TaxTMI 
TaxTMI 
2012 (7) TMI 726
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....iscussed the issue of raising the loan when the company has turnover of Rs. 99,70,965.55 and was always in a position to repay the loan. Hence the CIT(A) has erred in principle by treating these loans as genuine only because it were accepted in past years also. ii) On the facts and in the circumstances of the case, as the CIT(A)'s decision of treating the unsecured loan as genuine is not acceptable, hence the interest on above unsecured loan @12% must be added to the income of the assessee and in view of this the action of the CIT(A) is not acceptable. iii) The order of the CIT(A) be set aside and that of Assessing Officer be restored.." CO no.351/Del./2011[Assessee] 1. "That the learned CIT(A) was fully justified in deleting the addition of Rs. 28,83,480/- made by the Assessing Officer. 2. That the learned CIT(A) ought to also deleted the part disallowance of Rs. 1,95,898/- out of total disallowance of Rs.5,41,915/- made by the Assessing Officer out of interest paid. The disallowance sustained at Rs.1,95,898/- also deserves to be deleted. 3. That the learned CIT(A) ought to himself directed for allowance of the credit of TDS amount of Rs. 31,385/- as per certific....
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.... by limitation and no possibility of any claim in future, the remission or cessation of liability falls u/s 41(1) of the Act. 3. On appeal, the ld. CIT(A) allowed the claim of the assessee after having a remand report from the AO and comments of the assessee thereon, in the following terms:- "The facts of the case as well as submissions made by the appellant have been carefully considered. It is observed that the A.O. had disallowed unsecured loans to the extent of Rs. 28,83,480/- on the ground that these loans were outstanding for more than three years therefore exceeded time limit available in Schedule 19 & 21 of Laws Limitation Act. Further the loans were raised by the appellant without any financial need and the depositors had not filed legal suits against the appellant for recovery of the aforesaid loans. The A.O. on such basis held that the loan amounts were income of the assessee and the profits were chargeable to tax u/s 41(1) of the Act as the appellant was getting benefit in respect of such trading liability. On the other hand it has been contended by the appellant that the aforesaid loans were brought forward from preceding years and there had been no transaction d....
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....is liability to institute a suit in Court of Law to recover the debt. Thus it cannot be presumed that the creditor has remitted the debt when remedy to sue is barred by limitation period or that liability of the debtor has finally ceased because of the same. It would be a different situation if the creditor abandons his right to recover the debt or the creditor intends not to honour the liability even when demanded. Further, the A.O. has not discharged the onus to establish that these liabilities had ceased finally without the possibility of survival. Reliance is placed on the decision of the Hon'ble ITAT, Delhi in the case of Shri Vardhman Overseas Ltd. vs. ACIT (2008) 24 SOT 393 (Del). The unsecured loans have been raised by the appellant from relatives and do not represent trading liability for invoking provisions of section 41 (1) of the Act. In view of the above facts it is held that the A.O. was legally and factually incorrect in invoking provisions of section 41(1) of the Act and make disallowance at Rs. 28,83,480/-. Addition of `.28,83,480/- is directed to be deleted. Ground NO.2 is allowed." 4. The Revenue is now in appeal before us against the aforesaid findings of the....
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....covery of the said amount or for taking appropriate action against the assessee, it cannot be said that there was a cessation of liability. The liability still remains, though it may not be enforceable at law on account of the provisions of the law of limitation. Relying upon the decision in the case of Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518.SC), Hon'ble High Court further held that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and, therefore, even if the entries are made to write back the expenditure, the amount so written back cannot be added in the income of the assessee as per the provisions of section 41(1) of the Act. 5.2 Hon'ble Bombay High Court in the case of CIT Vs. Chase Bright Steel Ltd.,177 ITR 128(Bombay) while relying upon their judgment in J. K. Chemicals Ltd. Vs. CIT, [1966] 62 ITR 34 held that the liability of an assessee does not cease merely because the liability has become barred by limitation. The liability ceases when it has become barred by limitation and the assessee has unequivocally expressed its intention not to honour the liability even when demanded. 5.3 Hon'ble Sup....
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....while referring the judgment of the Hon'ble Supreme Court in Sugauli Sugar Works (P.) Ltd. (supra) and a number of other decisions, upheld the findings of the Tribunal ,holding that since amounts payable to sundry creditors were not credited to assessee's profit and loss account and were still shown as outstanding at end of relevant year and the assessee having not unilaterally written back accounts of sundry creditors in its profit and loss account, provisions of sec. 41(1)(a) were not attracted. 5.6 In the light of view taken by the Hon'ble Supreme Court and jurisdictional High Court in their aforesaid decisions, it is apparent that unless there is a cessation of liability or there is a remission of liability by the creditor, the liability subsists and the assessee having not unilaterally written back accounts of the aforesaid creditors in its profit and loss account, the provisions of section 41(1) of the Act and explanation 1 thereto, are not attracted. In the instant case, there is nothing to suggest that the assessee obtained any benefit either by way of remission or cessation of any liability while the aforesaid liabilities are continually admitted by the assessee in thei....
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....t free unsecured loan of Rs.28,83,480/- as upheld in Ground no.2 above, the disallowance is restricted at the balance resultant amount of Rs.16,32,480/- (Rs. 45,15,960- Rs. 28,43,480). Therefore, the disallowance is restricted at `.l,95,898/- . The appellant gets relief of Rs. 3,46,017/- on this score. Ground N0.3 is partly allowed." 9. The assessee is now in appeal before us against the findings of the ld. CIT(A) for upholding the addition of Rs.1,95,898/-.The ld. AR on behalf the assessee did not make any submissions before us on this ground. 10. We have gone through the facts of the case. As is apparent from the impugned orders, the assessee did not place any evidence before the AO or the ld. CIT(A) as to how the funds borrowed by it had been utilized and what was the commercial expediency in such borrowings. In this connection, the relevant provisions of section 36(1)(iii) of the Act provide for deduction of interest on the borrowed funds raised for business purposes. Once the assessee claims any such deduction, the onus is on the assessee to satisfy the AO that loans raised by the assessee were used for business purposes. If in the process of examination of claim for suc....
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....ion 36(1)(iii) of the Act, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concerns or other persons on interest free basis, are to be disallowed. 10.1 In K. Somasundaram and Brothers v. CIT [1999] 238 ITR 939, while dealing with a similar proposition, the Hon'ble Madras High Court held "........ The assessee clearly diverted the funds which had been borrowed, had been invested in the contract work, after the investment was recovered and was available either for the purposes of the business or by way of repayment of the loan. The assessee did neither, but chose to divert the money for non-business purposes. After such diversion, the interest paid on the capital borrowing to the extent of the amounts diverted can no longer be an item of expenditure which can be claimed for deduction as an item of business expenditure. If the amounts diverted was subsequently brought back into the business and utilised in the business, the assessee could thereafter claim the interest paid as a deduction. But so long as the diversion continues the assessee would be disentitled." 10.2 In view of the foregoing, especi....