1994 (3) TMI 138 - AT - Income Tax

Tribunal allows interest deduction, upholds disallowance under section 40A(8), and confirms cash credit addition.

The Tribunal partly allowed the appeals by reversing the disallowance of interest on borrowed funds for all assessment years, upholding the disallowance ... Assessment Year, Borrowed Capital, Raw Material Issues Involved:1. Disallowance of interest paid on borrowed funds due to diversion of funds to sister concern without charging interest.2. Disallowance of interest under section 40A(8) paid to directors on current account.3. Addition of cash credits of Rs. 46,000 for assessment year 1981-82.Detailed Analysis:1. Disallowance of Interest Paid on Borrowed Funds:The primary issue pertains to the disallowance of interest paid on borrowed funds on the grounds that the funds were diverted to a sister concern without charging any interest. For the assessment year 1978-79, the Assessing Officer (AO) disallowed interest of Rs. 36,585 due to advances made to the sister concern, Copper Strips (P.) Ltd., without interest. The AO concluded that these advances were not for business purposes, as there was no indication in the books that they were made against any material received or purchased from the sister concern.On appeal, the CIT (Appeals) initially restored the issue to the AO for further examination. The AO's subsequent assessment still doubted the nexus between the advances and the material received for conversion. The CIT (Appeals) later directed disallowance of 75% interest on the closing balance, not relating to the business.The assessee argued that the advances were made as business security for the material lying with the assessee for conversion, supported by an agreement dated 15-11-1978, which stated that the deposits would not bear any interest. The Tribunal found that the advances facilitated the business of job work done by the assessee, which was a major source of income, and thus were in the commercial expediency of the business. The Tribunal reversed the CIT (Appeals) decision and directed the AO to delete the disallowance of interest for all the assessment years under consideration.2. Disallowance of Interest under Section 40A(8):The second issue involves the disallowance of interest under section 40A(8), which the AO applied to interest paid to directors on current accounts. The AO disallowed sums of Rs. 18,163 for 1978-79, Rs. 18,592 for 1979-80, Rs. 13,068 for 1980-81, and Rs. 22,398 for 1981-82, based on a Tribunal decision.On appeal, the CIT (Appeals) restored the matter for 1978-79 to the AO for fresh adjudication but upheld the disallowance for the other years, holding that section 40A(8) applies to current accounts of directors. The Tribunal upheld the disallowance made by the AO and confirmed by the CIT (Appeals) for all years except 1978-79, which was restored for fresh adjudication.3. Addition of Cash Credits:The third issue pertains to the addition of cash credits of Rs. 46,000 for the assessment year 1981-82. The AO disbelieved the loans advanced by Smt. Chandraben M. Sanghrajka (Rs. 26,000) and Shri Mahesh M. Sanghrajka (Rs. 20,000), citing reasons such as the loans being received in cash, lack of tax assessment of the creditors, and doubts about their financial capacity.On appeal, the CIT (Appeals) confirmed the additions due to the lack of evidence establishing the creditworthiness of the creditors. The Tribunal upheld the decision of the CIT (Appeals), noting that no corroborative evidence was produced to substantiate the availability of funds and the nexus with the loans advanced.Conclusion:The appeals were partly allowed, with the Tribunal reversing the disallowance of interest on borrowed funds for all assessment years under consideration, upholding the disallowance of interest under section 40A(8) for all years except 1978-79, and confirming the addition of cash credits for the assessment year 1981-82.