ACIT, CIRCLE-1(1), TIRUPATI, TIRUPATHI vs. B.V. REDDY & SONS, CHITTOOR, CHITTOOR

PER B. RAMAKOTAIAH, A.M. :

This is an appeal by Revenue against the order of the Commissioner of Income Tax (Appeals)-Tirupati, dated 19-11-2015. The grounds raised by Revenue are as under:

“2. The Ld.CIT(A) erred in not passing a speaking order by not giving any reasons for the decision. 3. The Ld.CIT(A) erred in placing reliance on the ITAT’s order for Asst. Years 2003-04 and 2004-05 and Ld.CIT(A)’s order for Asst. Year 2008-09 in appellant’s case, ignoring the fact that the said orders pertained to non- charging of interest from altogether different debtors.

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(a) Sri V. Dwarkanath Reddy, partner, has taken a loan from the firm at Rs. 17,38,18,316/_ and paid interest at Rs. 1,59,16,750/- say @ 9.15% ;

(b) Sri V. Madhusudhan Reddy, partner, has taken a loan at Rs. 12,38,03,768/- from the firm and paid interest at Rs 97,01,618/- say @ 9.83% &

(c) Sri V. Dinesh Reddy, partner, has taken a loan from the firm at Rs 18,71,89,191/- and paid interest at Rs. 1,49,99,248/-, say @8.01% whereas the assessee-firm is charging interest from the debtors at a high rate i.e. 12% and above.

(d) The sources for the above advances are from interest bearing borrowals and hence the loss incurred by the firm on account of interest paid by the partners at a lower rate is not in accordance with business principles.

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Hence, AO proposed to charge the interest @ 12% on the above loans to the partners and bring to tax the difference of interest, as worked out by him, at Rs. 49,41,447/-, Rs. 51,54,834/-& of Rs. 74,63,554/- respectively on the loans to the respective partners and accordingly issued a show cause notice to assessee. AR objected for the proposed addition stating that it is so agreed by partners to so charge. Further, the firm has many credit balances on which no interest was paid which was also available for lending to partners. AO found that this explanation is not acceptable in the absence of proof. AO held that assessee has conveniently reduced its net profit, thus reduced the tax payable. In view of that AO made an addition of Rs. 1,71,59,735/- to the income returned.

2.1. Further, AO has noticed that assessee has not charged interest on the outstanding amounts from the following persons:

i. E Ramachandram Naidu - Rs. 3,36,000/- ii. A Arumugam - Rs. 50,05,000/- iii. R Purushotham Reddy - Rs. 27,40,522/- Total - Rs. 80,81,522/-

AO found that these amounts have been shown as an outstanding for the last several years & all of them were brought into system either by way of deposits or loans. So, he was of the view that the amounts so outstanding without yielding any income are nothing but amounts diverted from the system. In other words, AO is of the view that the interest bearing loans were diverted as interest free advances. The above amounts were very old and no recovery proceedings have been initiated by the assessee-firm to

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Sri E. Ramachandra Naidu, assessee advanced Rs. 3,00,000/- but did not offer any interest in any year on this advance. In the case of Sri R. Arumugam, the assessee-firm has offered interest till AY. 2003-04 but suddenly did not offer any interest from AY. 2004-05 onwards. In respect of Sri R. Purushotham Reddy, assessee did not furnish the details for any of the year including from which year the amount is outstanding in assessee's books etc. AO was of the view that the partners of the firm were having substantial interest with the above persons and hence not charged any interest from them and mentioned as interest free loans. Hence, he proposed to charge the interest @12% on the above outstanding at Rs. 80,81,522/- and add the sum quantified at Rs. 9,69,782/- to the returned income and accordingly issued a show cause notice. Ld.AR objected stating that all of them have been reduced to poor status, recovery of principal itself is doubtful and hence the proposed addition is not necessary. AO held that this explanation is not acceptable as there is a procedure laid down u/s. 36(2) of the Act to treat a debt as a bad debt. Therefore, he added the interest at Rs 9,69,782/- to the returned income.

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charged on the funds diverted to partners charged at 9%, then the excess interest can be disallowed u/s. 36(i)(iii). AO cannot bring any interest (notional or otherwise) to tax when assessee has not charged. With these directions, the issue of charging interest on partners balance was set aside to AO for examination of facts and applicable law.

7.1. Coming to the issue of charging interest on bad and doubtful recovery, this issue was held against Revenue in earlier years. In fact the ground No. 3 is not clear whether the ground pertains to this issue or not. As the issue was decided against the Revenue in earlier year, we do not see any reason to hold otherwise. The order of Ld.CIT(A) on this issue (which was discussed in the order) is confirmed. Ground is rejected.

Order pronounced in the open court on 23rd May, 2018

Sd/- Sd/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, Dated 23rd May, 2018 TNMM

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Copy to : 1. The Asst. Commissioner of Income Tax, Circle-1(1), Tirupati.