2001 (12) TMI 62 - HC - Income Tax

Assessing officer's addition upheld; s.114 Evidence Act applied for missing bank records, interest-free loans implausible

HC upheld the assessing officer's addition and ruled against the taxpayer. The court found it implausible that a finance company would make interest-free ... Legitimacy of the addition on account of interest-free loan/advance - Applicability of interest u/s 234B - advancing interest-free loans to its sister concern - HELD THAT:- As the assessee was a finance company, it could show a huge amount at its hands at any point of time, but the bank accounts of the assessee during the relevant period having not been produced, it was for the Assessing Officer to ascertain as to whether the advance had been paid out of the loan taken by it or not. At the cost of repetition, we may reiterate that it is also not expected that a financing company would advance an interest-free loan to another, when it itself takes loan and pays interest upon the principal sum. As the assessee could not produce any document in this regard, an adverse inference in terms of section 114 of the Evidence Act should be drawn to the effect that had those documents been produced, the same would have gone against the interest of the assessee, we are of the opinion that the questions of law involved in the instant case should be answered in the negative, i.e., in favour of the Revenue and against the assessee. This appeal is disposed accordingly. Issues Involved:1. Legitimacy of the addition of Rs.10 lakhs on account of interest-free loan/advance.2. Applicability of interest u/s 234B of the Income-tax Act, 1961.Summary:1. Legitimacy of the Addition of Rs.10 Lakhs on Account of Interest-Free Loan/Advance:The core issue revolves around whether the Tribunal was correct in deleting the addition of Rs.10 lakhs made by the Assessing Officer (AO) due to an interest-free loan/advance of Rs.47,67,740 given by the assessee to a sister concern. The AO noticed that the assessee had borrowed money and paid interest on those loans while advancing interest-free loans to its sister concern, National Air Products Ltd. The AO disallowed the interest liability to the extent of Rs.10 lakhs, drawing an adverse inference due to the assessee's failure to furnish the required bank statements. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this disallowance. However, the Tribunal later deleted the addition, presuming that the loan was given out of the profits of the year. The High Court, referencing various judgments, concluded that the nexus between the funds advanced and the funds available must be established by the assessee. The absence of relevant documents led to an adverse inference against the assessee, and the Tribunal's finding was deemed perverse.2. Applicability of Interest u/s 234B of the Income-tax Act, 1961:The AO also held that the assessee was liable to pay interest u/s 234B due to the shortfall in advance tax payments. The Tribunal had deleted this interest charge, but the High Court emphasized that interest under sections 234A, 234B, and 234C is mandatory, as held in Anjum M.H. Ghaswala's case [2001] 252 ITR 1 (SC). The High Court noted that the assessee did not produce necessary documents to prove that the advances were made out of profits and not borrowed funds, thereby justifying the interest charge u/s 234B.Conclusion:The High Court answered the questions of law in favor of the Revenue and against the assessee, holding that the Tribunal's findings were perverse due to the lack of evidence provided by the assessee. The appeal was disposed of accordingly.