2017 (7) TMI 33 - AT - Income Tax

Disallowance of financial charges by 50% - contentions of assessee that these financial charges have arisen only because of discounting of the bills and funds are utilised for payment to the creditors - Held that - Contention of assessee was neither examined by the AO nor by the CIT(A), even though assessee is insisting on this. As seen from the orders in earlier years and also in AY. 2008-09 and 2009-10, the financial charges are allowed as such in scrutiny proceedings, that too in post search proceedings in AYs. 2004-05 and 2005-06. This means that the financial charges are utilised for the purpose of business only. We are prima-facie satisfied that the financial charges cannot be disallowed. However, AO has not given any finding whether the funds are really diverted to sister concerns, out of the funds availed due to discounting of bills. Therefore, for the limited purpose of verification, the issue is restored to the file of the AO. Appeals of assessee allowed for statistical purposes.

Summary

Issues:
1. Disallowance of financial charges by 50% by the Assessing Officer (AO) confirmed by the Ld. CIT(A).
2. Disallowance of amount of purchases in AY. 2007-08.

Analysis:
1. The primary issue in this case pertains to the disallowance of 50% of financial charges claimed by the assessee. The AO disallowed a portion of the financial charges in both AYs 2006-07 and 2007-08, alleging that the funds were diverted to advance loans to sister concerns without interest. The Ld. CIT(A) upheld this disallowance, citing similar disallowances in previous years. The assessee contended that the financial charges were related to LC discounting for business purposes only and not diverted for non-business activities. The Tribunal found that the AO did not establish a nexus between the funds and non-business usage, and hence, directed the AO to verify if funds were actually diverted. If no diversion occurred, the full claim of financial charges should be allowed.

2. Another issue in AY. 2007-08 was the disallowance of a specific amount of purchases. The assessee had consented to this disallowance before the AO, which was confirmed by the Ld. CIT(A). During the appeal, no arguments were presented on this issue, and therefore, it was considered not pressed. The Tribunal did not delve further into this issue due to the lack of arguments.

In conclusion, the Tribunal allowed both appeals of the assessee for statistical purposes, directing the AO to re-examine the financial charges issue to ensure that no funds were diverted for non-business purposes. The judgment emphasized the importance of establishing a clear nexus between the funds and their usage before making any disallowances, highlighting the need for thorough verification in such cases.