TaxTMI 
TaxTMI 
2013 (1) TMI 600
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....sing Officer in disallowing Rs. 2,76,68,393 out of interest debited to Profit and Loss A/c. stating that interest free advances were given to group companies by the assessee and, therefore, interest relatable to such advances cannot be allowed as deduction. 3. Brief facts of the issue are that during the course of assessment proceedings the Assessing Officer noticed that the assessee has advanced loans amounting to Rs. 23,05,69,947 to six of its group companies as under: Sl. No. Particulars Amount (Rs.) 1. Natco Drug & Fine Chemicals 41,260 2. Natco Trust 12,86,418 3. Nat Soft Information P. Ltd. 6,49,759 4. Natco Organics Ltd. 5,81,50,536 5. Krishna Port Company Ltd. 17,00,77,719 6. Krishnapatnam Rail Road Ltd. 3,64,255 Total 23,05,69,947 4. The Assessing Officer noticed that the assessee has paid huge amount of interest on the loans/borrowed funds taken by it from banks/financial institutions. However, the assessee has not charged any interest on the above advances/loans given to its sister concerns. In response to query raised by the Assessing Officer as to why for not charging interest on the a....
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....erm loans from the banks/financial institutions as on 31.03.2005 compared to 31.03.2004. Parts of the term loan and cash credit were repaid. Stating that the advances were given to group companies out of profits generated from the operations of the business of the company and not from loans taken from the banks/financial institutions, the assessee contended that the Assessing Officer was not justified in making the above disallowance out of interest claimed by it. In this regard, reliance was placed on the decisions in the cases of Saleem Chawda v. ITO [2006], CIT v. Radico Khaitan Ltd., Malwa Cotton Spinning Mills v. Asstt. CIT [2004] 89 ITD 65 (Chd.) (TM), CIT v. Tin Box Co. [2003] 260 ITR 637, and S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1. 8. The AR further submitted that the CIT(A) ought to have seen that borrowed funds were not utilised by the assessee for advancing monies to its group companies and the monies advances were from out of the monies generated from the operations of its business and no additional borrowings were made to finance such advances and in fact the assessee repaid part of term loans raised in earlier years and, therefore, no interest can be ....
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....r dated 29.2.2012 held that if the interest has been charged on advances made by the assessee in subsequent assessment year in its entirety, then there cannot be any further addition in the assessment year under consideration. We have considered this argument also. The assessee also taken a plea before us that though the advances made by the assessee to its sister concerns at free of interest in earlier year, however, the interest on these advances has been accounted in subsequent years. Being so, the order of the Tribunal cited supra is to be followed. We are in full agreement with the argument of the assessee's counsel for this proposition, if the advances made by the assessee to its sister concerns at free of interest on commercial expediency as prevailing in the earlier year. The assessee before us made contradictory arguments that it has offered the interest on these advances in subsequent years, being so it cannot be brought into tax in assessment year under consideration. In our opinion, one has to see the method of accounting employed by the assessee. The assessee being following mercantile system of accounting, it has to be accounted on accrual basis. On the other ha....
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....ance amount could not be recovered from them. As further noted by the Assessing Officer, the assessee has submitted whereabouts of some of the parties were not known and some parties have refused to return the advances. However, the Assessing Officer was not convinced with such submissions of the assessee. He noted that the said amounts are not bad debts and hence provisions of section 36(2) are not applicable to the same. He noted that the assessee has not filed account copies of those parties. It failed to furnish any evidence regarding the nature of goods and services those parties were to render to the assessee. He further mentioned that the assessee has not filed any evidence regarding the efforts made by it to recoup the advances. He further noted that most of the parties are well known concerns. With these reasons, he held that the claim of the assessee for deduction of the amount of Rs. 5,21,62,330 cannot be allowed. Thus, he disallowed the said amount. 13. The learned AR submitted that the said amount of Rs. 5,21,62,330 were given as advances to various parties, either for materials or for rendering services. The parties have failed to supply goods/ render services and ....
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....ist, a sum of Rs. 1,80,330 is shown against Container Corporation of India, Rs. 2,00,000 shown against Divya Electricals, a sum of Rs. 2,42,000 shown against Reliance Industries Ltd., a sum of Rs. 2,91,554 shown against Gujarat Alkalies & Chemicals Ltd., Rs. 3,42,372 against The Indian Hotels Ltd., a sum of Rs. 7,56,886 shown against Ranbaxy Laboratories Ltd., a sum of Rs. 9,19,880 shown against Sun Pharmaceuticals Ltd., a sum of Rs. 11,52,649 shown against IOC Ltd., a sum of Rs. 11,74,949 against Hindustan Petroleum Corporation, a sum of Rs. 22,23,165 shown against Singareni Collieries Co. Ltd., and a sum of Rs. 30,40,938 against Voltas Ltd., etc. It is unbelievable that such well known reputed concerns, including Government Undertakings, have refused to return the advances. As stated above, various amounts shown against different parties, do not constitute trade debt, and unless it is a trade debt, the same cannot be allowed deduction, following ratio of decision of Hon'ble Andhra Pradesh High Court in CIT v. Sirpur Paper Mills [1983] 144 ITR 393. In this context, it is pertinent to reproduce the observations made by the Hon'ble High Court in the said decision: "In A. E. Thoma....
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....y for the assessee to establish that a debt had become bad in the previous year, before getting deduction, and mere write off as irrecoverable of debt or part thereof is substantial compliance with the provisions of section 36(1)(vii) of the Act. The question is, if the said entry of write off of bad debts or part thereof made in the books of account is conclusive and Assessing Officer is precluded from making enquiries, before receiving/accruing the deduction under the scheme as provided for under the Income-tax Act, entries which have been made as to whether the same are genuine entries or imaginary and fanciful entries, qua the same the Assessing Officer is fully empowered to make enquiry, however, wisdom of the assessee cannot be in such manner questioned and no demonstrative or infallible proof of bad debt having become bad is required, and commercial expediency is to be seen from the point of view of the assessee, depending on the nature of transaction, capacity of debtor, etc., but qua entry, semblance of genuineness has to be there and the same should not be mere paper work. All the citations put before us by the assessee's counsel wherein genuineness of the entries was nev....
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....ught in by way of amendment w.e.f. 1st April, 1989, under s. 36(1)(vii) inquiry is not permissible. 18. Thus, as it is evident from the provisions of section itself, the Assessing Officer as well as the appellate authority have examined the claim of the assessee and held that the assessee has failed to prove that the debt in question had actually become irrecoverable during the previous year in question. The assessee only furnished list of debts and the details called for by the authorities have not been furnished. The claim of the bad debts has been disallowed by considering the material on record by finding as a fact that the debt has not been proved as bad debt. Even otherwise as held by the jurisdictional High Court in the case of Sirpur Paper Mills (supra) only the debt which constitutes trade debt could be claimed as bad debt if it is irrecoverable. In the present case it is observed by the lower authorities that the debts which were written off were not trade debts as seen from para 13.2 of the CIT(A) order. Accordingly, we confirm the order of the CIT(A) on this issue. 19. The next ground in this appeal is with regard to sustaining disallowance of Rs. 24,75,026 toward....
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....ards salary, travelling, lodging and boarding, conveyance, imprest to filed staff etc., for their visits to various placed in the course of carrying on the business and such advances of Rs. 24,75,026 were written off as the assessee could not recover the same from some of the employees as those employees had left the organisation without settling their dues. Therefore, the CIT(A) is not justified in sustaining the disallowance of advances of Rs. 24,75,026 written off by the assessee. 22. The learned DR submitted that the assessee's contention is that the amounts have been advanced to their employees towards salary and for travelling in connection with visit of those employees to different places during course of business of the assessee company. Thus, admittedly, the said amounts were not in the nature of debts and hence, as rightly stated by the Assessing Officer, the same cannot be considered as bad debts. From the list of such advances written off, furnished before the CIT(A), it can be seen that a sum of Rs. 1,65,912 is shown against Sri S. Kishore Kumar. It has not been explained as to when and for which purpose such huge amount has been given to that employee. A sum of Rs.....