Commercial expediency in fund diversion affects interest disallowance and tax treatment of interest earned on transferred funds.

Interest disallowance for transfers from a cash credit account to family members' savings accounts was reconsidered on the basis of commercial expediency. The Tribunal noted that the first appellate authority had accepted that the diversion was made to oblige the bank, and therefore limiting relief only to transfers kept for a short period was not appropriate. The interest element arising from such diversion was not to be treated as a routine disallowance exercise in the manner adopted by the lower authorities. The interest earned on the diverted funds was directed to be brought to tax in the assessee's hands.

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Issues: Whether interest disallowance was justified where funds from the assessee's cash credit account were transferred to family members' savings accounts and whether any commercial expediency justified the diversion.

Analysis: The assessee had maintained that sufficient interest-free funds were available and that the transfers were made only for short periods to satisfy the bank's requirements. The Tribunal noted that the first appellate authority itself had accepted the element of commercial expediency in the transfers. On that basis, the Tribunal held that the approach of restricting the relief only to transfers kept for a limited period was not proper. Since the diversion was made to oblige the bank, the interest element arising from such diversion could not be treated merely as a disallowance exercise in the manner adopted by the lower authorities.

Conclusion: The interest disallowance as sustained by the lower authority was not upheld in the manner directed. The interest earned on the diversion of funds to family members' accounts was directed to be brought to tax in the assessee's hands.

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