No penalty can be levied u/s 271(1)(c) for concealment of income on addition made u/s 41(1) in respect of sundry creditors appearing in Balance-sheet:

AO levied penalty u/s 271(1)(c) on addition made u/s 41(1) in respect of sundry creditors outstanding at the end of the year. Hon’ble ITAT observed that such liability duly appeared in the Balance-sheet of the assessee and hence, it couldn’t be said that the conclusively liability ceased to exist. It was held that although the addition was not in dispute, it didn’t amount to concealment of income and hence, penalty was not justified on such addition. Accordingly, penalty was deleted.

[CHRAG HARMANBHAI PATEL (HUF) Vs. ITO – ITA Nos.298 & 1323/Ahd/2012]

No addition can be made u/s 41(1) in respect of creditors outstanding at the end of the year:

AO found that there were certain outstanding creditors for goods at the end of the year and few of them were outstanding for over three years. AO issued notices u/s 133(6) to certain creditors which returned un-served and even the assessee couldn’t furnish confirmation of any of the creditors. Hence, AO concluded that the creditors no longer existed at the given places, the said outstanding sums were no more payable and the liability had ceased to exist. Accordingly, an addition was made in respect of such creditors u/s 41(1). The Hon’ble ITAT observed that the assessee had shown such creditors as its liability in the Balance-sheet and the same was in respect of purchases made by the assessee. The assessee had not written off the said amount and had acknowledged the liability to pay by reflecting the same in Balance-sheet. Even the Revenue had not brought anything on record to prove that the assessee had obtained any benefit either by way of remission or cessation of liabilities. In light of the aforesaid facts, the impugned addition was deleted by the Hon’ble ITAT.

[PURVIDEVI MAHENDRAKUMAR CHAUDHARY VS. ITO – ITA NOS.1426 & 1698/Ahd/2012]

No disallowance can be made u/s 36(1)(iii) in respect of interest if assessee has sufficient interest free funds:

AO found that the assessee had certain capital work-in-progress. He further observed that assessee’s total loss and miscellaneous expenses were far more than assessee’s share capital and accordingly, assessee’s net worth was negative. He therefore took a view that secured and unsecured loans might have been used for making payments for acquisition of assets. Accordingly, he made proportionate disallowance of interest u/s 36(1)(iii). Hon’ble ITAT observed that AO had disallowed interest u/s 36(1)(iii) without ascertaining the fact as to whether capital was borrowed for capital assets or not. Revenue also failed to prove the onus of establishing the nexus that interest bearing funds had been used for acquiring such capital assets. Further, such investment was made in preceding year when the assessee had interest free funds. Following the ratio laid down in the case of “Reliance Utilities and Power Ltd. – 313 ITR 340 (Mum)”, CIT(A) had held that the presumption will go in favour of the assessee that such investments were made out of interest free funds and accordingly, deleted the said disallowance. Revenue couldn’t controvert such findings of CIT(A) and accordingly, Hon’ble ITAT also upheld the order passed by CIT(A).

[ITO Vs. RAVIRAJ FOILS LTD. – ITA No. 2945/Ahd/2011]

Liquidated damages paid towards late delivery of goods are allowable as business expenditure:

AO disallowed certain liquidated damages incurred by the assessee paid towards late delivery of goods. Hon’ble ITAT observed that amount in respect of liquidated damages was deducted on account of delay in terms of purchase order. Delay in delivery had occurred due to delay in terms of purchase order, delay in approvals of drawings by the customers and performance tests of the equipment, etc. In light of such facts, it was held that amounts paid as damages towards late delivery of goods are allowable as business expenditure.

[ACIT Vs. MAZDA LTD. – ITA Nos.1106 & 1750/Ahd/2012]

If CIT(A) dismisses a ground after wrongly recording that the same is not pressed by assessee, ITAT can restore the matter for afresh consideration:

AO made an addition on account of water and service charges. Ld. CIT(A) recorded that the assessee had not pressed the said ground since the same was decided against the assessee in earlier years. Assessee preferred an appeal before ITAT and submitted that CIT(A) had wrongly recorded the same. ITAT observed that the DR had not brought anything on record to show the said issue was decided against the assessee in earlier years. Hence, ITAT restored the matter to the file of AO to decide the issue afresh after giving reasonable opportunity of being heard to the assessee alongwith certain directions. On Revenue’s appeal, Hon’ble High Court held that the order of ITAT required no interference and accordingly, revenue’s appeal was dismissed.

[CIT vs. Gujarat Alkalies & Chemicals Ltd. – Tax Appeal No. 816 of 2013]

Interest paid @ 18% on unsecured loans from parties covered u/s 40A(2)(b) is reasonable:

AO found that the assessee had paid interest @ 18% on unsecured loans obtained from persons covered u/s 40A(2)(b) as against interest @ 12% to other parties. Hence, he disallowed interest in excess of 12%. Hon’ble ITAT observed that the said loans from unsecured persons were received in earlier years and interest @ 18% on such loans was accepted in earlier years by the revenue. It was further observed that the parties to whom interest @ 18% was paid were falling in the highest tax bracket and hence, there was no loss to the revenue. Hon’ble ITAT was of the view that such unsecured loans were obtained to meet the business requirements and to ensure that the assessee’s movable and immovable assets remain free from any encumbrances. Further, such loans involve huge risks and are generally not required to be repaid at a short notice. In light of the above, it was held that interest @ 18% was reasonable.

[SOUTHERN INDIA BIDI WORKS PVT. LTD. Vs. ACIT – ITA Nos.1847/Ahd/2011 and 1113/Ahd/2012]

ITAT is bound to deal with judgment relied upon and cited by an assessee:

AO made addition in respect of bogus purchases/sales which was confirmed by CIT(A) as well as ITAT. On further appeal, Hon’ble High Court observed that ITAT, while dismissing assessee’s appeal, had neither considered nor dealt with the judgment in the case of “CIT vs. President Industries – 258 ITR 654” which was cited by the assesse and on which, assessee had placed heavy reliance. Hon’ble High Court held that whenever any decision has been relied upon and/or cited by any assessee, the concerned authority /ITAT is bound to consider and deal with the same and opine as to whether the same shall be applicable or not. Accordingly, the matter was remanded to ITAT with a direction to decide the issue after considering the decision in the case of CIT vs. President as relied upon by the assessee.

[Dattani And Co. vs. ITO – Tax Appeal No.847-849 of 2013]