TaxTMI 
TaxTMI 
2016 (9) TMI 693
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.... 3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that finance cost of Rs. 19,82,930/- was deductible expense in A. Y.2009-10. 4. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that the onus was on A.O. and not on assessee to prove that interest free advance was from borrowed funds. 5. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest even though no business is carried on by the assessee and the only income earned by the assessee from rent and capital gain does not qualify under the head Income from Business . 6. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest pertaining to business which has ceased to exist and therefore not eligible for deduction of interest expense. 7. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in deleting the disallowance of interest by relying upon the decision of the Hon'ble Apex Court in the case of Veecumsees v/s CIT (1996) 86 Taxman 243 (SC) which is ....
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....sessee has mutually agreed with the lenders that the provision of interest would be made in the account in the year, the firm (borrower) would be able to make the payment does not automatically give the liberty to follow such agreement. It was argued by ld. DR that section 145 contemplates only two accounting system either cash or mercantile system and it does not allow any other system. So, if the assessee is following the mercantile system then the liability does not get postponed merely because quantification is done after the year, but accrued in the previous year. Ld. DR relied upon the judgement of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT 82 ITR 363 (SC). It was further argued by ld. DR that proviso to section 40(a)(ia) deals with the situation where in respect of any such sum, i.e. in the present context being 'interest' paid or payable on which tax deductible but not deducted will be allowed deduction in the year TDS is deducted. As per the arguments of ld. DR no interest was paid or payable and no provision was at all made in the years 1999-2000, 2004- 05, therefore no deduction of interest paid could have been allowed by CIT(A). O....
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....and appears to be valid arrangement. Later on the appellant's textile business was dosed down due to adverse business conditions, and also a part of the loan was recovered by lenders by selling the pledged shares. It is understandable that in such a case, where the borrower's financial condition was not sound, the lenders might wish to postpone the recognition of interest income which may or may not be realized at all in future. Conversely in such a case, the appellant (borrower) may also not be expected to claim or provide for the interest expenses on accrual basis unilaterally as the certainty of the payment of the same is not definite. In fact, the said interest liability has been crystallized during the year, as earlier it was not certain whether the interest would be payable or not. The appellant has paid the interest after deducting TDS in current assessment year, and accordingly claimed the interest expenses in current assessment year. Since the appellant was in a position to pay the interest component, the same was provided and paid during the year under consideration. As such it is an allowable expenditure. 13. In view of the facts and circumstances explai....
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....onsideration that as per the facts and circumstances of the present case where the borrowers financial condition was not sound, the lenders might wish to postpone the recognition of interest income which may or may not be realized at all in future. Ld. CIT(A) has also appreciated that in the facts of the present case the said interest liability has been crystallized during the year, as earlier it was not certain whether the interest would be payable or not. Since the assessee has paid the interest after deducting TDS in current assessment year, and accordingly claimed the interest expenses in current assessment year as the assessee was in a position to pay the interest component and hence the same was provided and paid during the year under consideration. Ld. CIT(A) has rightly found no justification in disallowing such claim of the assessee for the payment of interest. It was also appreciated by ld. CIT(A) that since the assessee has deducted the TDS in AY 2009-10 under consideration therefore it would automatically be allowed in this year as per the provision of section 40(a)(ia). Ld. CIT(A) has also found the facts of the present case distinguishable from the facts of the case o....
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....her submitted that the interest cannot be allowed in view of the assessee advancing interest free loans to various parties amounting to nearly Rs. 2.82 crores, and in order to support his arguments ld. DR relied upon CIT vs. Avery Cycle Industries India Ltd. (2008) 209 CTR 167 (P&H) and CIT vs. Abhisek Industries Ltd. (2006) 286 ITR 1 (P&H). 9. On the other hand ld. AR representing the assessee relied upon the orders passed by CIT(A) and submitted that interest free loan given to the sister concern were partly allowed out of profit generated from the firm. It was argued by ld. AR that the AO has failed to take into consideration the fact that the family members of promoters has given interest free loan to the extent of Rs. 147.28 lakhs and partners capital account increased by Rs. 138.53 lakhs. Therefore, the decision of the AO to the effect that the interest free advance given to the sister concern out of the borrowing money is altogether incorrect. 10. We have heard the counsels for both the parties on this ground and we have also perused the material placed on record as well as the orders passed by the revenue authorities. Ld. CIT(A) had dealt with the other ground in para....
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....ot be denied. 27. Now coming to the second issue, the appellant has shown by giving figures that it has advanced interest free loans out of interest free loans from family & partner's capital. The position of the borrowed funds and the interest free funds given to the sister concerns are as under:- Description Balance as on 1/4/2000 Less: interest free loans included in loan schedule as of 1-4- 2000 Balance interest bearing loans as at 1/4/2000 Loans amount outstanding as on 31/3/2009 Increase/ Decrease 1 Loans- Secured 139.89 0 139.89 Nil Paid in 2004- 05 Interest paid for earlier Yr 2 Loans unsecured 163.28 91.52 71.46 98.40 (+)26.64 3 Loans & Advances paid to sister concern 237.11 0 237.11 282.58 (+) 45.47 4 Interest free loans from family 91.52 91.52 238.80 (+)147.28 5 Partners Capital a/c 171.54 debit 171.54 debit 110.28 (-)77.27 =33.01 (+)138.53 28. From the above table, the following facts emerge:- "2) Unsecured loans shown at Sr.No.2 above (balance Sheet Schedule A), amounting to Rs. 163.2....
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....given to sister concerns in present case. Both issues have been discussed in detail by ld. CIT(A) and the CIT(A) while dealing with the first issue has rightly considered the facts of the present case and observed that the loan was initially taken for textile business, which has been closed/suspended due to adverse business conditions but the assessee is still showing income from certain other sources such as rental income and profit on sale of shares though not under the head " Profits or gains of business or profession". Ld. CIT(A) while considering the latter judgement of Hon'ble Supreme court in the case of Veecumsees (supra) had rightly come to the conclusion that business of the assessee is a composite business during the period under consideration and expenditure is incurred for this composite business activities. Hence, the ld. CIT(A) has rightly held that the claim of the assessee of interest cannot be denied. The ld. CIT(A) has also considered the figures regarding advance of interest free loans out of interest free loans from family and partner's capital and the ld. CIT(A) after considering the facts and figures and documentary evidences has correctly noticed that the in....