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2016 (9) TMI 693 - ITAT MUMBAI

2016 (9) TMI 693 - ITAT MUMBAI - TMI - Allowability of interest as deductible expenses - applicability of provision of section 40(a)(ia) - Held that:- CIT(A) judicially taken into consideration 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 .....

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llowing 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). - Decided in favour assessee - Interest attributable to loans - Whether the interest can be disallowed due to the closure of business/profession closure of one of the activities? - whether the interest expenses can .....

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or profession”. Ld. CIT(A) while considering the latter judgement of Hon’ble Supreme court in the case of Veecumsees (1996 (4) TMI 6 - SUPREME Court) 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 regardin .....

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rder the AO had not examined in detail to establish that the interest free loans to sister concerns were out of borrowed funds and therefore in the absence of proving any nexus between the borrowed funds and interest free loans given by the assessee, it was not justifiable for the AO to make any disallowance. - Decided in favour assessee - ITA No.6934/Mum/2014 - Dated:- 5-8-2016 - SHRI JASON P. BOAZ, AM AND SHRI SANDEEP GOSAIN, JM For The Appellant : Shri A. Kumbhar For The Respondent : Shri Rus .....

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and in law, the ld. CIT(A) has erred in allowing the interest of ₹ 38,36,600/- as deductible expense in A.Y.2009-10. 2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that interest of ₹ 38,36,000/- has become payable in F. Y.2008-09 and not in F.Y.1999-2000 to 2004- 05. 3. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that finance cost of ₹ 19,82,930/- was deductible expense in A. Y.2009-10 .....

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ess . 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 disting .....

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t craves leave to amend or alter any ground or arid a new ground which may be necessary. 3. The brief facts of the case are that the assessee was running textile processing unit and the return of income disclosing total income at ₹ 55,96,880/- was filed on 30th July, 2009. Subsequently the case was selected for scrutiny. After serving statutory notices and seeking reply of the assessee, the order of assessment u/s 143(3) of the Income Tax Act, 1961 was passed by DCIT(A) on 05/12/2011. Whil .....

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sed by the assessee are inter-connected and inter-related therefore we thought it fit to dispose off the same through the present common order. This ground raised by the revenue relates to the issue of allowing the interest of ₹ 38,36,600/- as deductible expenses in A.Y. 2009-10. In this respect, ld. DR appearing on behalf of revenue supported the orders passed by AO and submitted that although the assessee has paid interest to its lenders and that is why it has made TDS from such payments .....

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wer) 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 Cour .....

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no deduction of interest paid could have been allowed by CIT(A). On the other hand, ld. AR has relied upon the orders passed by CIT(A) and had submitted that the AO has not considered the factual legal position as made by the assessee. At the time of assessment it was argued by ld. AR that although the AO had expected that interest were paid and TDS was deducted and paid such interest in the instant case since the assessee is maintaining the books of accounts on mercantile basis and passed entri .....

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ee and repaid in the year 2004-05, however compensation by way of interest was paid much latter in AY 2009-10. It was also pointed out that the lender company also offered the said income for taxation in the AY 2009-10 on the basis of TDS certificates issued by firm. In this respect ld. AR also drawn our attention to the paper book which contains certificates, P& L A/c, TDS certificates etc. 5. We have heard the counsels for both the parties on this ground and we have also perused the materi .....

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is not disputed rather the dispute is with regard to the year in which the interest expenses should be allowed. The appellant has contended that the interest was not provided for in its books earlier due to the arrangement between the parties to pay the principle amount first and then the interest would be accounted for when the appellant is able to pay the same. Such an arrangement has been made looking at the financial condition of the business and appears to be valid arrangement. Later on th .....

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terest 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 p .....

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n those years in view of the provisions of Sec. 40(a)(ia), since no TDS was deducted against the same in those years. Further, since the appellant has deducted the TDS in A.Y. 2009-10 under consideration, it would be automatically be allowed in this year, as per Proviso to Sec. 40(a)(ia), 15. The AO has argued that under mercantile system of accounting, the liability does not get postponed merely because quantification is done later, relying upon the judgment in the case of Kedarnath Jute Manufa .....

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tual arrangement of appellant with the lenders and the appellant is not contesting at all the claim of liability on accrual basis in those years, In contrast to the case of Kedarnath Jute Manufacturing Co ltd. (supra). 16. It is a fact on record that the appellant has provided for & paid the interest expenses in current assessment year, and also deducted the applicable TDS thereon, and further, the counter parties have also recognized their corresponding income in current assessment year. In .....

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aken into consideration 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 .....

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sideration 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 of Kedarnath Jute Manufacturing co. Ltd. (supra) as per the facts of the afore mentioned judgement the assessee maintaining accounts on mercantile system was fully justified in claiming deduction of sales tax which it was liable to pay during the relevant assessment year, and the liability .....

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cturing co. Ltd. (supra). 7. No new circumstance has been brought on record before us by the learned DR in order to controvert or rebut the findings recorded by the learned CIT (A) on the basis of the remand report. Moreover, there is no reason for us to deviate from the findings recorded by the learned CIT (A). Therefore, we are of the considered view that the findings recoded by the learned CIT (A) are judicious and are well reasoned. Accordingly, we uphold the same. Resultantly, this ground r .....

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7,829/- and Bank charges of ₹ 6,733/- total amounting to ₹ 19,82,930/- had been loaded by the assessee on loans which were taken to finance the losses of the textile processing the process which was closed down much earlier to the previous year relevant to assessment year being considered for assessment. It was argued by ld. DR that since the assessee has discontinued its core business of textile processing for which the loans were taken therefore the interest paid and other incident .....

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d. 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 ₹ 147.28 lakhs and partners capital account increased by ₹ 138.53 lakhs. Therefore, the decision of the AO to the effect that .....

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sions of the appellant carefully. I find two issues involved in adjudicating the ground of appeal: (i) Whether the interest can be disallowed due to closure of business/ closure of one of the activities: (ii) Whether the interest expenses could be attributed to interest free loans given to sister concerns in present case. 25. Coming to the first issue, I find that in the case of L.M. Chhabda and Sons (supra) relied upon by the AD, it was held by Hon'ble Supreme Court that if an assessee carr .....

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e Hon'ble Supreme Court held that "The fact that the particular part of the business for which the loans had been obtained had been transferred or closed down did not alter the fact that the loans had, when obtained, been for the purpose of the assessee's business. The test of 'same business' appropriate for set-off of carried forward losses was not appropriate here". 26. In the present case, it can be observed that the loan was initially taken for textile business, whi .....

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interest u/s 36(1 )(iii). The business of the appellant is a composite business during the period under consideration and expenditure is incurred for this composite business activities. Hence, the claim of appellant of interest cannot 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 give .....

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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 ₹ 163.28 lakhs includes interest free loans of ₹ 91.53 received from partner family as such net interest bearing unsecured loan was ₹ 71. 76 lacs as at 31/03/2000 and ₹ 98.40 lakhs as at 3110312009 which means loans were just incr .....

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as ₹ 33.01 lacs which indicates that either firm has made profit or partners have bought money in the business." 29. It can be observed from the above that no advances were given out of the borrowed funds. The family members of the appellant firm have brought in interest free funds to the tune of ₹ 147.28 lakhs. The net increase of the interest free funds to the sister concerns during the period under consideration are to the tune of ₹ 45.47 lakhs, which are much less than .....

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re out borrowed funds. In absence of proving any nexus between the borrowed funds and interest free loans given it would not be justified to make any disallowance. 31. In view of the above, the addition made by making the disallowance amounting to ₹ 19,82,930/-is not justified and hence deleted. Therefore, the ground no. 2 of appeal is allowed. 11. We have considered the both factual and legal issues which are involved in adjudicating this ground of appeal (i) whether the interest can be d .....

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ut 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, .....

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