TaxTMI 
TaxTMI 
TaxTMI 
2012 (12) TMI 246
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.... established correlation and direct nexus between the amount given to the sister concern and the borrowings made by the company more so he did not appreciate the contention of the appellant that the company had interest free funds which could have been part of the mount given hence whole of the expenditure was not relating to interest bearing funds and therefore Rs.3,10,812 disallowed was excessive and no reasonable to the facts and circumstances of the case. 4. The appellant submits that eh interest u/s/. 234B and 234C have been wrongly charged and hence the same may kindly be deleted or reduced. 5. In view of above and others that may be urged at the time of hearing the appellant requests that a. Interest of Rs.3,10,812 disallowed may kindly be deleted; b. Interest charged U/s. 234B and 234C may kindly be reduced; and c. Such other further relief and reductions be allowed as the facts and circumstances of the case so requires." 2. Brief facts of the case are that assessee-company is engaged in the business of manufacturing of laminates and plywood sheets, electrical insulators, plywood etc. The assessee filed its return of income for the year under consideration declaring t....
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....no disallowance of interest can be made. Ld. AR submitted that if advances are made to third party without interest from funds other than borrowing. It would not be a case of diverting borrowings to non-business purpose and so no part of interest on borrowing should be disallowed. Ld. AR relied upon the decision of Hon'ble Allahabad High Court in the case of CIT v. Dhampur Sugar Mills Ltd. (No.2) (2005) 274 ITR 370 (All). It is submitted that in the case of CIT v. Prem Heavy Engineering Works P. Ltd. (2006) 285 ITR 554 (All) it has been held that where sufficient funds are available with the assessee in the form of interest free advance from customer's share capital reserves etc. to make interest free advance to sister concern and no disallowance can be made in relation to interest on borrowings by assessee on the ground that interest free advances were given to sister concern. This would be a case where borrowed money was not diverted by assessee but funds other than borrowings had been used in making those advances. Ld. AR submitted that there was no occasion to make addition since the assessee was having sufficient interest free funds and the advances have been made out of this ....
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....g Officer has failed to establish any nexus between the borrowed funds and the funds utilized for giving advances to sister concern. These two rival submission needs to be examined in the light of judicial pronouncements as relied by the respective parties. The Hon'ble Apex Court in the case of S.A. Builders Ltd. (supra) has clarified that it was not the opinion of the Hon'ble Supreme Court that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the creditors of the sister concern utilizes the amount advanced to it in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously if cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not ....
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.... which were dismissed by the impugned judgment." 7. The Hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds. (supra) has held in para-11 & 12 of its judgment as under:- "11. In view of the provisions contained in s. 36(1)(iii) of IT Act, the interest paid by the assessee in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction. Hence, the question to be considered in a case such as the one before us is as to whether the interest-free advance was made by the assessee for commercial expediency or not. If the advances were not made by the assessee for a business purpose of the assessee firm, interest paid by the assessee on that part of the borrowed capital which is commensurate with the amount of the interest-free advances extended by it cannot be said to have been paid for the purpose of its business. 12. The 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 person....
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....pinion, this issue is squarely coverd against the assessee by this judgment of Hon'ble Delhi High Court and respectfully following the same, this issue is decided against the assessee." From the judgment of Hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds. (supra) as followed by the Hon'ble co-ordinate Bench in ITA No.243/Ahd/2011 & ITA No.3512/Ahd/2010 (supra) it can be gathered that where mixed funds are used for the purpose of giving interest free advances, the test of commercial expediency is required to be applied. However, the Ho'ble jurisdictional High Court in tax appeal No.829 of 2007 in the case of CIT v. Raghuvir Synthetics Ltd. held as under:- "As can be noted from the order of the Tribunal,, the Assessing Officer disallowed the interest solely on the ground that the as had given interest free loans to the associate concerns, viz., R.R. Family Trust and Sagar Textile Mills and this disallowance, in appeal the CIT(Appeals) deleted by holding that the amount advanced to both R.R. Family Trust and Sagar Textiles Mills were not given during the year under consideration, but the same was given in the earlier years. CIT(Appeals) had also taken note....