2018 (1) TMI 790 - AT - Income Tax

Addition made towards prior period expenditure towards interest paid to supplier - allowable busniss expenditure - claim of the assessee that the liability to pay the interest itself accrued only pursuant to the bill dated 3.11.1992 raised by the said supplier and the same was duly paid by the assessee before the end of the previous year ending 31.3.1993 - Held that - We are informed that the tax rates for domestic companies for both Asst Years 1992-93 and 1993-94 were one and the same ie 45% tax plus surcharge of 15%. Hence there is no loss that could be attributed to the exchequer because of this claim of expenditure by the assessee as the business expediency of the said expenditure and its genuineness had not been doubted by the revenue at any point of time. It is not in dispute that the said payment of interest on delayed payment to supplier is a legitimate business expenditure. See CIT vs Jagatjit Industries Ltd reported in (2010 (9) TMI 58 - DELHI HIGH COURT). In view of these facts, we have no hesitation in directing the ld AO to delete the disallowance made on account of prior period expenses - Decided in favour of assessee Disallowance of interest paid on borrowed funds - assessee had diverted the borrowed funds for non-business purposes - Held that - We find from the perusal of the balance sheet of the assessee company which is part of the paper book filed before us, that the assessee company is having sufficient own funds in the form of share capital and reserves and surplus to the tune of ₹ 9,02,06,003/- which is higher than the loans taken by the assesse company. Hence the presumption could be drawn in favour of the assessee that the interest free funds were given out of the own funds available with the assessee company. See CIT vs Britannia Industries Ltd 2005 (6) TMI 19 - CALCUTTA High Court . - Decided in favour of assessee. Disallowing the claim of bad debts written off in respect of debts pertaining to Jute division - Held that - out of the total debtors of the assessee company in the sum of ₹ 5,92,08,719/- as on 31.3.1993, a sum of ₹ 2,92,65,884/- represents old balances, out of which debts representing ₹ 16,43,829/- had been written off in the books of accounts as bad debt. Hence it clearly proves that the same represents trade debts of the assessee. Since the debt is reflected under sundry debtors, it goes without saying that the income was offered in the earlier years and unrealized portion of the debt is reflected under the head Sundry Debtors in the balance sheet. The above note also impliedly proves that the assets of jute division representing sundry debtors had been merged with the sundry debtors of tea division of the assessee company. In view of these facts, we hold that the assessee company had indeed complied with the requirements of section 36(2) of the Act in the instant case and is accordingly entitled for deduction u/s 36(1)(vii) of the Act - Decided in favour of assessee Disallowance towards provision for leave encashment - Held that - We find that the provisions of section 43B(f) of the Act was introduced in the statute by the Finance Act 2001 with effect from 1.4.2002 (i.e from Asst Year 2002-03 onwards) wherein the claim of deduction towards leave encashment could be allowed only on payment basis. This provision cannot be made applicable for Asst Year 2001-02 which is the year under consideration. Hence the basis of disallowance by applying provisions of section 43B of the Act is incorrect in the instant case. There is no dispute that the assessee had made provision based on rational workings towards provision for leave encashment . Hence the assessee would be entitled for deduction on provision basis by placing reliance on the decision in the case of Bharat Earth Movers Ltd.(2000 (8) TMI 4 - SUPREME Court). - Decided in favour of assessee Disallowing the set off of business loss of packaging division of the assessee with the business income - Held that - We hold that once the separate profit and loss account of packaging division was filed by the assessee, the same ought to have been examined by the revenue which has not been done in the instant case. Hence in the interest of justice and fairplay, we deem it fit and appropriate to remand this issue to the file of the ld AO with a direction to examine the profit and loss account of packaging division of the assessee company and decide the allowability of loss of packaging division afresh, in accordance with law. The aspect of double addition would have to be addressed by the ld AO while disposing of this set aside assessment. Accordingly, the Ground No. 2 raised by the assessee for Asst Year 2001-02 is allowed for statistical purposes. Non treating the receipt of other income as composite income of the assessee - Held that - AO ought not to have treated the aforesaid receipts as other income and hence not part of composite income of the assessee merely based on admission of the assessee. Getting into the merits of each item of receipt, we find that the receipt towards sale of tea waste, rent realized and tea claim realized, would be eligible to be forming part of composite income of the assessee based on the decision of this tribunal dated 11.9.2015 supra and by the decision of ld CITA in assessee s own case for the Asst Year 2009-10. As far as other items of receipts are concerned, no details were furnished by the assessee and no business nexus of those receipts with the tea business were proved by the assessee. Hence we hold that the same would have to be treated separately as income from other sources. For the sake of clarity, we would like to state the incomes forming part of composite income would be sale of tea waste, rent realized and tea claim realized. The other receipts i.e sale of assets and sundry receipts would have to be treated as income from other sources. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Addition towards prior period expenditure.
2. Disallowance of interest on borrowed funds.
3. Disallowance of bad debts written off.
4. Disallowance towards provision for leave encashment.
5. Set off of business loss of packaging division.
6. Treatment of other income as composite income.

Issue-wise Detailed Analysis:

1. Addition towards Prior Period Expenditure:
The first issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in upholding the addition of ?10,62,008/- towards interest paid to the supplier. The Assessing Officer (AO) disallowed the interest payment as it pertained to the previous assessment year (1992-93) and not the current one (1993-94). The tribunal found that the liability to pay the interest accrued only when the bill was raised on 3.11.1992, and the assessee could not have anticipated this before the annual general meeting. The tribunal directed the AO to delete the disallowance, allowing the ground raised by the assessee.

2. Disallowance of Interest on Borrowed Funds:
The second issue was whether the CIT(A) was justified in upholding the disallowance of ?3,09,095/- towards interest on borrowed funds. The AO disallowed the interest, arguing that the assessee had diverted borrowed funds for non-business purposes by giving interest-free loans. The tribunal found that the assessee had sufficient own funds to cover these advances and cited precedents from the Calcutta High Court and Bombay High Court. The tribunal directed the deletion of the disallowance, allowing the ground raised by the assessee.

3. Disallowance of Bad Debts Written Off:
The third issue concerned the disallowance of ?16,43,829/- towards bad debts written off related to the jute division. The AO disallowed the claim as the assessee could not prove that the income was offered in earlier years. The tribunal found that the debts were indeed trade debts and the conditions of section 36(2) were met. The tribunal directed the allowance of the bad debts written off, allowing the ground raised by the assessee.

4. Disallowance towards Provision for Leave Encashment:
For the assessment year 2001-02, the issue was whether the CIT(A) was justified in upholding the disallowance of ?3,02,480/- towards provision for leave encashment. The AO disallowed the provision by applying section 43B(f), which mandates deduction on a payment basis. The tribunal found that section 43B(f) was applicable from assessment year 2002-03 onwards and not for 2001-02. The tribunal allowed the deduction based on the Supreme Court decision in Bharat Earth Movers Ltd., allowing the ground raised by the assessee.

5. Set off of Business Loss of Packaging Division:
The next issue was whether the CIT(A) was justified in upholding the disallowance of ?20,78,182/- towards the loss of the packaging division. The AO disallowed the loss as the assessee could not produce books of accounts for the packaging division. The tribunal found that the assessee had prepared consolidated financial statements and there was no requirement for division-wise financial statements. The tribunal remanded the issue back to the AO to examine the profit and loss account of the packaging division and address the aspect of double addition, allowing the ground for statistical purposes.

6. Treatment of Other Income as Composite Income:
For the assessment years 2011-12 and 2012-13, the issue was whether the CIT(A) was justified in upholding the AO's decision to not treat certain receipts as composite income. The AO treated receipts like sale of tea waste, rent realized, and sundry receipts as income from other sources. The tribunal found that the receipts from sale of tea waste, rent realized, and tea claim realized should be part of the composite income, while other receipts like sale of assets and sundry receipts should be treated as income from other sources. The tribunal partly allowed the grounds raised by the assessee.

Conclusion:
The appeals were allowed in part, with specific directions to the AO for reassessment and deletion of certain disallowances. The tribunal emphasized the importance of adhering to statutory provisions and judicial precedents in determining the tax liabilities of the assessee.