SAMPAT ALUMINIUM PVT.LTD.,,AHMEDABAD vs. DY. CIT, CIRCLE-8,, AHMEDABAD

The Solitary ground of appeal of the assessee is against the decision of ld. CIT(A) in confirming the disallowance of Rs. 12,53,874/- by working out interest @ 12% on amount outstanding/advances to Deora Wires N. Machines Pvt. Ltd. by invoking the provision of section 36(1)(iii) of the act.

The fact in brief is that assessee has filed return of income declaring income of Rs. 33,83,500/- on 30th Sep, 2010. Thereafter, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 21st Sep, 2011. On scrutiny, the assessing officer noticed that assessee has claimed interest expenses of Rs. 56,61,364/- in the profit and loss account during the year under consideration. On verification of the detail and information furnished by the assessee, the assessing officer has noticed that out of the aforesaid interest expense a sum of Rs. 20,60,290/- has been paid to various creditors on account of late payment made against the purchases. The assessing officer observed that interest paid to sundry creditors for late payment was not in respect of borrowed money, therefore, the same was not allowable u/s. 36(1)(iii) of the act. The assessing officer has further noticed that assessee has made huge sale to its sister concern namely Deora Wire Pvt. Ltd. however, no interest was charged on late payment received. Even the assessee has not charged any interest from sister concern on credit allowed beyond normal period on the other hand it has paid interest to the supplier on late payment. On query, the assessee has explained that it has not charged or collected interest from any of its debtors as there has been no business condition about the charging of interest and there was no agreement for collecting of interest from debtor for late payment. The assessing officer has not accepted the explanation of the assessee and stated that as per ledger account of sister concern of the assessee the outstanding amount has remained unrecovered beyond reasonable period and no interest was charged on such huge receivables from its sister concern without any reason. He was of the view that the assessee had tried to divert its profit which was an abnormal business practice. Consequently, the assessing officer has worked out interest @ 9% per annum after allowing normal credit period of one month which was allowed by the assessee to other customer and disallowed the interest to the extent of Rs. 20,60,290/- paid to the creditors.

Aggrieved assessee has field appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by restricting the disallowance to the amount of Rs. 12,53,874/-. Relevant part of the decision of ld. CIT(A) is reproduced as under:- “5. I have perused the facts of the case as enumerated by A.O. and as submitted by appellant. I have perused the case laws relied on by A.O. as well as appellant. It i$ seen that learning CIT(Appeals) in the earlier year deleted the addition on similar grounds by concluding that since expenditure was Incurred for business purpose and genuineness of the expenditure was not in doubt so no addition could have been made by the assessing officer. In the course of appellate proceedings from the copy of account of DWNMPL, it was noted that besides the transactions of sale and purchase, the appellant has also advanced loan to the tune of Rs. 55767607 on different dates during the year and same is also shown in the debtors account even though it is not related to purchase. This fact has not been considered or was not present in the appeal of earlier year. Even if it is accepted that appellant is free to grant credit or extra time for payment to any of its customer including its sister concern, there is no justification for advancing of money When already dated is required to pay huge amount beyond the credit limit. It is further seen that the appellant has got share capital of only Rs. 1.08 crores and reserves and surplus of Rs. 75.03 lakhs. These amounts are hardly able to cover the money advanced by the appellant to its impugned sister concern. The majority of this amount is advanced in the month of February 2010 and March 2010. The issue was raised in the appellate proceedings on 03/12/2014 and while furnishing the details on 08/12/2014, the appellant did not explain the reason for advance of money to editor from whom already money was recoverable on account of sale meat to it while I agree in principle with my predecessor that appellant cannot be forced to charge interest from editor on the ground that its creditor is charging interest from it, I do not find any justification for advance of further amount of money to the same debtor. The average interest at the rate of 12 percent is worked out on the money advanced as below:- Month Amount Cumulative Simple Interest @12%

During the course of appellate proceedings before us, the ld. counsel has contended that ld. CIT(A) has incorrectly restricted the disallowance to the amount of Rs. 12,53,874/- by levying the interest @ 12% on the amount of loan and advances made to its sister concern whereas the disallowance was worked out by the assessing officer at 9%. The ld. counsel has also given the working of charging interest @ 9% which comes to Rs. 6,34,877/-, therefore, he has requested that disallowance should be restricted to the amount of Rs. @ 9%. On the other hand, ld. departmental representative has supported the order of ld. CIT(A).

We have heard the rival contention and perused the matrial on record carefully. The ld. CIT(A) has held that the in the earlier year the similar addition was deleted since the expenditure was incurred for business purpose,however, he has noticed that during the year under consideration beside the transaction of sale, the assessee has also advanced loan to the amount of Rs. 5,57,67,607/- on different dates during the year to its sister concern DWNMPL which was not

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 30-11-2018