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2016 (11) TMI 206

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..... Additions towards advances turning bad - Held that:- On perusal of the paper book filed by the assessee, we find that these advances were given in the normal course of business towards purchase of raw materials. When the suppliers not supplied the goods, the assessee has classified these advances under the head “advances to suppliers” and kept under current assets. The assessee has written off these advances in the books of accounts as bad debts. Even if these amounts are not allowed as deduction u/s 36(1)(v) of the Act, the assessee can always claim deduction u/s 37 of the Act, as the scope of section 37 of the Act is vide enough to include all such amounts paid for the purpose of business and are to be allowed unless and otherwise the advance is capital in nature. In the present case on hand, on perusal of the details available on record, we noticed that these advances are given for the purpose of purchase of raw materials. The assessee has written off these advances in the books of accounts. Therefore, we are of the view that the A.O. was erred in holding that the advances are in the nature of capital advances and hence, not allowable as deduction u/s 37 of the Act. The CIT(A .....

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..... antern, all of them were suppliers of the assessee and the advances are given in the normal course of business which were turned bad. The assessee further submitted that it has given advances to suppliers towards supply of raw materials and the suppliers neither supplied the goods nor returned the advances, therefore, after putting its best effort to recover the money, decided to write off as advances irrecoverable. To support his arguments, the assessee has taken support from the decisions of Hon ble High Court of J K, in the case of Chenab Forest Company Vs. CIT (1974) 96 ITR 568 and the High Court of Delhi, in the case of Mohan Meakin Limited Vs. CIT in ITA No.405/2007. 4. The A.O. after considering the explanations of the assessee, held that the assessee has given interest free advances out of interest bearing funds to its partners and sister concern without charging any interest. The A.O. further held that the assessee had borrowed huge funds from banks and without charging any interest diverted its interest bearing funds to the Managing partners and sister concerns. If the assessee had not given interest free advances, there would not have been any necessity for the a .....

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..... ithout any hitch. Since the whereabouts of the persons to whom advances were given were not known, after making due efforts, the assessee has come to the conclusion that it is prudent on its part to write off the impugned advances. With these observations, held that the assessee is entitled to a deduction in respect of these advances as expenditure as contemplated in terms of the provisions of section 37 of the Act and the A.O. is directed to delete the additions made towards write off of trade advances. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 6. The Ld. D.R. submitted that the CIT(A) erred in deleting charging of interest on advances given to sister concerns and partners terming them as trade advances, since these funds are originated from interest bearing funds. The D.R. further submitted that the assessee has borrowed funds from bank on which it has paid huge interest. If advances are not given to the partners and sister concerns, the assessee would not have suffered interest expenses, consequently, the tax payable to the Government would enhance. Since the assessee has given interest free advances to partners and sister concerns, the A.O. has right .....

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..... ster concerns is debited to the capital account of the partners, still there is a credit balance in the partners capital account, therefore, the A.O. was not correct in holding that the assessee has diverted its interest bearing funds to its partners and sister concerns. The CIT(A) after considering the relevant details rightly deleted additions made by the A.O. We do not see any reasons to interfere with the order of the CIT(A). Hence, we direct the A.O. to delete additions towards notional interest and reject the ground raised by the revenue. 9. The next issue that came up for our consideration is advances written off of ₹ 20,20,763/-. The A.O. has made additions of ₹ 20,20,763/- towards advances turning bad. The A.O. was of the opinion that advances to suppliers are in the nature of capital advances and hence, the assessee is not eligible to write off capital advances either under the provisions of section 36(1)(v) or Section 37 of the Act. It is the contention of the assessee that the advances are in the nature of trade advances. The assessee further contended that it has given advances to suppliers towards purchase of raw materials and the advances turning bad, .....

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