2004 (3) TMI 315 - AT - Income Tax

Revenue's appeal allowed on expenses, dismissed on accrued interest addition. CIT(A) to reconsider expenses issue.

ASSISTANT COMMISSIONER OF INCOME TAX. Versus MEHTAB CHAND PANNA LAL.

The appeal of the Revenue was allowed for statistical purposes on the first issue regarding disallowance of expenses, restoring the matter to the CIT(A) ... - Issues Involved:1. Disallowance of expenses under the heads 'Raffu', designing, polishing, and 'Rangai'.2. Addition on account of accrued interest on debit balance standing in the account of a sister-concern.Issue-wise Detailed Analysis:1. Disallowance of Expenses:The Revenue challenged the deletion of disallowance of expenses amounting to Rs. 1,47,150 made by the AO under the heads 'Raffu', designing, polishing, and 'Rangai'. The AO disallowed these expenses due to lack of verification and non-production of payees. The CIT(A) deleted the disallowance on the grounds that no such disallowance was made in earlier or subsequent years, and the expenses were recorded in the books of account. The Tribunal found that the CIT(A) did not consider the specific reasons given by the AO for disallowance. It was held that unless the facts are identical in all years, no addition could be deleted on such grounds. The Tribunal restored the matter to the file of the CIT(A) for reconsideration, directing the CIT(A) to verify the payments and decide the issue by giving reasonable opportunity to the assessee.2. Accrued Interest on Debit Balance:The Revenue contested the deletion of an addition of Rs. 1,00,709 made by the AO on account of accrued interest on a debit balance standing in the account of a sister-concern. The AO argued that the assessee attempted to evade tax liability through a collusive agreement with the sister-concern and that it was beyond business prudence to forego interest on advances made out of interest-bearing loans. The CIT(A) deleted the addition, considering an agreement dated 1st April 1990, and a decision by the Allahabad High Court in a similar matter. The Tribunal upheld the CIT(A)'s decision, rejecting the AO's objections regarding the validity of the agreement and the financial condition of the sister-concern. The Tribunal found that the case was covered by the Allahabad High Court's decision, which held that interest could not be said to have accrued if the debtor companies had financial difficulties and the assessee had stopped charging interest. The Tribunal noted that the AO did not disallow any interest paid by the assessee on borrowed capital, making the Revenue's cited case law inapplicable.Conclusion:The appeal of the Revenue was allowed for statistical purposes on the first issue, restoring the matter to the CIT(A) for reconsideration. The appeal was dismissed on the second issue, upholding the CIT(A)'s deletion of the addition on account of accrued interest on the debit balance.