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TMI Blog2011 (7) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... rm loan from bank and to certain other parties. The Assessing Officer found that the assessee had not charged interest from M/s Standard Sulphonators Ltd. against deposit and from M/s Uniflex Industries Ltd. against loans and deposits. He also noticed that the assessee had charged interest from sister concern, M/s Industrial Enterprises and paid interest to M/s Kuteer Finance and M/s Kashi Prasad Roop Kishore which were also sister concerns of the assessee group. He, therefore, asked the assessee to explain as to why interest paid on loans/deposits may not be disallowed proportionately on the advances given to M/s Standard Sulphonators Ltd. and M/s Uniflex Industries Ltd. The assessee submitted that the security deposit of ₹ 50 lakhs was given to M/s Standard Sulphonators Ltd. for the use of land paper which were mortgaged to the State Bank of India. The Assessing Officer did not accept the explanation of the assessee and disallowed the interest on security deposit for land @14.50%on ₹ 50 lakhs. The said disallowance was worked out at ₹ 7.25 lakhs. The Assessing Officer also disallowed interest in case of M/s Uniflex Industries Ltd. at ₹ 7,69,931 and of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned property is charged to bank as collateral security. Since the deposit has been made for the purpose of the business, the proportionate disallowance of ₹ 7,25,000/- is not called far. 6. The appellant had supplied detergents to Standard Sulphonators Pvt. Ltd.(SSPL) and procured packaging materials from Uniflex Industries Pvt. Ltd. in earlier years. SSPL has suffered huge looses in the business and debit balance is in respect of goods supplied as well as money advanced. Uniflex has expanded its capacity on our assurance of enhanced supplies but due to discontinuance of contract with P&G with us, we could not procure material from them and money was advanced to help them out in the crises. However, Uniflex has repaid the amount during the year. Copy of account of both the parties is attached. The average balance in the account of Uniflex Industries Pvt. Ltd. was ₹ 53.03 lacs and in the account of Standard Sulphonators Pvt. Ltd. was ₹ 114.82 lacs. The money was advanced due to commercial expediency as survival of both the company will result in optimum capacity utilization of the appellant's business. Hence disallowance of interest amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urity deposit would have been ₹ 6,62,500/- instead of ₹ 7,25,000/-." The assessee also furnished statement of accounts of the parties in question and the sanction note of State Bank of India in support of its contention that the land of M/s Standard Sulphonators Ltd. was provided as security and the loans were against stocks and book debits of the assessee. 5. The ld. CIT(A) after considering the submissions of the assessee observed that the security deposit of ₹ 50 lakhs with M/s Standard Sulphonators Ltd. was for their land mortgaged with bank to secure the loans to the assessee and that the debit balance of M/s Uniflex Industries Ltd. was in respect of advances for purchase of packing material, etc. in the earlier years which had been received back during this year. He further observed that the other debits in the account of M/s Standard Sulphonators Ltd. were related to the sale of detergents and occasional advances in the course of business with them. The ld. CIT(A) was of the view that the interest free debits were in the course of business activity of the assessee and it was not open for the Assessing Officer to override business prudence of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the amount outstanding in the accounts of the aforesaid companies because the assessee was charging and also paying interest to other concerns to whom loans were given or deposits were received as the case may be. In the present case, it is noticed that the assessee utilized land belonging to M/s Standard Sulphonators Ltd. as a security against loan raised from the bank, this fact is also clear from page 17 of the assessee's compilation, which is a copy of certificate issued by the State Bank of India, Civil Lines, Kanpur wherein it is certified that the property owned by M/s Standard Sulphonators Ltd. was pledged with the bank as security against loan provided to the assessee. The value of the said property as per valuation report dated 20.9.2007 was ₹ 2.25 crores. Since the company, M/s Standard Sulphonators Ltd. had provided its land as security to the bank against loan taken by the assessee and in lieu of that the assessee deposited a sum of ₹ 50 lakhs with the said company i.e. M/s Standard Sulphonators Ltd., so it cannot be said that the said amount of ₹ 50 lakhs was an interest free advance or loan. Therefore, the Assessing Officer was not justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,324 had been claimed by the assessee as bad debts. According to the Assessing Officer, the assessee filed details and copy of accounts of few parties, but the nature of transaction in few of the cases could not be verified in the absence of details. The Assessing Officer pointed out that in the following cases the transaction could not be verified:- S.No. Name of the Party Amount in Rs. S.No. Name of the party Amount in Rs. 1. Jai Mata Di Agency Rs.6,212/- 2. Gaurav Agencies Rs.5,287/- 3. Bansal Rs.5,569/- 4. Bibbbnl Rs.3,378/- 5. Jai Bajrang Rs.5,173/- 6. Ambey Trading Rs.8,138/- 7. Devendra Rs.5,372/- 8. Ajai Kumar Rs.4,069/- 9. Shiv Agency ₹ 5,591/- 10. Sri Harit Rs.8559/- 11. Shambhu Nath Rs.25,266/- 12. Swarnima Rs.6,200/- 12. Provision for expenses Rs.85,000/- 13. Baba Maha Rs.9,686/- 14. Afzarul Rs.2,160/- 15. Bhagwan Rs.9,943/- 16. Take CH Rs.7,418/- 17. Mohit Trading Rs.8,675/- 18. Madhu General Rs.9,459/- Total Rs.1,57,220/- Total Rs.63,935/- 11. The Assessing Officer made the disallowance of ₹ 5,81,875 by observing as under:- 5.1. The nature of transaction in the above cases could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of account a sum of ₹ 1,84,708/- has been written off by the assessee. However, as regards ₹ 3,23,521/- related to M/s Trivedi Oil Tankers (Old), assessee has written off and mentioned as "being debit balance of party as on 31.03.2002 written off as no longer receivable in earlier year the party account was debited by ₹ 3,00,000/- (Net) towards over claim of shortage in transit which party did not accept and ultimately the amount was paid to the party". 6.3. In this connection assessee has filed reply dated 22.02.2005 that they have deducted from the freight bills of the transports and debited party account in respect of shortage. Now the same has been written off. In this connection assessee was specifically required to file confirm copy of account of M/s Trivedi Oil Tankers so that the transactions as mentioned in reply may be verified. Assessee could not file the desired information; therefore, the claim of assessee is not admissible. Consequently, a sum of ₹ 3,23,521/- written off in the account of M/s Trivedi Oil Tankers is not allowable. Further, since the assessee has not filed confirmed copy of account; therefore, the credit balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reliance is placed on CIT v. Oriental Motors Car Co. Pvt. Ltd. (1980) 124 ITR 74 (All), CIT v. Phalton Sugar Works Ltd. (1986) 162 ITR 622 (Bom.). The disallowance of ₹ 3,60,720/- is totally unjustified and liable to be deleted. 3. The appellant had written off ₹ 3,23,527/- debit balance in the account of Trivedi Oil Tanker during the year. The appellant had filed the copy of party account for the current as well as for the earlier years. The debit balance of the party account had arisen due to the debit to the party account of ₹ 3,00,000/- on account of our claim for shortage in transit and other deductions made from the freight bills. Since, the party had not accepted our claim, which had been taken as income in the immediately preceding year, the amount was paid and claimed as balance written off during the year. The learned ACIT had verified all the facts but disallowed the balance written off on the ground that the confirmed copy of account of the party had not been submitted. The learned ACIT failed to note that the liability had crystallized during the year after settlement of dispute and hence should be allowed as deduction. The disallowance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of advances for supplies and services for the purposes of business and in the ordinary course of business. It was also observed that the amounts have been actually written off in the books of account and debited to the profit and loss account. Such write offs were covered under the provisions of section 36(1)(vii) of the Act read with section 28 of the Act. Therefore, such write offs were definitely allowable as bad debts. He further observed that the liability of ₹ 4,88,038 was incurred and accounted for in the earlier years and was lying credited in the books of the assessee. The same were not written off. As such, there was no question of cessation or remission of the liability. The same could not be added under section 41 of the Act. Accordingly, the impugned additions made by the Assessing Officer were deleted. 16. Now the Department is in appeal. 17. The ld. D.R strongly supported the order of the Assessing Officer and reiterated the observations made in the assessment order dated 25.2.2005. 18. In his rival submissions, the ld. counsel for the assessee reiterated the submissions made before the ld. CIT(A) and supported the impugned order passed by the ld. CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsi. The Assessing Officer was of the view that the assessee had made contract for forward business in foreign exchange as per exchange contract dated 31.12.2001 and that the transactions made by the assessee were not related to the business of the assessee. According to him, it was speculation loss, therefore, could not be set off against the income derived from income other than speculation business. The Assessing Officer made disallowance of ₹ 5,63,427. 24. The assessee carried the matter to the ld. CIT(A) and submitted as under:- "The appellant had borrowed working capital limit from State Bank of India. Part of the limit has been converted into FCNRB demand loan and to cover the currency risk the appellant has taken forward coverage for the foreign currency borrowed. Copy of agreement is enclosed. All these facts were submitted along with the evidence before the learned ACIT but the learned ACIT had disallowed the expenditure stating that the transaction is not related to the business of the appellant and it is a speculative transaction. The learned ACIT failed to understand that the money borrowed in US$ were used for the business and only to cover the currency fluctu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel for the assessee in his rival submissions reiterated the submissions made before the ld. CIT(A) and strongly supported the impugned order passed by him. 28. After considering the submissions of both the parties, it is noticed that the assessee borrowed a sum of USD 7,30,000 from State Bank of India in the month of December 2001 which was repayable after 11 months in USD. The assessee also entered into forward exchange contract through State Bank of India for purchase of 7,30,000 USD after 11 months at a fixed price to cover up the risk of upward fluctuation of the USD rate and paid fixed premium over the support rate. Proportionate amount for the period falling in the assessment year under consideration was at ₹ 5,63,427. That amount was charged by the assessee in the profit and loss account. Since the amount of premium paid was fixed and there was no element of speculation in the transaction, the amount so paid set to rest the possible fluctuation liability of the assessee company at the time of repayment of loan. While doing so, the assessee-company reduced its cost of borrowings to 11.021% including the premium cost as against 14.5% interest charged by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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