2018 (4) TMI 515 - AT - Income Tax

Interest disallowed u/s 36(l)(iii) - Held that - We find that is undisputed that the investment has been done out of mixed source of funds. The assessee had sufficient own funds which covers more than the investment made. Moreover, the ld. Commissioner of Income Tax (Appeals) has also given a finding that the loan funds were for specific purpose and there has been no dilution of the same. Provision for mark to market loss disallowance - assessee has not filed the appeal against the disallowance but in the current assessment year it has passed a reversal entry debiting the provision and crediting the profit and loss account - Held that - Apparently, there is some discrepancy in the claim made and the disallowance earlier done. However, in our considered opinion, this issue needs to be examined by reference to the actual books of account and the entries therein. If the facts narrated by the ld. Counsel of the assessee are to be applied, there is a reversal entry debiting the provision and crediting the profit and loss account by sum of ₹ 29,42,23,853/- which represents the disallowances made in the earlier year. In our considered onion, this issue needs to be examined by the A.O. with reference to the books of account. Hence, we remit this issue to the file of the Assessing Officer. The Assessing Officer is directed to examine this issue afresh after giving the assessee proper opportunity of being heard.

Summary

Issues Involved:
1. Deletion of interest disallowed under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Allowance of deduction for exchange difference gain on reversal of provision for loss.

Issue-wise Detailed Analysis:

1. Deletion of Interest Disallowed under Section 36(1)(iii):

The Revenue challenged the CIT(A)'s decision to delete the interest disallowed by the Assessing Officer (AO) under Section 36(1)(iii) of the Income Tax Act, 1961. The AO had disallowed ?24,84,689/- of interest, attributing it to advances given for purchasing business premises and other immovable properties, which were not put to use during the year. The AO calculated this disallowance by proportionately attributing the interest cost to the advances for fixed assets.

The assessee argued that these advances were made from its own funds, not borrowed funds, which were used for specific purposes like packing credit and post-shipment credit. The CIT(A) accepted this argument, noting that the assessee had sufficient own funds to cover the investments and relied on the decision of the Bombay High Court in the case of Reliance Utilities & Power Ltd. (313 ITR 340), which established a presumption that investments are made out of interest-free funds if such funds are sufficient.

The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the conclusion that the investment was made from mixed funds, with sufficient own funds to cover the investment. The Tribunal noted that the AO had not demonstrated that borrowed funds were used for these advances, and thus, the disallowance under Section 36(1)(iii) was not justified.

2. Allowance of Deduction for Exchange Difference Gain on Reversal of Provision for Loss:

The second issue involved the assessee's claim for a deduction of ?29,42,23,853/- from the income returned, which the AO had disallowed. The AO noted that the assessee had earned an exchange difference gain of ?90,68,46,429/- and had reduced this from the purchase cost. The assessee argued that this amount included a reversal of a provision for loss made in the previous year, which was disallowed during the assessment proceedings of AY 2009-10.

The CIT(A) found that the assessee had consistently followed Accounting Standard-11 (AS-11) for accounting foreign exchange fluctuations and that the AO had allowed similar adjustments in previous years. The CIT(A) directed the AO to allow the deduction, noting that genuine claims should be allowed even if they result in assessing income below the returned income.

The Tribunal agreed with the CIT(A) in principle but noted discrepancies in the records regarding the exact amounts disallowed and reversed. The Tribunal remitted the issue back to the AO for a fresh examination with reference to the actual books of account and entries therein, directing the AO to verify the assessee's claim and allow the deduction if justified.

Conclusion:

The Tribunal upheld the CIT(A)'s decision on the deletion of interest disallowed under Section 36(1)(iii) but remitted the issue of the deduction for exchange difference gain back to the AO for further verification. The appeal by the Revenue was thus partly allowed.