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M/s Sponge Iron India Ltd. (merged with NMDC Ltd.) Versus Dy. Commissioner of Incometax, Circle – 3 (2) , Hyderabad

2016 (9) TMI 914 - ITAT HYDERABAD

Disallowance of proportionate interest - making advance to the sick company - Held that:- It is a fact that assessee has lent advances to a company, which has become sick as per the BIFR norms subsequently. It is outside the control of the assessee company and as per prudence, the interest and advances are unrealizable. The interest being revenue in nature not provided in the books. From the record, it is not established there is a link between the advance made and funds borrowed by the assessee .....

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he sick company, in absence of such findings, interest disallowance on notional basis is not justified. Hence, grounds of appeal of the assessee on this issue are allowed. - Addition for provision for non moving stores - determination of book profit - Held that:- From submissions of ld. AR, the assessee had written off the value of non-moving stock as per the valuation policy of the company. This write off cannot be considered as unascertained liability for the purpose of section 115JB. The .....

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rtained after making certain adjustments to the profit declared in the profit & loss. The adjustment involves the addition of certain unascertained liabilities. In the present case, the loss written off due to write off of stock cannot be termed as unascertained liabilities. The adjustment made by the AO to determine book profit u/s 115JB is not proper. Hence, the ground raised by the AO on this issue is allowed. - ITA Nos. 484 & 485/Hyd/2016 - Dated:- 10-8-2016 - SMT P. MADHAVI DEVI, JUDICIAL M .....

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ITA No. 484/Hyd/2016: 1. The learned CIT (A) erred in facts and law while passing order. 2. The learned CIT(A) erred in disallowing the depreciation on SAF Plant of ₹ 8,93,31,644/- 3. The learned CIT(A) erred in disallowing proportionate interest of ₹ 18,53,245/- calculated at 14.5% on the deposit made with Sick PSU of ₹ 127.81Iakhs. 4. The learned CIT(A) erred in observing that the provision for non moving stores of ₹ 11,86,000/- do not constitute the ascertained liabil .....

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a total loss of ₹ 22,14,83,554/-. The AO reopened the assessment by issue of notice u/s 148 and completed the assessment by making the following additions and assessed the loss at ₹ 12,58,91,876/-. a) Depreciation on SAF ₹ 8,93,31,644/- b) Depreciation on Railway sidings ₹ 5,189/- c) Income related to previous year ₹ 30,04,000/- d) Proportionate disallowance on interest on ICDs ₹ 18,53,245/- e) Donations ₹ 4,600/- f) Provision for bad and doubtful debts .....

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on u/s 32 of the I.T. Act. The Assessing Officer also relied on judgment of Hon'ble High Court in various cases. During the assessment proceedings, assessee submitted that the assets of SAF are ready to use is carefully considered by the AO. The AO observed that it is pertinent to note that the assets of SAF were not actually put to use from 1996-97. Even though huge time lapsed from the date of putting the assets to trial runs, assessee has not actually put the assets to use. During the A. .....

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ITAT in assessee s own case for AYs 2001-02 and 2003-04 confirmed the disallowance made by the AO on account of depreciation. 7. Aggrieved, the assessee is in appeal before us. 8. Before us, the ld. AR of the assessee filed written submissions wherein it was stated that SAF plant is not a separate unit by itself but an integral part of the entire machinery of the assessee company and the unit as such was functioning. It is pleaded that plant and machinery form part of same block of assets and ne .....

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the ITAT in assessee s own case for AYs 2001-02 and 2003-04. Therefore, we uphold the order of the CIT(A) in confirming the action of the AO following the decision of the coordinate bench of this Tribunal. Hence, this ground is dismissed. 11. As regards ground No. 3 pertaining to disallowance of proportionate interest of ₹ 18,53,245/-, AO observed that, no prudent businessman would pay interest on the loans borrowed by him, while his funds are lying elsewhere as interest free deposits. The .....

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allowed u/s 36(1)(vii) of the Act. The Assessing Officer relied on the Kerala High Court decision in the case of CIT Vs. Baby and Co. reported in 254 ITR 248 wherein it was held that so long as the advances are interest free, the AO is perfectly justified in disallowing the interest in proportion to the advances made. It was noticed that the assessee has paid interest on the borrowed funds at 14.5%. In view of the legal Position, the AO held that the assessee is liable for proportionate disallow .....

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, interest is not provided for in the books of account of the appellant. Before the AO it was pleaded that the deposit was made in the year 1992 and it was agreed by the said PSU that it would pay interest. Interest was not charged as the said PSU became sick. It was also submitted that there is no nexus between the borrowed funds and the deposit made. Therefore, pleaded that no part of the interest paid be disallowed. However, the AO held that the proportionate interest on the deposit of ₹ .....

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h deposits becomes even more difficult that too in the given circumstances of the assessee s case. When the assessee company has made a conscious policy decision not to provide for interest on the said deposits which fact has also been taken by disallowing a portion of interest liability of the assessee. CIT(A) held that thus the PSU becoming sick and being not able to pay interest to the assessee company are beyond the control of the assessee, therefore, the AO is justified in disallowing the i .....

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95-96 onwards. He referred to the observations that CIT (A) in her order noted that "it is understandable that when the possibility of recovery of the principal amount itself becomes doubtful on such a company becoming sick, likelihood of receiving interest on such deposits becomes even more difficult." Despite knowing that the interest payments were not regular, the CIT(A) concluded contradictorily that the assessee has given interest free inter-corporate deposit by taking a loan bear .....

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"When the appellant company has made a conscious policy decision not to provide for interest on the said deposits which fact has also been taken into consideration by Comptroller and Auditor General, no adverse view can be taken by disallowing a portion of the interest liability of the appellant. In view of the above, therefore, the AO is not justified in disallowing interest payment. 16. Ld. DR, on the other hand, relied upon the order of the CIT(A). 17. Considered the submissions of the p .....

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. In absence of such information, we also hold that they are distinct transaction and cannot be considered for any comparison. As interest is not recoverable in fact and only the realizable income alone can be brought to books. Hence, the assessee has actually incurred interest expenses, which cannot be disturbed with the above said unrealizable interest income. When the AO has not brought anything on record to show that the actual borrowings were made only for the purpose of making advance to t .....

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