2025 (4) TMI 918 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - borrowed funds are utilized by paying huge interest and the assessee had advanced the loans to third parties without any commercial exigency - as alleged assessee has diverted the interest bearing funds without charging any interest - HELD THAT - It is an admitted fact that the two concerns to whom advances made were not related parties. It is also an admitted fact that the assessee was charging interest from the above concerns from assessment year 2013-14 till assessment year 2015-16 and was offering the same to tax although the above two concerns have failed to pay any interest to the assessee company. It is also an admitted fact that the assessee during the assessment year 2016-17 did not charge any interest from the said companies on the ground that when the recovery of the principal is in doubt there is no point in charging any interest from the said companies. We find merit in the arguments of assessee that the assessee could have charged interest and could have claimed the same as bad debt. However as a prudent businessman the assessee has not recognized the interest on such doubtful debts. In our opinion merely because the assessee has not recognized the interest income in respect of the outstanding amount from these two concerns it cannot change the colour of such advance which is a commercial transaction . Since the impugned loans / advances were given in the course of business and are commercial transactions for which the assessee was charging interest from assessment year 2013-14 till 2015-16 and only because of non-payment of interest from the said parties the assessee stopped charging interest for the impugned assessment year and to recover the principal and interest the assessee has entered into a Joint Venture Agreement with the said concerns therefore such commercial transactions cannot be termed as diversion of interest bearing funds. Provisions of section 36(1)(iii) of the Act are not applicable to the facts of the present case. Decided in favour of assessee. Addition on account of melting charges - Addition by estimating the melting gain at 4% of metal issued as against 1.70% shown by the assessee - HELD THAT - Since admittedly the assessee in the instant case has maintained books of account which were not rejected by the Assessing Officer therefore respectfully following the decision of the Tribunal in assessee s own case for assessment year 2017-18 2023 (3) TMI 1569 - ITAT PUNE and in absence of any contrary material brought to our notice we set aside the order of the CIT(A) / NFAC and direct the Assessing Officer to delete the addition on account of melting charges - Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the disallowance of interest under Section 36(1)(iii) of the Income Tax Act, 1961, amounting to Rs. 2,95,58,034/- was justified.
Whether the addition of Rs. 1,06,90,398/- on account of melting gain was justified.

ISSUE-WISE DETAILED ANALYSIS

Disallowance of Interest under Section 36(1)(iii)

Relevant Legal Framework and Precedents: Section 36(1)(iii) of the Income Tax Act, 1961, pertains to the allowance of interest paid in respect of capital borrowed for business purposes. The court referred to precedents such as CIT vs. Vasisth Chay Vyapar Ltd. and S.A. Builders to evaluate the applicability of the law.
Court's Interpretation and Reasoning: The Tribunal considered the nature of the advances given to M/s. Ashoka Builders and Developers and Ashoka Engineering Co. It noted that these were commercial transactions and not related-party transactions. The court emphasized that the assessee had charged interest in previous years and had offered it to tax, but stopped charging interest when the recovery of the principal became doubtful.
Key Evidence and Findings: The Tribunal found that the assessee had entered into a Joint Venture Agreement with the two companies to recover the principal and interest. It also noted that the assessee had not recognized the interest income due to the doubtful recovery of the principal, which was a prudent business decision.
Application of Law to Facts: The Tribunal concluded that the provisions of Section 36(1)(iii) were not applicable as the advances were commercial transactions made in the course of business, and the non-charging of interest was due to the doubtful recovery of the principal.
Treatment of Competing Arguments: The Tribunal rejected the Department's argument that borrowed funds were diverted without commercial exigency. It found that the assessee's decision not to charge interest was commercially justified.
Conclusions: The Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition, allowing the assessee's appeal on this issue.

Addition on Account of Melting Gain

Relevant Legal Framework and Precedents: The issue revolved around the estimation of melting gain and whether the Assessing Officer was justified in adopting a higher percentage than what was declared by the assessee. The Tribunal referred to its earlier decisions in the assessee's own case for guidance.
Court's Interpretation and Reasoning: The Tribunal noted that the assessee maintained regular books of account, which were audited and not rejected by the Assessing Officer. It emphasized that the variation in melting gain percentages was due to the varying purity of old ornaments.
Key Evidence and Findings: The Tribunal observed that the assessee's books of account were not found to be defective, and the melting gain register was properly maintained.
Application of Law to Facts: The Tribunal found that the Assessing Officer's estimation of melting gain at 4% was arbitrary and not based on any defect in the assessee's records. It relied on the Tribunal's previous decisions in the assessee's favor for similar issues.
Treatment of Competing Arguments: The Tribunal rejected the Department's reliance on market averages and previous years' results, emphasizing the lack of defects in the assessee's records.
Conclusions: The Tribunal set aside the order of the CIT(A) and directed the Assessing Officer to delete the addition on account of melting charges, allowing the assessee's appeal on this issue.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Since the impugned loans / advances were given to M/s. Ashoka Builders and Developers and Ashoka Engineering Co. in the course of business and are commercial transactions for which the assessee was charging interest from assessment year 2013-14 till 2015-16... such commercial transactions cannot be termed as diversion of interest bearing funds."
Core Principles Established: The Tribunal reaffirmed that non-recognition of interest income due to doubtful recovery does not change the commercial nature of advances, and arbitrary estimations of melting gain without defects in records are unjustified.
Final Determinations on Each Issue: The assessee's appeal was allowed on both issues. The disallowance of interest under Section 36(1)(iii) was deleted, and the addition on account of melting gain was set aside.

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