TaxTMI 
TaxTMI 
2016 (4) TMI 958
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....ut of interest could have been made u/s 36(1)(iii). (iii) That the CIT(A) failed to appreciate the submission of the assessee that Zira Co-operative Sugar Mills was wound up in 2004-05 and the debt has gone bad therefore no interest could have been charged from the Sugar Mill during the year under consideration. (iv) That the CIT(A) was not justified in sustaining the disallowance of Rs. 2,58,086/- made by the AO on account of Penal Interest. Both of AO and CIT(A) failed to understand the nature of the penal interest which was clearly compensatory in nature." 3. The brief facts of the case as noted in the assessment order are that the assessee is a Co-operative Society engaged in the business of manufacturing of Sugar and Molasses. The return of income in this case was filed on 29. 09.2008 declaring Nil income and which was taken up for scrutiny. During the course of assessment proceedings, the Assessing Officer observed that assessee had incurred an expenditure of Rs. 2,58,086/- as penal interest which was charged by the Bank for overdrawing the cash credit limit. The Assessing Officer show caused the assessee that since it was a penalty and therefore, it was not an admissible ....
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....re us. 8. At the outset, the learned AR submitted that assessee had paid interest on its cash credit limit which was utilized for making payments to cane growers and in this respect our attention was invited to (PB-6) where a copy of certificate of Bank was placed and wherein the Bank had certified that interest amounting to Rs. 86,57,029/- was charged on cash credit limit granted for clearing cane payments. The learned AR in view of this certificate submitted that the interest expenditure was incurred for the purposes of business and therefore, disallowance made by Assessing Officer and partly upheld by learned CIT(A) was not justified. 9. Arguing further the learned AR submitted that investment in shares of Sugarfed was made by assessee way back out of capital of Rs. 449.40 lacs made available by Punjab Government and therefore the investment was made out of interest free and surplus funds. It was further submitted that the investments in Sugarfed Punjab was made purely based upon commercial expediency as Sugarfed was controlling body for all Sugar Co-operative Societies. Without prejudice to the above it was submitted that the investment was made in earlier years and last inve....
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....ghtly upheld the part disallowance. 12. As regards the loan to Society the learned DR submitted that as per argument of learned AR, the said Society M/s Zira Sugar Mills was wound up in 2004 then how the amount is outstanding in the books of assessee for the Asst. Year 2008-09. He argued that if the society was wound up in 2004, then assessee should have written off the amount in that year itself. He submitted that continuation of reflection of loan in the balance sheet of assessee company shows that amount might be recoverable and therefore, this requires further investigation. 13. As regards the other addition on account of penal interest the learned DR relied upon the order of authorities below. 14. We have heard the rival parties and have gone through the material placed on record. We find that it is an undisputed fact that assessee had made investment in the shares of Sugarfed, Punjab in earlier years and the last investment was made on12.09.2003. It is also an undisputed fact that Punjab Government through Registrar of Cooperative Societies had invested a capital equivalent to an amount of Rs. 449.40 in the assessee's business and it was out of this amount of capital t....
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....rest as there was no point in continuing to debit interest while not receiving it. It is also a fact that the said society was put under the liquidation vide order of Registrar Co-operative Society in F.Y. Year 2004-05 as is apparent from (PB-8), therefore, in the present year, it was not appropriate for the assessee to charge interest on the said loan as the recovery of principal itself was in doubt. The argument of learned DR that when the society was wound up in 2004-05 how the amount was appearing in the balance sheet of assessee as on 31.3.2008, we find that this is not a relevant issue in this case as the issue is of disallowance u/s 36(1)(iii) on loans which has become bad and hence not recoverable. It is an undisputed fact that loan was given way back in 1990 and that too out of surplus funds and therefore, there was no nexus between loan advanced and interest paid. Therefore, no disallowance could have been made u/s 36(1)(iii) of the Act. As regards argument of learned DR that why this amount was not written off in the year 2004-05 itself we find that the order of Registrar of Co-operative Society placed at (PB-8) is for appointment of a liquidator whereby the liquidator t....