TaxTMI 
TaxTMI 
2014 (4) TMI 903
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngaged in the business of trading in bullion (gold and silver) in the HUF status. During the course of assessment proceedings, it has been observed by the A.O. that the accounts of members of the HUF of the assessee have debit balances as per the books of the accounts on which no interest were charged, whereas interest was paid on the amounts borrowed from banks as well as relatives including the HUF entities of the family members. Accordingly, interest on the debit balances of individual members of HUF were worked out and disallowed proportionately to the extent of R. 28,93,009/-, holding that the funds borrowed for business purposes were diverted for making interest free advances. The appeal has arisen mainly on this ground. As indicated, the assessee is in to the business of wholesale trading in bullion, and the business is carried in the name of Chanda Anjaiah Parameswar (CAP) as a proprietary concern in HUF status and have very high turnovers under its belt. For the purpose of business, the assessee obtained cash credit of Rs. 20.00 Crores from Axis Bank, R.P. Road, Secunderabad. It was observed by the AO that some of the funds from CC A/c., are diverted into the SB accounts o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the 5B accounts of the individuals to oblige the request of the banks and the assessing officer has agreed in principle for not charging the interest on the balances kept for a short period of few days. However, while calculating the interest both the opening debit balances and balances kept for short period intermittently were not considered by the assessing officer while analysing of the calculations of interest on the credit balances in the individual accounts, the assessee has furnished the details of excess calculation of interest in few cases, including the interest calculated on short duration funds transferred to SB accounts, along with the fund flow statement as on 31.03.2009. 6. On hearing the AR of the assessee, the CIT(A) observed that Mr. Chanda Anajaiah Parameshwar was carrying the business of trading in bullion in the status of HUF. It has been observed by the AO that amounts borrowed by the assessee through CC account with Axis Bank were diverted to the SB accounts of following individual members of the assessee's family and the debit balances as on 31.03.2009 were shown as under: (1) Chanda Parameshwar Rs. 8,47,15,000 (2) Chanda Neelima Rs. 74,10,000 (3) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s as on 1st of April were on account of carried forward of figures which were squared up in a day or two subsequently and based on the submission that the AO has accepted the contention of the assessee during the course of the assessment proceedings to exclude such opening balances for calculating interest on proportionate basis. It was also submitted that the AO agreed to exclude the debit balances kept for a short period in calculating the interest, but was not done in passing the order, that has resulted in excess calculation of interest as worked out by the AO for the purpose of disallowance. There is force in the arguments of the assessee on this aspect and the AO has himself mentioned about excluding the amounts kept for few days like 2 or 3 days and also the opening debit balances which are squared up in quick time, for the purpose of calculating the proportionate interest for disallowance. However, the same was not shown on the record and the reasons are not indicated for excluding such amounts for calculation of the interest. Keeping the nature of the transactions and also the faint angle of commercial expediency/ business connection, the assessing officer should consider ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ailable to the assessee and as such, the finding of the assessing officer that business funds diverted for non-business purposes is not correct. In this context, the assessee referred to the judicial decisions in the case of Munjal Sales Corporation (supra), M/s. Bharat Tubes & Tin Printers (supra) and M/s. Maheshwari Handloom Agency Pvt. Ltd. (supra). The decision of the Apex court in the case of Munjal Sales Corporation Vs. CIT & another as reported in 290 ITR 298 has been gone through and as per the said decision, the issue mainly involved was whether the allowance of the expenditure u/s. 36(1)(iii) read with section 40b(iv) of IT Act or not. Though the decision of the Apex Court was that when the assessee was having enough opening balances to cover the interest free advances, there is no angle of disallowances of proportionate interest, the facts of the present case are distinguishable from the facts of the case in said decision mainly on the ground that the said decision was mainly referring to the allowability of deduction u/s. 36(1)(iii) r.w.s. 40b(iv) of the IT Act in light of the change in law w.e.f. 01.04.1993, where as the present issue revolve around allowability of exp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the cash diverted by the assessee without any benefit to assessee. Accordingly, it was held that claim for deduction of interest on borrowings is to be disallowed, where the amounts are diverted. Similar is the observation by the Apex Court in SA Builders vs. CIT (288 ITR 1) wherein it was commented that to make the expensed deductable, commercial expediency behind advancing the loan, is the criteria to be proved by the assessee to get deduction of interest paid on funds diverted as interest free loan. On the facts of this case, as indicated in the fund flow statement filed in the course of the appellate proceedings, the application of the funds for the purpose of interest free loans was put at Rs. 11.11 crores as against the interest free funds of Rs. 5.93 crores in the form of capital and interest free unsecured loans available to the assessee. This very fact proves that there is diversion of the funds borrowed for business purposes to the non-business purposes. Based on the facts as well as the ratio of the decision of ITAT in the case of ACIT Vs. Punjab Stainless Steel Industries (supra), the amounts borrowed for business purposes are to be treated as amounts diverted for b....