2021 (9) TMI 1171 - AT - Income Tax

Addition u/s 36(1)(iii) - assessee had paid interest to the sundry creditors AND on the other hand no interest was charged from the sundry debtors - Assessee submitted that the purchaser of the rice from the assessee were having the loss in this year so it was not possible to charge interest when the payments were at risk and that there was no such agreement between the purchasers and the assessee to charge any interest - HELD THAT - Nothing is brought on record to substantiate that there was any agreement between the assessee and the debtors for charging of interest on the trade debits which were on account of purchases of the Rice made from the assessee - assessee furnished the copies of the accounts from the debtors in the said accounts also no interest was charged and moreover the A.O. had not established any nexus between the interest bearing funds with the interest free advances. On the contrary the debtors were on account of purchases made from the assessee, therefore, the A.O. was not justified in invoking the provision of Section 36(1)(iii) of the Act and making the impugned addition which was wrongly sustained by the Ld. CIT(A). In the absence of any nexus proved between the interest bearing funds and the debtors the impugned addition deserves to be deleted, accordingly the same is deleted. Addition on account of loss in bardana - HELD THAT - AO framed the assessment ex parte and the assessee furnished the documentary evidence in the form of purchase and sale bills of bardana before the Ld. CIT(A). In such type of business the bardana is used to store goods like paddy, rice and rice bran etc. and again reused, the value of bardana deteriorate with passage of time and there is also wear and tear, therefore, the purchase price and the sale price of bardana cannot be the same. Moreover nothing is brought on record that he assessee inflated the purchases or suppressed the sales, therefore, the addition made by the A.O. and sustained by the Ld. CIT(A) on account of loss in bardana was not justified, accordingly the same is deleted. Appeal of the Assessee is allowed.

Summary

Issues:
1. Sustenance of addition made under section 36(1)(iii) of the Income Tax Act, 1961.
2. Sustenance of addition made on account of bardana loss.

Issue 1: Sustenance of addition made under section 36(1)(iii) of the Income Tax Act, 1961:
The appeal concerned the addition of ?4,41,065 under section 36(1)(iii) of the Income Tax Act, 1961. The Assessing Officer (A.O.) observed that the assessee paid interest to creditors but not to debtors, considering it impermissible under the Act. The A.O. passed an ex parte assessment order making the addition. The assessee contended that due to losses in trade, charging interest was not feasible, citing trade practices and lack of agreement with debtors. The Commissioner of Income Tax (Appeals) upheld the addition, emphasizing the need for a coherent explanation. However, the ITAT found no evidence of an agreement to charge interest, leading to the deletion of the addition.

Issue 2: Sustenance of addition made on account of bardana loss:
The second issue involved the addition of ?2,82,442 as bardana loss. The A.O. made this addition, claiming the assessee failed to justify the loss. The assessee argued that bardana loss was a common trade practice due to wear and tear, supported by documentary evidence. The A.O. noted discrepancies in purchase and sale prices of bardana but the ITAT found no evidence of inflated purchases or suppressed sales. The ITAT concluded that the bardana's value deteriorated over time due to frequent use, justifying the difference in purchase and sale prices. Consequently, the addition was deemed unjustified and deleted.

In conclusion, the ITAT allowed the appeal, deleting both additions made by the A.O. The judgment highlighted the importance of providing coherent explanations and evidence to support claims, emphasizing the need for a nexus between the disputed amounts and established business practices.