2021 (1) TMI 1019 - AT - Income Tax

Disallowance of proportionate interest on capital advances provided by the assessee - contentions of the Ld. AR are that, the advances does not pertains to sister concerns but the balance with government authorities - HELD THAT - We find, out of total amount of ₹ 50,64,880/- disclosed under short term loans and advances in the note to financial accounts, the amount of ₹ 47,11,874/- pertains to VAT, service tax, TDS and income tax refund receivables. Whereas the A.O. is of the opinion that these are the advances provided to sister concerns. Thus the advances disclosed in the financial statements are with the statutory authorities and the action of the A.O. to disallow proportionate interest considering such advances is not acceptable. Accordingly, we set aside the order of the CIT(A) and direct the Assessing officer to delete the addition and allow the grounds of appeal in favour of the assessee.

Summary

Issues:
Disallowed interest on borrowing for day-to-day business needs, treatment of amount as capital advance, computation error in disallowance, confirmation of disallowance by CIT(A).

Analysis:
The assessee appealed against the order of Commissioner of Income Tax (Appeals) regarding the disallowance of interest on borrowing for day-to-day business needs. The AO disallowed interest on borrowing, considering capital advances made by the assessee, leading to a total income assessment. The CIT(A) upheld this decision, prompting the appeal to the Tribunal.

During the hearing, the AR argued that the advances in question were related to VAT, Service Tax, TDS, etc., not capital advances for acquiring assets. The AR presented evidence supporting this claim and requested the appeal to be allowed. The DR, however, supported the CIT(A)'s decision.

The Tribunal analyzed the disputed issue of interest disallowance in light of the capital advances provided by the assessee. The AR clarified that the advances were not to sister concerns but related to government authorities. The Tribunal reviewed the financial statements and noted that a significant portion of the disclosed advances pertained to statutory dues, not sister concerns as assumed by the AO. Consequently, the Tribunal concluded that the AO's decision to disallow interest based on these advances was unfounded. The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, ruling in favor of the assessee.

Ultimately, the Tribunal allowed the appeal filed by the assessee, overturning the disallowance of interest on borrowing and emphasizing the nature of the advances in question.