The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) found the addition of ₹16.84 Lakhs as LC discounting charges under Section 36(1)(iii) of Income Tax Act,1961 to be unjustified.
BPS Mineral Exports Pvt. Ltd.,appellant-assessee,engaged in trading various products, filed its return on October 29, 2017, declaring a loss of Rs. 2,14,691/-. The assessment was finalized at Rs. 15,47,014/- after adding Rs. 17,61,705/- for disallowance under Section 36(1)(iii) due to interest-bearing funds allegedly used for interest-free loans.
The assessee aggrieved by the order appealed before the Commissioner of Income Tax(Appeals)[CIT(A)] who dismissed the appeal later. The assessee appealed before the tribunal.
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The assessee’s counsel argued that the disallowance of Rs. 16,83,705/- under Section 36(1)(iii) for “LC discounting charges” was unwarranted, as the advances were opening balances from previous years and not funded by interest-bearing loans. It was contended that the advances were business-related, given to unrelated parties, and Section 36(1)(iii) was inapplicable. The counsel cited S.A. Builders Ltd. vs. CIT (SC) and CIT vs. Cargill Global Trading Pvt. Ltd. (Delhi HC) to support the claim that LC discounting charges do not qualify as interest.
The revenue counsel argued that the assessee failed to prove the loans and advances were for material purchases and questioned the justification for interest-free advances with significant trade payables outstanding. It was contended that the disallowance under Section 36(1)(iii) by the AO and CIT(A) was justified.
A delay of 224 days in filing the appeal was explained as due to the assessee’s wife’s medical issues, and a request was made to condone the delay.
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A single member bench comprising Suchitra Kamble (Judicial Member) reviewed the submissions and evidence on record, condoned the delay, and found the advances were made for business purposes, primarily for material purchases.
It noted that while the CIT(A) questioned the prudence of granting interest-free advances, the evidence, including the Tax Audit Report and financial statements, showed no diversion of funds. Relying on the decisions in CIT vs. Cargill Global Trading Pvt. Ltd. and S.A. Builders Ltd. vs. CIT, the Tribunal held the disallowance under Section 36(1)(iii) to be unjustified.
In short,the appeal filed by the assessee was allowed.
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