2017 (11) TMI 1062 - AT - Income Tax

Disallowance of interest - Held that - Revenue has not disputed the fact that the assessee is having unsecured interest free advances. Under these facts, the Assessing Officer ought not to have made disallowance of interest. Accordingly, we hereby direct the AO to delete the disallowance. - Decided in favour of assessee Disallowance made by invoking the provision of Section 40A(3) - Held that - The Hon ble High Court in the case of Anupam Tele Service vs. ITO (2014 (2) TMI 30 - GUJARAT HIGH COURT) under the identical facts decided the issue in favour of the assessee held that payment between the assessee and the Tata Teleservice Ltd. were genuine. The Tata TeleServices Ltd. had insisted that such payments be made in cash, which Tata Teleservices Ltd. in turn assured and deposited the amount in a bank account. In the facts of the case of assessee, rigors of Section 40A(3) must be lifted. Since, the facts are identical and the assessee has demonstrated that the assessee made payment in cash at the instances of the finance company, therefore rigors of section 40A(3) must be lifted.- Decided in favour of assessee

Issues Involved:
1. Disallowance of bad debts claim under Section 36(1)(vii).
2. Disallowance of interest on account of interest-free loans.
3. Disallowance under Section 40A(3) for cash payments.

Detailed Analysis:

1. Disallowance of Bad Debts Claim under Section 36(1)(vii):

The assessee claimed bad debts amounting to ?10,67,083, which was disallowed by the AO on the grounds that the debts were not business debts and did not arise during the normal course of business. The AO noted the absence of evidence proving that the debts were taken as revenue in the current or previous years. The CIT(A) upheld the disallowance, emphasizing the lack of evidence that the advance was for business purposes and that the debts were not taken into account while computing income. The Tribunal observed that the assessee had not claimed the amount as a trading loss before the CIT(A) and thus restored the issue to the AO for fresh decision, allowing the ground for statistical purposes.

2. Disallowance of Interest on Account of Interest-Free Loans:

The AO disallowed ?14,10,093.46 of interest due to interest-free advances to sister concerns, despite the assessee's claim of sufficient interest-free funds. The CIT(A) partly allowed the appeal, considering the capital but not the interest-free unsecured loans. The Tribunal noted that the Revenue did not dispute the availability of interest-free funds and cited case laws supporting the presumption that interest-free advances are made from own funds when mixed funds are available. Consequently, the Tribunal directed the AO to delete the disallowance, allowing the ground in favor of the assessee.

3. Disallowance under Section 40A(3) for Cash Payments:

The AO disallowed ?1,95,677 under Section 40A(3) for cash payments exceeding the prescribed limit. The assessee argued that the payments were made under business exigencies, as finance companies insisted on cash payments due to dishonored cheques. The Tribunal referenced the Hon’ble Gujarat High Court's judgment in Anupam Tele Services vs. ITO, which allowed lifting the rigors of Section 40A(3) under similar circumstances. The Tribunal directed the AO to delete the disallowance, allowing the ground in favor of the assessee.

General Ground:

Ground No. 4 was deemed general in nature and required no separate adjudication.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, directing fresh consideration on the bad debts issue and deleting the disallowances related to interest and cash payments under Section 40A(3). The order was pronounced in the open court on November 8, 2017.

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