2015 (8) TMI 283

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....ainst the appellant by our order and judgment dated 03.03.2015 in Commissioner of Income Tax-I, Ludhiana vs. M/s Kudu Industries, Ludhiana, ITA No.382 of 2014. 3. The appeal is admitted on the following substantial question of law:- "i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in directing the AO to recompute the disallowance under section 36(1)(iii) of the Act by adopting the average cost of debt for the year." 4. The assessee was engaged in the manufacturing, trading and job work of yarn and fabrics. The assessee had made interest free advances to various parties including by way of advances to suppliers and employees. These were in the normal course of business. However, advances....

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....erted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for nonbusiness purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) o....