1998 (7) TMI 124 - AT - Income Tax

Tribunal upholds disallowance of interest & power expenses, deems not for business

Mittal Castings Ltd. Versus Deputy Commissioner Of Income-Tax

Mittal Castings Ltd. Versus Deputy Commissioner Of Income-Tax - ITD 069, 260, TTJ 062 TTJ 591 Issues Involved:1. Disallowance of interest debited to Profit & Loss Account.2. Disallowance of power expenses.3. Validity of the orders passed by the authorities.Detailed Analysis:1. Disallowance of Interest Debited to Profit & Loss Account:The appellant-company claimed a deduction of interest amounting to Rs. 16,37,881 paid to financial institutions. The Assessing Officer disallowed this interest because the company had advanced money to shareholders and concerns without charging interest, while paying interest on borrowings. The CIT(A) upheld the disallowance proportionate to interest-free advances made by the assessee, treating it as non-business expenditure.The appellant argued that there was no established nexus between borrowed funds and advances made, citing various legal precedents. However, the tribunal noted that the appellant's balance sheet did not support the availability of interest-free funds for the advances made. The company had significant business losses and sold substantial assets, which negated the argument of continuing business operations. The tribunal upheld the CIT(A)'s decision, concluding that the borrowings were no longer for business purposes, and thus, the interest paid on such borrowings was not deductible as business expenditure.2. Disallowance of Power Expenses:The appellant made a provision for additional liability of Rs. 96,78,827 for power expenses, which was being contested and not paid. The Assessing Officer treated this as a contingent liability and disallowed it, a decision upheld by the CIT(A). The appellant contended that the liability was based on bills received from DESU for minimum charges, arguing that the liability was ascertained and should be allowed.The tribunal found that the appellant's power connection was disconnected due to fraudulent abstraction of energy, and the company was not engaged in manufacturing during the relevant year. The tribunal noted that the liability was disputed by the appellant itself, and no payment had been made. The tribunal concluded that the liability was not a business expenditure, as the business was not continuing, and substantial assets had been sold. The tribunal upheld the CIT(A)'s decision, disallowing the power expenses as the liability was still disputed and not incurred wholly and exclusively for business purposes.3. Validity of the Orders Passed by the Authorities:The appellant claimed that the orders passed by the authorities were bad in law and void ab initio. However, no specific arguments were advanced on this ground. The tribunal dismissed this ground as no arguments were presented.Conclusion:The tribunal dismissed the appeal of the assessee, upholding the CIT(A)'s decisions on both the disallowance of interest and power expenses. The tribunal found that the borrowings were not for business purposes and the power expenses were not incurred wholly and exclusively for business purposes, as the business operations had ceased and significant assets were sold. The orders passed by the authorities were found to be valid.