2020 (1) TMI 119 - AT - Income Tax

Deemed interest on the loans and advances given to the associate concern - Accrual of income - HELD THAT - As decided in own case 2017 (11) TMI 1747 - ITAT AHMEDABAD In assessment year and subsequent years, assessee has stopped charging interest and accounting it in the income on accrual basis. This is not a sound accounting policy as at outset it should have been recognized the same as income on accrual basis and thereafter would have given the deduction of claim of bad debt which the assessee failed in these years. Further, when we visualize this situation as a whole traveling from three assessment years, then, it is observed that interest income was recognized on accrual basis and thereafter claimed as a bad debt of its non-realization, this has been allowed by ld. CIT(A). If we remit the issue to the file to assessing officer in subsequent years by holding that income is to be recognized on accrual basis and thereafter, it is to be claimed as bad debt whether allowable or not, then, to our mind, it will be an academic and futile exercise because in reality asssessee has not received any interest income from its sister concern. It is to be recognized that in all the aforesaid three years the income from interest on accrual basis remained unrecoverable which was allowed as a bad debt. Thus, in order to avoid multiplicity of the proceedings, we allow the appeal of the assessee Disallowance on account of unpaid service tax of earlier years by erroneously invoking the provisions of section 43B - HELD THAT - Before ld. A.O. in response to the notice, assessee submitted in its reply letter dated 29th October, 2016 in which it did not object to the addition of ₹ 31,622/- and even before ld.CIT(A) and as no details have been furnished in support of its contention. Therefore, this ground of appeal of the assessee is dismissed.

Summary

Issues:
1. Disallowance of deemed interest on loans and advances to associate concern.
2. Disallowance of unpaid service tax under section 43B of the Income Tax Act, 1961.
3. Dismissal of penalty proceedings under section 271(l)(c) for alleged concealment of income.
4. Confirmation of interest charges under section 234B and 234C of the Income Tax Act, 1961.

Issue 1: The appellant contested the disallowance of deemed interest on loans and advances to an associate concern. The assessing officer added ?99,143 as interest on interest-free advances given to sister concerns. The appellant argued that the loans were for business purposes, and no interest-bearing loans were diverted for interest-free advances. The ITAT, considering past judgments, allowed the appeal, noting that the assessing officer did not question the genuineness of the transactions and that the appellant had followed the mercantile system of accounting. The ITAT concluded that recognizing interest income on accrual basis and then claiming it as bad debt was a sound accounting practice, thus overturning the disallowance.

Issue 2: The second issue involved the disallowance of ?31,622 for unpaid service tax under section 43B of the Income Tax Act, 1961. The assessing officer added this amount to the income as the service tax liability was not fully paid. The appellant did not object to this addition in responses to notices. The ITAT upheld the disallowance, stating that no supporting details were provided by the appellant before the lower authorities, leading to the dismissal of this ground of appeal.

Issue 3: The third issue pertained to the initiation of penalty proceedings under section 271(l)(c) for alleged concealment of income. The ITAT did not delve into this issue in detail as the appellant had not pressed this ground during the proceedings.

Issue 4: The final issue concerned the confirmation of interest charges under sections 234B and 234C of the Income Tax Act, 1961. The ITAT did not provide specific details on this issue, but it was mentioned in the grounds of appeal.

In conclusion, the ITAT partially allowed the appeal filed by the Assessee, overturning the disallowance of deemed interest on loans and advances while upholding the disallowance of unpaid service tax due to lack of supporting details. The ITAT did not address the penalty proceedings issue in detail and only mentioned the confirmation of interest charges under sections 234B and 234C.