TaxTMI 
TaxTMI 
2013 (7) TMI 768
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....ommercial expediency was involved in giving interest free advances to Shri Arun Jain, Rishab Agencies & Surabhi J.K.S.A.V. Kendra Pali." 2. The facts related to this case, in brief, are that the Assessing Officer during the course of assessment proceedings noticed that the assessee had given loan to the following persons/concerns and had not charged interest: 1. Shri Arun Jain Rs.35,32,620/- 2. M/s Rishabh Agencies (A) Pali Rs. 57,000/- 3. M/s Surabhi J.K.S.A.V. Kendra Pali Rs. 2,50,000/- Rs.38,39,620/- 2.1 The Assessing Officer further observed that as per the details available in Schedule-10 of the audit report, the assessee had paid total interest of Rs.5,78,220/- to the relatives, bank and other. The....
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....l from said firm. Therefore, no interest has been received / charged. The interest from Rishabh Agencies on advance of Rs.57,000/- for 9 months @12% may be included to the income of the assessee." 2.2 The Assessing Officer also examined on oath Shri Arun Jain u/s 131 of the Act (hereinafter referred to as the "Act") on 09/12/2010. In his statement Shri Arun Jain stated that the amount was received by him on behalf of the firm M/s Marudhara Fab Tex, in which he is one of the partners having 50% share and other two partners Shri Rakesh Kumar and Shri Sampat Raj having 25% share each. Shri Arun Jain claimed that the amount was received as security deposit as major part of grey cloth job work of M/s Marudhara Fab Tex was got done from M/s....
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....should be for the purpose of business or profession. The Assessing Officer observed that so long as the amount borrowed is used in the business, the interest paid on such borrowing was an expenditure which was required to be deducted in the computation of the income from the business. The Assessing Officer held that the assessee diverted its interest free advances to the relatives and paid the interest, which was claimed as business expenditure. He worked out the interest on the aforesaid referred to loans at Rs.4,66,762/- and disallowed the same. The reliance was also placed on the following case laws: (i) K. Somasundaram and Brothers vs. CIT [1999] 238 ITR 939 (Mad) (ii) CIT vs. Venkateswaran [1996] 222 ITR 163 (Mad) (iii) CIT vs....
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....not as security deposit with M/s Marudhara Fab Tex. He also observed that Shri Arun Jain while replying to question no. 7, stated that the assessee had not advanced any amount as security deposit to any of the other parties. The learned CIT(A) was of the view that there was no system to advance the amount as security deposit and that there was no such agreement where any such type of condition was given that the assessee will deposit the security for business. The learned CIT(A) was of the view that the assessee failed to prove any business expediency and that the advances were given for any business purpose. Accordingly, the learned CIT(A) held that the Assessing Officer was justified in making the disallowance. 4. Now the assessee is i....
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....cer, in his statement recorded on 09/10/2010, clearly stated that they had not taken security deposit from other parties but received security only from the assessee for the reason that the substantial goods were lying with the assessee. A reference was made to page No. 53 of the assessee's compilation, which is the copy of statement of Shri Arun Jain. The assessee also drew our attention towards page No. 21 of the assessee's compilation which is the copy of the affidavit dated 13/10/2010 of Shri Arun Jain wherein it was stated that no interest was paid on the security amount received from the assessee. It was accordingly submitted that the Assessing Officer was not justified in making the addition for notional interest when there was no ne....
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....g 50% share. Therefore, there was no reason to disbelieve that the assessee had given interest free security to Shri Arun Jain, partner of M/s Marudhara Fab Tex from whom a sum of Rs.1,45,39,177/- as job charges was received by the assessee. Therefore, the learned CIT(A) was not justified in confirming the disallowance made by the Assessing Officer on account of notional interest on the security deposit given to the party from whom maximum job work was obtained by the assessee. As regards to the observation of the Assessing Officer that the amount outstanding in the name of Shri Arun Jain was shown under the head "loans and advances" and not under the head "security deposit" in the balance sheet, the said observation cannot change the natur....