Business Decisions on Interest-Free Advances Should Not Be Arbitrarily Questioned by Revenue

BPS Mineral Exports Pvt. Ltd. Vs ITO (ITAT Ahmedabad)

In the case of BPS Mineral Exports Pvt. Ltd. vs ITO, the Income Tax Appellate Tribunal (ITAT) Ahmedabad addressed an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) (CIT(A)) for the assessment year 2016-17. The dispute centered around the disallowance of Rs. 16,83,705/- under Section 36(1)(iii) of the Income Tax Act for LC (Letter of Credit) discounting charges. The assessee, engaged in local trading of various products, had filed its return declaring a current year loss of Rs. 2,14,691/-, but the assessment was completed at an income of Rs. 15,47,014/-, with the disallowance being a key factor.

The CIT(A) upheld the disallowance, asserting that the LC discounting charges should be disallowed under Section 36(1)(iii), as the assessee had extended interest-free loans to certain parties while simultaneously incurring finance costs. The assessee argued that these advances were not given in the current year but were part of the opening balance, and that the charges were business-related and not subject to disallowance under Section 36(1)(iii). The appellant’s representative further referenced judicial precedents, including the S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC) decision, arguing that the Revenue cannot dictate the manner in which the business should be conducted.