2013 (6) TMI 455 - AT - Income Tax

Proportional disallowance of interest on advance given to sister concerns - CIT(A) deleted the addition - AY 2004-05 - Held that - From the material on record it is quite evident that the assessee has not only given advances to its sister concerns but has also received advances from them. From the account of one of the sister concern i.e., Kedia Vanaspati Ltd., it can be seen that there is a credit balance of Rs.3,28,02,809/- with the assessee. It further reveals that the assessee had regular business transaction with its sister concern. In the aforesaid factual situation the disallowance made by the AO on allegation of diverting borrowed funds to the sister concerns is not borne out from record, hence, cannot be accepted. The assessee has business connection with its sister concerns is also suggestive of the fact that they are in the nature of trade advances only, hence cannot be considered as loans. Also contention of DR that the CIT (A) has considered additional evidence in violation of Rule 46A are irrelevant as it is evident from the order of the CIT (A) that in course of the appeal proceeding the CIT (A) in fact had sought the comments of the AO on the issue but the AO did not respond to it - Against revenue. Direction of the CIT(A) not to add disallowable interest while computing MAT - AY 2006-07 - Held that - A reading of the provision contained u/s 115JB makes it clear that the basis for computation of book profit is the net profit as shown in the profit and loss account and which maybe increased by the items prescribed in item (a) to (i) and reduced by items (i) to (viii). Therefore any of the items which are to be added for arriving at the book profit must fall within the items specified under the explanation. Sec. 115JB being a self contained provision, one has to go strictly by the provision contained therein. Since the additions made by the AO to arrive at the book profit are outside the purview of items enumerated under explanation I to section 115JB, the computation made by the AO is legally unsustainable. Accordingly uphold the order of the CIT (A) and dismiss the grounds raised by the department.

Summary

Issues involved:
- Appeal against deletion of addition for proportional disallowance of interest on advance to sister concerns.
- Direction for not adding disallowable interest while computing Minimum Alternate Tax (MAT).
- Cross objection challenging disallowance of interest on advance to sister concerns.

Analysis:

Issue 1: Appeal against deletion of addition for proportional disallowance of interest on advance to sister concerns:
The department appealed against the CIT(A) deleting the addition made by the Assessing Officer on account of proportional disallowance of interest on advances given to sister concerns. The Assessing Officer disallowed an amount for different financial years, which the CIT(A) overturned after considering the submissions of the assessee. The CIT(A) found that the appellant company had received/purchases more than the payments/sales made to sister concerns, indicating no excess advances or sales. The CIT(A) concluded that the Assessing Officer had not properly appreciated the facts and made a presumptive interest addition without valid grounds. The Tribunal upheld the CIT(A)'s decision, emphasizing that the disallowance made by the Assessing Officer was not supported by the evidence on record, and the appellant had business connections with sister concerns, suggesting the advances were trade-related.

Issue 2: Direction for not adding disallowable interest while computing MAT:
In another appeal, the department challenged the direction of the CIT(A) to not add disallowable interest while computing MAT. The Assessing Officer had made presumptive disallowance of expenditure claimed towards interest and added it to the total income. The CIT(A) directed the Assessing Officer not to add the disallowable interest for computing MAT, citing that such additions were outside the purview of items enumerated under explanation I to section 115JB. The Tribunal upheld the CIT(A)'s decision, stating that the additions made by the Assessing Officer did not fall within the prescribed items for computing book profit under section 115JB.

Issue 3: Cross objection challenging disallowance of interest on advance to sister concerns:
The cross objection by the assessee challenged the disallowance of interest on advances made to sister concerns. The Assessing Officer disallowed interest on the grounds of interest-free advances to sister concerns, which the CIT(A) partially accepted. The CIT(A) held that interest should be charged only on the net due amount receivable from sister concerns. The Tribunal, after considering the submissions and materials on record, concluded that the disallowance of interest could not be sustained as the advances appeared to be more in the nature of trade advances, and there was no evidence of diverting interest-bearing funds to sister concerns without charging interest.

In summary, the Tribunal dismissed the department's appeals related to the deletion of addition for interest disallowance and direction for not adding disallowable interest while computing MAT. The Tribunal allowed the assessee's Cross Objection challenging the disallowance of interest on advances to sister concerns.