TaxTMI 
TaxTMI 
2010 (5) TMI 53
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....ired that there was an opening debit balance of Rs.1,80,64,962/- in that account, on 1st April, 2000. The debit balance in that account, at the end of the financial year, stood at Rs.1,75,49,633/-. It was noted by the Assessing Officer that M/s.Kesho Ram Industries was a sister concern of the assessee, in which two partners of the assessee firm, namely, Shri Paramjit Singh and Shri Harvinder Singh, were also partners, holding 50% shares in the profits of that firm. The Assessing Officer held that there was a clear cut diversion of the funds borrowed by the assessee, since the funds were advanced to M/s.Kesho Ram Industries out of CC 40 account of the assessee with Punjab & Sind Bank, in which the secured loan stood at Rs.1.33 crores. He was of the view that interest bearing funds had, thus, been diverted to the associate concern. He rejected the contention that since the firm had interest free funds in the current account of the partners aggregating Rs.22.7 crores, besides Rs.4.60 crores in the account of the father of a late partner Shri Trilochan Singh, the interest free advance to M/s.Kesho Ram Industries were made by the firm out of those interest free funds of Rs.27.32 crores.....
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....free and, therefore, the nature of the amount was the same as interest free advance. It was also found by the Tribunal that there was direct nexus between interest bearing loans and the interest free advances, since the advances had been made from the cash credit account and this position had not been disputed before it. The Tribunal was of the view that no case for commercial expediency in making the interest free advances was made out by the assessee. 6. In S.A.Builders Ltd. v. Commissioner of Income-Tax(Appeals) & Another: (2007) 288 ITR 1 (SC), it was found by the Assessing Officer that the assessee had transferred a sum of Rs.82 lakhs to its subsidiary company and there was a huge debit balance in the account of the subsidiary company. He, therefore, held that since the assessee had diverted the borrowed funds to its sister concern without charging any interest, proportionate interest relating to the said amount deserved to be disallowed. In the appeal filed by the assessee, Commissioner of Income Tax(Appeals) was of the view that only a sum of Rs.18 lakhs advanced to the subsidiary company had a clear nexus with the borrowed funds, since the borrowed amount had been paid o....
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....fore the Assessing Officer was that the interest free advances to M/s.Kesho Ram Industries were made out of interest free funds available with the assessee firm. No case of commercial expediency was set up before him. From a perusal of the order passed by the CIT(A), we find that the plea of commercial expediency was not set up before him as well. The assessee firm did not claim before him that the advances to M/s.Kesho Ram Industries were in the business interest of the assessee firm and were a measure of commercial expediency. The plea of commercial expediency in advancing the loan was set up for the first time before the Income Tax Appellate Tribunal. The assessee, however, failed to make out a case of commercial expediency before the Tribunal. During the course of arguments before us the assessee did not try to make out a case of commercial expediency in extending interest free advances to M/s.Kesho Ram Industries. The assessee did not tell the Tribunal as to what business interest of the assessee firm was sought to be achieved by making interest free advances to M/s.Kesho Ram Industries and in what manner that interest was served. The assessee was required not only to claim co....
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....see firm from CC 40 account, during the year in question. It appears that there was a purchase of sheets amounting to Rs.40,50,900/- from M/s.Kesho Ram Industries on 7th February, 2001. It was contended by the learned counsel for the appellant/assessee that this payment should be adjusted against the advances made from CC 40 account during this year. We are unable to accept the contention. There was already a debit balance of Rs.1,80,64,962.35 in the account as on 1st April, 2000. Therefore, this amount payable by the assessee to M/s.Kesho Ram Industries has to be adjusted against debit balance payable by M/s.Kesho Ram Industries prior to the advances extended during this year and not against the cash advances extended during the course of the year. Moreover, there is no finding recorded by the Assessing Officer, CIT(A) or by the ITAT that the opening balance of Rs.1,80,64,962.35 on 1st April, 2000 represented the premium payable by M/s.Kesho Ram Industries to the assessee firm, on transfer of DEPB licences. In fact, a perusal of the assessment order would show that the assessee itself submitted before him that interest free advances to M/s.Kesho Ram Industries amounted to Rs.1.81 ....
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....he commercial expediency, in our view, would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee firm and working solely in the interest of the assessee firm/company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advance when the assessee firm/company itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which included borrowed funds. The test to be appelied in such cases is not the source of the funds but the purpose for which the advances were ext....