediency. They argued that the AO's conclusion that the appellant was not engaged in business was incorrect. The tribunal noted the lack of specific findings by lower authorities on the alleged diversion of funds and directed the AO to reexamine the issue to determine if funds were actually diverted.

Issue 2: Disallowance of interest on hire purchase loan

Regarding the disallowance of interest on hire purchase loans, the appellant asserted that such expenditure should be allowed under section 37(1) if incurred for business purposes. They argued that the interest, being a revenue expenditure, should be permitted as it was discharged in installments. The tribunal directed the AO to investigate whether the asset acquired through the loan was for business purposes and decide accordingly.

Issue 3: Disallowance of interest on TDS

The appellant contended that the CIT(A) erred in not granting relief on interest on TDS, as the amount was added back in computation but re-added by the AO without proper examination. The tribunal instructed the AO to review whether the appellant had already accounted for the amount while computing income. The AO was directed to make a decision in accordance with the law after providing the appellant with a reasonable opportunity for a hearing.

In conclusion, the tribunal allowed the appeal for statistical purposes, setting aside the issues for further examination by the AO to ensure a fair and accurate decision based on the facts and legal provisions.