AO cannot sit in the chair of the businessman and direct him to do business in a particular fashion

ITAT Visakhapatnam in a recent judgment has ruled that Assessing Officer cannot sit in the chair of the businessman and direct him to do business in a particular fashion. The ITAT deleted the notional interest charged by AO on sundry debtors based on the fact that assessee charged interest for the preceding previous financial year.

Case Details:
INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM
I.T.A.No.132/Vizag/2012  Assessment Year: 2008-09
ITO vs. New Sarika Cotton Traders
Date of Order/Judgment: 18/03/2016

Brief Facts of the Case:
The assessee was a partnership firm, which is engaged in the business of trading in cotton.  The case of the assessee for AY 2008-09 was selected for scrutiny under CASS and accordingly and notices u/s 143(2) & 142(1) were issued. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has shown sundry debtors of Rs. 4,19,04,880/- in the name of M/s. Kumar Kotex Ltd. It was further noticed that the assessee has charged interest on the outstanding debtor balance for the financial year 2006-07 relevant to AY 2007-08. However, the assessee did charge any interest for the year under consideration. AO issued a show cause notice and asked assessee to explain why interest shall not be charged for the current financial year also. The assessee stated that the balance shown in the name of M/s. Kumar Kotex Limited was on account of supply of goods and the party owed money for the past 6 years and had not paid any amount during the financial year under consideration. The assessee further submitted that it did not follow the custom of calculating interest for the amounts due from the customers, however for the financial year 2006-07, interest was charged only to put pressure on the party to pay the amount. However, later on realizing that the step taken proved to be futile, it therefore, stopped charging interest on the outstanding balance. The assessee further submitted that the debtor financial position was very weak and it is not in a position to pay the outstanding balance. Under these circumstances, charging interest on the outstanding amount was not correct.

However, the AO held that the assessee had been actively in the trading activity with M/s. Kumar Kotex Ltd. for the last 6 years. Though the assessee had not received any amounts due from the debtor, the assessee has also not taken any steps to collect the amount due from the debtor. The AO further held that the assessee itself has charged interest for the previous financial year, however could not offered any cogent reasons for not charging the interest for the year under consideration. Accordingly, the AO charged interest @ 12% on the outstanding debtor balance and added it to the income of the assessee.

The CIT(A) held that during the year under consideration, the debtor was under BIFR. he further held that as seen from the records, the financial position of the trade debtor had gone very bad to worse and in the given circumstances getting principal amount itself is doubtful. Thus CIT(A) directed the Assessing Officer to delete the additions made towards interest on sundry debtor.

Excerpts from ITAT Judgment:
We do not see any merit in the contention of the Assessing Officer for the reason that the Assessing Officer cannot sit in the chair of the businessman and direct him to do business in a particular fashion. The outstanding amount due from the debtor is on account of trading liability. It is not a case of the Assessing Officer that the outstanding loan amount is a stock in trade of assessee and assessee is in the business of money lending to charge interest on the outstanding balance by following the mercantile system of accounting. Though, assessee charged interest for the last financial year, he explained the reasons for not charging the interest for the current financial year under consideration. From the perusal of the facts, it appears that the reasons given by the assessee appears to be reasonable. Therefore, we are of the opinion that charging interest on trade debtors is not correct.

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