2016 (6) TMI 1079 - AT - Income Tax

Tribunal overturns AO's disallowances under Income-tax Act, emphasizes business use of borrowed funds.

The Tribunal allowed the appeal, overturning the disallowances made by the Assessing Officer under sections 36(1)(iii), 69C, and 36(1)(vii) of the ... Disallowance the interest under section 36(1)(iii) - whether the funds have been withdrawn by some of the partners of the assessee firm which is not the business purposes of the assessee? - Held that:- In the instant case, borrowed funds have been presumably utilized for the withdrawal by some of the partners. However, in the same vein, the overall capital continues to remain positive and therefore allowability of interest in the case of the assessee is squarely covered by the decision of the Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., (2009 (1) TMI 4 - BOMBAY HIGH COURT ). Thus, contentions advanced by the Ld. AR for the assessee merits acceptance - Decided in favour of assessee Disallowance invoking section 69C - Held that:- CIT(A) has directed the Assessing Officer to reconcile the difference between the entries made in the books of account qua the TDS certificate while drawing conclusion on the issue. We find no infirmity in such direction given as a matter of fair play. Accordingly, we remit the issue back to the file of the Assessing Officer for de novo examination on the issue in accordance with law after giving proper opportunity of being heard to the assessee - Decided in favour of assessee for statistical purposes Allowability of loss - Held that:- We find ourselves in agreement with the directions given by the CIT(A). Winding up of a unit of business is different from winding up the entire business operations. The bad debt is allowable expenditure under section 36(1)(vii) of the Act provided it has been incurred in course of trade and debt or part thereof has been taken into account while computing the income of the assessee in the earlier years. In view of the aforesaid legal position, we remit the issue to the file of the Assessing Officer for de novo examination of the issue. The Assessing Officer shall allow the aforesaid claim on being satisfied that the debts were incurred in the course of trade and conditions as per section 36(1)(vii) r.w.s. 36(2) of the Act are satisfied - Decided in favour of assessee for statistical purposes Issues:1. Disallowance of interest under section 36(1)(iii) of the Income-tax Act.2. Disallowance of expenditure under section 69C of the Act.3. Disallowance of payment made to UP State Cooperative Spinning Mills Limited, Kanpur.Issue 1: Disallowance of Interest under Section 36(1)(iii) of the Income-tax Act:The appellant challenged the disallowance of interest amounting to Rs. 15,74,077 under section 36(1)(iii) of the Act, arguing that the borrowed funds were not diverted for non-business purposes. The Assessing Officer disallowed a proportionate amount of interest paid on borrowed funds to partners, alleging personal usage by partners. The Authorized Representative contended that overall capital remained positive, indicating business use. The Tribunal noted positive combined capital contributions by partners, distinguishing the case from precedent cited by the Revenue. Relying on the decision in CIT vs. Reliance Utilities and Power Ltd., the Tribunal allowed the appeal, emphasizing that borrowed funds were presumed used for business purposes.Issue 2: Disallowance of Expenditure under Section 69C of the Act:The Assessing Officer disallowed Rs. 1,20,579 as unexplained expenditure under section 69C, based on a discrepancy in commission payments to Shantoli Corporation. The CIT(A) directed proper verification and reconciliation of accounts, emphasizing the need for a reconciliation statement. The Tribunal upheld the CIT(A)'s direction for a de novo examination by the Assessing Officer to reconcile differences between book entries and TDS certificates, ensuring fair play and compliance with the law.Issue 3: Disallowance of Payment to UP State Cooperative Spinning Mills Limited, Kanpur:The appellant claimed a loss of Rs. 5,66,223 from a discontinued unit, including Rs. 1,92,323 paid to UP State Textile. The Assessing Officer disallowed the payment, deeming it unrelated to business due to unit discontinuation. The CIT(A) directed examination of whether the amount was declared as income in prior years. The Tribunal agreed with the CIT(A), remitting the issue for further examination to determine if the bad debt meets the criteria for allowable expenditure under section 36(1)(vii) of the Act. Ground No.3 was allowed for statistical purposes.In conclusion, the Tribunal allowed the appeal of the assessee on all three issues, emphasizing the need for proper examination and compliance with legal provisions in determining the disallowances and deductions under the Income-tax Act.