TMI Blog2011 (7) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... ain other parties. The Assessing Officer found that the assessee had not charged interest from M/s Standard Sulphonators Ltd. against deposit and from M/s Uniflex Industries Ltd. against loans and deposits. He also noticed that the assessee had charged interest from sister concern, M/s Industrial Enterprises and paid interest to M/s Kuteer Finance and M/s Kashi Prasad Roop Kishore which were also sister concerns of the assessee group. He, therefore, asked the assessee to explain as to why interest paid on loans/deposits may not be disallowed proportionately on the advances given to M/s Standard Sulphonators Ltd. and M/s Uniflex Industries Ltd. The assessee submitted that the security deposit of ₹ 50 lakhs was given to M/s Standard Sulphonators Ltd. for the use of land paper which were mortgaged to the State Bank of India. The Assessing Officer did not accept the explanation of the assessee and disallowed the interest on security deposit for land @14.50%on ₹ 50 lakhs. The said disallowance was worked out at ₹ 7.25 lakhs. The Assessing Officer also disallowed interest in case of M/s Uniflex Industries Ltd. at ₹ 7,69,931 and of ₹ 16,65,342 in case of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s charged to bank as collateral security. Since the deposit has been made for the purpose of the business, the proportionate disallowance of ₹ 7,25,000/- is not called far. 6. The appellant had supplied detergents to Standard Sulphonators Pvt. Ltd.(SSPL) and procured packaging materials from Uniflex Industries Pvt. Ltd. in earlier years. SSPL has suffered huge looses in the business and debit balance is in respect of goods supplied as well as money advanced. Uniflex has expanded its capacity on our assurance of enhanced supplies but due to discontinuance of contract with P G with us, we could not procure material from them and money was advanced to help them out in the crises. However, Uniflex has repaid the amount during the year. Copy of account of both the parties is attached. The average balance in the account of Uniflex Industries Pvt. Ltd. was ₹ 53.03 lacs and in the account of Standard Sulphonators Pvt. Ltd. was ₹ 114.82 lacs. The money was advanced due to commercial expediency as survival of both the company will result in optimum capacity utilization of the appellant's business. Hence disallowance of interest amounting to ₹ 7,69,931/- on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would have been ₹ 6,62,500/- instead of ₹ 7,25,000/-. The assessee also furnished statement of accounts of the parties in question and the sanction note of State Bank of India in support of its contention that the land of M/s Standard Sulphonators Ltd. was provided as security and the loans were against stocks and book debits of the assessee. 5. The ld. CIT(A) after considering the submissions of the assessee observed that the security deposit of ₹ 50 lakhs with M/s Standard Sulphonators Ltd. was for their land mortgaged with bank to secure the loans to the assessee and that the debit balance of M/s Uniflex Industries Ltd. was in respect of advances for purchase of packing material, etc. in the earlier years which had been received back during this year. He further observed that the other debits in the account of M/s Standard Sulphonators Ltd. were related to the sale of detergents and occasional advances in the course of business with them. The ld. CIT(A) was of the view that the interest free debits were in the course of business activity of the assessee and it was not open for the Assessing Officer to override business prudence of the assessee in makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount outstanding in the accounts of the aforesaid companies because the assessee was charging and also paying interest to other concerns to whom loans were given or deposits were received as the case may be. In the present case, it is noticed that the assessee utilized land belonging to M/s Standard Sulphonators Ltd. as a security against loan raised from the bank, this fact is also clear from page 17 of the assessee s compilation, which is a copy of certificate issued by the State Bank of India, Civil Lines, Kanpur wherein it is certified that the property owned by M/s Standard Sulphonators Ltd. was pledged with the bank as security against loan provided to the assessee. The value of the said property as per valuation report dated 20.9.2007 was ₹ 2.25 crores. Since the company, M/s Standard Sulphonators Ltd. had provided its land as security to the bank against loan taken by the assessee and in lieu of that the assessee deposited a sum of ₹ 50 lakhs with the said company i.e. M/s Standard Sulphonators Ltd., so it cannot be said that the said amount of ₹ 50 lakhs was an interest free advance or loan. Therefore, the Assessing Officer was not justified in maki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,18,324 had been claimed by the assessee as bad debts. According to the Assessing Officer, the assessee filed details and copy of accounts of few parties, but the nature of transaction in few of the cases could not be verified in the absence of details. The Assessing Officer pointed out that in the following cases the transaction could not be verified:- S.No. Name of the Party Amount in Rs. S.No. Name of the party Amount in Rs. 1. Jai Mata Di Agency Rs.6,212/- 2. Gaurav Agencies Rs.5,287/- 3. Bansal Rs.5,569/- 4. Bibbbnl Rs.3,378/- 5. Jai Bajrang Rs.5,173/- 6. Ambey Trading Rs.8,138/- 7. Devendra Rs.5,372/- 8. Ajai Kumar Rs.4,069/- 9. Shiv Agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 63,935/- + ₹ 3,60,720/-) Total disallowance of ₹ 5,81,875/- 12. The Assessing Officer also added a sum of ₹ 10,73,604 which were written off and debited in the profit and loss account by observing as under:- 6.1 Balance written off:- Assessee has filed a list of cases in which balances have been written off and debited in P L A/c total at ₹ 24,98,616/-. Copies of account in most of the cases have been filed except in the cases of Senior Box Factory for ₹ 23,203/-, Kaushal Commercial Artist for ₹ 1,100/-, Vijay Transport Agency for ₹ 1,950/-. Kamla Traders for ₹ 22,612/-, A. Z. ZafariforRs.33,733/-. 6.2. In the case of IPCL assessee vide his reply dated 22.02.2005 has submitted that a special discount of ₹ 350 per MT on purchases of LAB was claimed in F.Y. 2000-01 and reduced the cost of purchases. M/s IPCL did not allow the discount claimed by the assessee. Therefore, the same has been written off during the previous year. Similarly in the case of M/s Vishwa Arganics (P.) Ltd. rate difference was claimed by the assessee in F. Y. 1999-00. Later on, on settlement of account a sum of ₹ 1,84,708/- has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as bad debts during the year. The appellant had filed complete details of the accounts written off and also filed copy of accounts of major accounts. The appellant had produced complete books of accounts for verification of the amount written off. The learned ACIT had disallowed ₹ 2,27,755/- on the ground that the copies of account were not filed. The disallowance of bad debts written off amounting to ₹ 2,27,755/- is totally unjustified when all the books were verified by the learned ACIT. 2. During the year the appellant had settled old dispute with Gujrat Heavy Chemicals Ltd. and paid the settled amount. Gujrat Heavy Chemicals Ltd. was the supplier of raw materials. Since the amount was settled and paid during the year, the appellant had claimed the same as expenditure under the head bad debts/ balance written off. The learned ACIT had disallowed the same on the ground that details of settlement were not filed though he had verified from the books of accounts that the amount was paid to settle the old dispute. The learned ACIT failed to note that a contractual liability crystallizes only when the assessee agrees to pay. Reliance is placed on CIT v. Oriental Moto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases of balance written off the amount had been debited to the profit and loss account and credited to the party account. Hence all the balance written off should be allowed as a deduction. 14. It was further submitted as under:- The learned ACIT had also added ₹ 4,88,308/-, credit balance outstanding in the account of Triveni Oil Tanker u/s 41 being infractuous liability because confirmed copy of account was not filed. The learned ACIT failed to understand that unless the appellant had obtained benefit in respect of any liability by way of remission or cessation, the same could not be treated as income u/s 41 of the Income Tax Act. The aforesaid amount was neither written back by the appellant nor any benefits by way of remission or cession were obtained by the appellant. In fact the credit balance was paid in the subsequent period. In these circumstances, the additions of ₹ 4,88,308/- u/s 41 of the Act is totally unjustified and liable to be deleted . 15. The ld. CIT(A) after considering the submissions of the assessee observed that the write offs were in respect of customers balances, settlement of claims and disputed recoveries of advances for supplies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t vide ground No. 3 relates to the deletion of addition made by the Assessing Officer out of disallowance of foreign exchange fluctuation. 22. The facts related to this issue in brief are that the Assessing Officer during the course of assessment proceedings noticed that the assessee debited a sum of ₹ 5,63,427 in the profit and loss account as exchange rate difference. The explanation of the assessee before the Assessing Officer was as under:- Foreign exchange fluctuation amounting to ₹ 5,63,427/- represents the premium paid in respect of forward purchase of USD 7,30,000 relatable to the period under consideration. We are enjoying cash credit limit from the State Bank of India. During the year we have converted part of the rupee cash credit limit in to Foreign currency Loan (FCNRB) and to hedge the exchange risk we have taken forward cover in respect of 730000 USD. The one fourth of the total premium paid has been charged to the profit and loss account. The working and the evidences have already been submitted. 23. The assessee also filed a copy of letter written to the Chief Manager (Commercial), State Bank of India, Overseas Branch, Varansi. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r amounting to ₹ 5634277/- is charged to the Profit Loss Account. The amount of premium paid is fixed and there is no element of speculation in the transaction. Rather the transaction of forward contract to purchase the equivalent amount of USD has set to rest the possible fluctuation liability of the assessee company at the time of repayment of loan in USD. Further by entering into the said foreign currency borrowing and the coverage through forward contract, the assessee company has reduced its cost of borrowings to 11.021% including the premium cost as against 14.5% interest charged by the bank on cash credit Indian currency account. The detailed calculations have been furnished by the appellant. Thus, there is no element of speculation in the transaction and it is held that the transaction is for the business of the assessee company. In view of above observations, the AO was not justified to make addition of ₹ 5,63,427/- on account of foreign exchange rate difference. The same is directed to be deleted. Ground of appeal is accordingly allowed. 26. Now the Department is in appeal. 27. The ld. D.R supported the order of the Assessing Officer while the ld. cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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