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Issues: (i) whether interest expenditure attributable to advances made by the assessee to its sister concern was allowable where the assessee failed to produce bank statements and other material to establish that the advance came out of its own funds; and (ii) whether interest under section 234B of the Income-tax Act, 1961 was correctly levied.
Issue (i): whether interest expenditure attributable to advances made by the assessee to its sister concern was allowable where the assessee failed to produce bank statements and other material to establish that the advance came out of its own funds
Analysis: The assessee, a financing company, was repeatedly called upon to produce the relevant bank records and cash-flow material to show the source of the interest-free advance. No such material was produced. The Court held that the nexus between borrowed funds and the advance had to be established by the assessee, and in the absence of the primary records an adverse inference was warranted. On the facts, the Tribunal's conclusion that the advance came out of profits was treated as a perverse inference, since it ignored the evidentiary burden and the surrounding financial circumstances.
Conclusion: The disallowance of interest was justified and this issue was decided against the assessee.
Issue (ii): whether interest under section 234B of the Income-tax Act, 1961 was correctly levied
Analysis: Interest under sections 234A, 234B and 234C is mandatory in nature. The Court relied on the statutory scheme and the absence of material produced by the assessee to hold that the levy under section 234B could not be disturbed. The Tribunal's deletion of the interest was therefore unsustainable.
Conclusion: The levy of interest under section 234B was upheld and this issue was decided against the assessee.
Final Conclusion: The questions of law were answered in favour of the Revenue, the Tribunal's order was set aside to that extent, and the appeal stood disposed of accordingly.
Ratio Decidendi: Where an assessee fails to produce material necessary to establish that an interest-free advance was made from its own funds, the burden of proof is not discharged and an adverse inference may be drawn; interest statutorily payable under section 234B is mandatory.
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