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The Nakodar Co-Operative Sugar Mills Ltd. Versus DCIT, Phagwara

2016 (4) TMI 958 - ITAT AMRITSAR

Disallowance u/s 36(1)(iii) - of interest paid to the bank on C/C account - Held that:- 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 plac .....

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interest on funds used for making payments to Cane growers cannot be said to be for non business purposes only on the basis that the assessee was not able to recover its dues from a loanee to whom loan was given out of its surplus funds in earlier years. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Suraj Dev Dada (2014 (5) TMI 625 - PUNJAB & HARYANA HIGH COURT ) has held that where the recovery of principal amount was difficult the addition on account of notional interest on ac .....

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s are "compensatory" in nature as assessee has not violated any law but the extra payment has been made for lower valuation of stocks pledge with Bank. Therefore, we hold that the penal interest was in the nature of compensatory payment and allowable u/s 37(1) - Decided in favour of assessee - ITA No. 701 (Asr)/2014 - Dated:- 28-3-2016 - A. D. Jain, JM And T. S. Kapoor, AM For the Appellant : Shri Y K Sud, CA For the Respondent : Shri Tarsem Lal, DR ORDER Per T S Kapoor ( AM ) This is an appeal .....

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res of Sugarfed. (ii) That both AO and CIT(A) failed to appreciate that there was no nexus of interest paid to the bank on C/C account which was purely for financing of the stocks of the notional interest chargeable on advance to Zira Co-operative Sugar Mills and investment made in share of Sugarfed and therefore no disallowance out 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 wou .....

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-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 ₹ 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 penalt .....

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r observed that assessee had purchased shares of Sugarfed (Punjab) amounting to ₹ 53.82 lac during the earlier years but no dividend was received from the year 2003-04 to 2007-08. He further observed that assessee was not able to recover an amount of ₹ 40 lacs alongwith accrued interest of ₹ 58.59 lacs from M/s Zira Co-operative Sugar Mills Ltd. Therefore, he held that the borrowings made by assessee were not made for business purposes and accordingly interest payable on this a .....

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t was also submitted that the loan amount cannot be linked to Bank borrowings which were strictly utilized for making sugarcane payments and other incidental expenses. The Assessing Officer, however, was not satisfied with the submissions of assessee and therefore, he disallowed the interest amount of ₹ 87.74 lacs which was paid to Bank u/s 36 (1)(iii) of the Act. 6. Aggrieved with the order the Assessing Officer filed appeal before learned CIT(A) and the learned CIT(A) upheld the addition .....

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earned 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 ₹ 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 o .....

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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 investment was made on 12.09.2003 and in all these years the Assessing Officer had not held that these investments were not for business purposes nor any disallowance was made u/s 36(1)(iii) of the Act. In view of the above, it was submitted that disallowance made by Assessing Officer and parlty upheld by learned CIT(A) was no .....

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be recovered as Zira Sugar Mill had gone sick and was ultimately wound up in Financial Year 2004-05 and in this respect our attention was invited to (PB-8) where a copy of order of Registrar Co-operative Societies was placed. The learned AR further submitted that detailed submissions were made to learned CIT(A) which the learned CIT(A) had recorded in his order but without considering the written submissions and without considering the case laws relied by assessee has wrongly upheld the addition .....

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was charged as per terms and conditions between assessee and Bank. Reliance in this respect was placed on the case law of Jamna Auto Industires vs. CIT decided by Punjab & Haryan High Court and reported at 299 ITR 92 for the proposition that damages for breach of contract was a deductible expenditure. 11. The learned DR, on the other hand, submitted that though assessee had been claiming that interest free funds were utilized for making investments in the shares of Sugarfed but nothing has b .....

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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 year .....

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uthorities simply brushed aside the submissions of assessee and held that the investment was made for non business purposes, therefore, arrived at the conclusion that disallowance out of interest payment be made. However, while arriving at this decision the learned CIT(A) has ignored that during the year no investment in the shares of Sugarfed was made and rather investment related back to earlier years and in earlier years, there was no disallowance made by the authorities u/s 36(1)(iii) of the .....

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body of all Co-operative Sugar Mills in Punjab and investment in this company by Sugar Mills including assessee is out of commercial expediency and cannot be held to be for non business purposes. The Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. vs. CIT 379 ITR 347 (SC), has held that advances to subsidiary companies to provide additional margin to them to meet working capital requirements is business expediency and therefore, interest paid on borrowing was not to be disallowed, .....

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B-7). The loan carried interest @ 16.5 per annum. The assessee has been debiting interest accrued up to 31.3.1998 but when it failed to recover that interest, then, it stopped providing interest 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 .....

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s 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 takes charge of any sick society. The assessee may be in the hope of recovering part of its dues from the liqui .....

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loanee to whom loan was given out of its surplus funds in earlier years. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Suraj Dev Dada 367 ITR 92(P&H) has held that where the recovery of principal amount was difficult the addition on account of notional interest on account of loan to said company cannot be made u/s 36(1)(iii) of the Act. In view of the above, entire facts and circumstances we hold that there was no nexus between interest paid and loans made by assesse .....

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gation which the assessee is bound to pay as per terms and conditions of the agreement. The Hon'ble Punjab & Haryana High Court in the case of Jamna Auto Indus. Vs. CIT 299 ITR 92 (P&H) has differentiated the damages for breach of contract and penalty. The Hon'ble Court has held that damages for breach of contract are deductible expenditure. The relevant findings of the Hon'ble Court are reproduced below. "Whenever damages are to be paid by an assessee for the breach of .....

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