Disallowance of financial expenses in proportion to purchase...

Disallowance of financial expenses in proportion to purchase from bogus companies was challenged. The assessing officer disallowed expenditure to the extent of paper transactions not backed by actual business. The CIT(A) disallowed losses on circular transactions as artificial and managed but allowed financial charges incurred for business purposes. The assessee pleaded that funds were required for working capital, but in paper transactions, there is no capital requirement as there was no actual purchase or sale. The assessee adopted the route of circular trading to raise higher finance from banks. The discounting charges on letters of credit paid to banks were genuine. The funds raised were used to augment working capital for delivery-based business. There was no diversion of funds. The funds from discounted letters of credit were used for business and allowable u/s 36(1)(iii). No ground to interfere with CIT(A)'s conclusions. The Revenue's ground was dismissed.