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2016 (11) TMI 206 - ITAT VISAKHAPATNAM

2016 (11) TMI 206 - ITAT VISAKHAPATNAM - TMI - Additions towards notional interest on advances given to partners and sister concerns - Held that:- We find force in the arguments of the assessee for the reason that the partners have withdrawn an amount of ₹ 59,73,600/- during the financial year 2006-07, relevant to assessment year 2007-08 out of the amount standing to the credit of their capital account. Though the assessee is having borrowed funds, the borrowed funds represent the deployme .....

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(A) after considering the relevant details rightly deleted additions made by the A.O. - Decided in favour of assessee. - 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 ass .....

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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) after considering the relevant details rightly deleted additions made by the A.O - Decided in favour of assessee. - I.T.A.No.41/Vizag/2013, C.O. No.46/Vizag/2013 - Dated:- 22-9 .....

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d disposed off, by way of this common order for the sake of convenience. 2. The brief facts of the case are that the assessee is a partnership firm, which is engaged in the business of dealer in footwear filed its return of income for the assessment year 2009-10 on 29.9.2010 declaring total income of ₹ 68,58,677/-. The case has been selected for scrutiny under CASS and accordingly, notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative o .....

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ncerns without interest, therefore, issued a notice and asked to explain why the notional interest shall not be charged on the interest free advances given to partners of the firm and sister concern. Similarly, the A.O. noticed that the assessee has claimed ₹ 20,20,763/- under the head Advance turning bad . To ascertain the nature of expenditure debited to the profit & loss account, a show cause notice was issued and asked to explain the nature of advances written off. In response to n .....

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fore, 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 i .....

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partners and sister concerns, charged notional interest of 12% per annum on the total amount advanced to partners and sister concerns and brought to tax. As regards advances turning bad, the A.O. observed that the assessee claims to have given advances to suppliers towards purchase of raw materials, however, on verification of details of trade debtors in the financial year 2007-08 relevant to assessment year 2008-09, the names of the above suppliers were not reflected in the debtors list, but th .....

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d the submissions made before the A.O. The CIT(A) after considering the explanations of the assessee held that the partners have withdrawn funds from their earlier contributions, therefore, the A.O. was not correct in charging notional interest on the amount withdrawn by the partners from their capital account. As regards advances given to sister concerns, the CIT(A) held that the assessee has given advances to its sister concerns in the normal course of business and the advances are in the natu .....

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of materials in the normal course of business and the advances turned bad because the suppliers neither supplied the goods nor returned the advances. Thus, advances were made in the ordinary course of business with an intention to carry on the business operations smoothly and without 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 .....

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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 rightly charged interest and .....

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ed the order of the CIT(A). 7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The first issue that came up for our consideration is additions towards notional interest on advances given to partners and sister concerns. The A.O. observed that the assessee has diverted its interest bearing funds to partners of the firm and sister concerns without charging any interest. The A.O. further observed that the assessee has p .....

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ances to its sister concern in the normal course of business and the advance given to sister concerns is having business nexus, therefore, the A.O. was not correct in holding that the assessee has given interest free advances to sister concerns out of borrowed funds. 8. Having heard both the sides, we find force in the arguments of the assessee for the reason that the partners have withdrawn an amount of ₹ 59,73,600/- during the financial year 2006-07, relevant to assessment year 2007-08 o .....

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nt, 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 of .....

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pliers towards purchase of raw materials and the advances turning bad, because the suppliers neither supplied the raw materials nor returned advances. The assessee after putting its best efforts to recover the money from the supplier, written off the advances as irrecoverable, therefore, the A.O. was not correct in holding that these advances are capital in nature. 10. Having heard both the sides and having considered materials, we find force in the argument of the assessee for the reason that t .....

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