TaxTMI 
TaxTMI 
2015 (8) TMI 362
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....the AO in making disallowance of an amount of Rs. 14,04,000/- on account of interest. 3. That while confirming the said disallowance the learned CIT(A) has erred both on facts and in law in misinterpreting the agreement entered into between the assessee and North West Paper Kraft Private Limited. 4. That the disallowance has been confirmed ignoring the explanation and evidences brought on record by the assessee. 5. The appellant craves leave to add, amend or alter any of the grounds of appeal." 4. From the above grounds it would be clear that only grievance of the assessee in this appeal relates to the confirmation of addition amounting to Rs. 14,04,000/- made by the AO on account of disallowance of interest. The facts related to this issue in brief are that assessee e-filed the return of income on 28th September, 2008 declaring an income of Rs. nil which was processed u/s 143(1) of the Income Tax Act, 1961(hereinafter referred to as the Act) on 09.02.2010, later on the case was selected for scrutiny. 5. During the course of assessment proceedings the AO noticed that the assessee had advanced Rs. 1.17 crores to M/s North West Paper Craft Pvt. Ltd. but no interest had been char....
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.... ld. CIT(A) and reiterated the submissions made before the AO, it was further submitted that advance was given for the purchase of plant and machinery since the assessee was interested to set up a paper manufacturing plant. It was stated that no interest was charged by the partners on their capital which was Rs. 92.34 lakhs as on 31.3.2008 and no interest was paid on unsecured loans. It was further stated that the partners of the assessee firm had taken sufficient land in Uttarpradesh (U.P) for installation of plant & machinery and the infrastructure of the paper mill was developed along with plant and machinery. It was also stated that the AO had not doubted the genuineness of the agreement submitted and had nowhere held that the advance was not made for business consideration. Therefore, the disallowance of interest was not called for. The assessee furnished copy of account of M/s Northwest Paper Crafts P. Ltd. for the financial year 2006-07 relevant to the preceding assessment year 2007-08. From the above said account the Ld. CIT(A) found that there were inflow and outflow of funds through out the financial year 2006-07 and that the assessee paid Rs. 1,97,49,114/- and received ....
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....rth West Paper Crafts Pvt. Ltd. as an advance, it was a business transaction for the purpose of purchase of Plant & Machinery, as the assessee entered into an agreement for purchasing Plant & Machinery. It was further stated that the assessee furnished all the details to the AO as well as the Ld. CIT(A) and explained that there was no nexus in the interest free advance and the interest bearing loans. Therefore, the disallowance made by the AO and confirmed by the Ld. CIT(A) was not justified. The reliance was placed on the following case laws :- * CIT vs. Rockman Cycle Industries Ltd. (2009) 176 Taxmann 21 (P&H) * CIT vs. Amrit Soap Co. (2009) 308 ITR 287 (P&H) * Munjal Sales Corporation vs. CIT (2008) 298 ITR 298(SC) * S.A. Builders vs. CIT(2007) 288 ITR 1 (SC) 8. In his rival submissions. Ld. DR reiterated the observations made by the authorities below and strongly supported the impugned order passed by the Ld. CIT(A). 9. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case it is noticed that the assessee entered into an agreement with M/s North West Paper Crafts Pvt. Ltd. for purchase of....
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.... has been recorded that the interest paid in respect of the advances was for business consideration, then the deduction has to be allowed to the assessee while computing the income. Merely because the interest-free loan has been advanced to the sister concerns, no such inference can be drawn that the said advances were not for any business connection or purpose. The Supreme Court in S.A.Builders Ltd.'s case (Supra) has held that when the assessee borrowed the fund from the bank and lent some of it to its sister concerns as an interest-free loan, then the real test to allow the interest as deduction under section 36(1)(iii) of the Act is whether this was done for commercial expediency or not. Similar view has been taken by the Supreme Court in Munjal Sales Corpn.'s case (Supra)." 11. In the present case also the interest was paid by the assessee on the amount borrowed for the purposes of business so it was to be allowed u/s 36(1)(iii) of the Act and once it is established that the interest paid was for the business consideration than the deduction has to be allowed to the assessee while computing the income u/s 28 of the Act and no disallowance can be made merely on this basis that....
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....to add, amend or alter any of the grounds of appeal." 13. Ground no. 1 and 7 are journal in nature while ground no. 4 was not pressed, so these grounds do not require and any comments our parts. Ground no. 2 relates to the disallowance made by the AO on account of notional interest on the advance given to M/s North West Paper Crafts (P) Ltd. for the purchase of Plant & Machinery. 14. The facts related to this issue are identical to the facts involved in Ground no. 2 of the assessee's appeal in I.T.A. No. 1194/Del/2012 for the A.Y. 2008-09 and even the rival submissions were similar. Therefore our findings given in former part of this order vide paras 9 to 11 shall apply mutatis mutandis. In that view of the matter, the impugned addition is deleted. 15. Vide Ground no. 3 the grievance of the assessee relates to the disallowance of Rs. 4,39,764/- made by the A.O. on account of interest by invoking the provisions of Sec. 40(a)(ia) of the Act. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had paid interest to the tune of Rs. 4,39,764/- to M/s TML Financial Services Ltd. on account of secured loan of Rs.....
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..... Hence there is no diversion of any fund for personal gain of the partners or its stake holders at the expense of the firm. The assessee has also not obtained any working capital funds from any bank or financial institution. Further no interest has been paid to any unsecured loans. The advance to Mr. Rakesh Khanna was advanced against purchase of their assets and was made for the business expediency. In view of above, it is submitted that the assessee has not made any advances which is not linked with business activity, therefore, no disallowance of interest be made." That the reliance of the Ld. AO on the above judgement of Abhishek Industries Limited is also misplaced. The facts of the case of the assessee is clearly distinguishable as specified in the judgement of Hon'ble Punjab and Haryana High Court in Abhishek Industries Limited. The advance made to Sh. Rakesh Khanna by the assessee was for business considerations only, and this fact has not been negated by the ld. AO. Hence, the ratio of judgement relied upon by the A.O. is squarely not applicable. Reliance in the case of assessee is placed on the judgement of Hon'ble Supreme Court in the case of S.A.Builders vs. CIT(2007)....
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....h Khanna against the purchase of asset for business expediency. Therefore, disallowance made by the AO and sustained by the Ld. CIT(A) was not justified. In his rival submissions. The ld. DR strongly supported the orders of the authorities below. 21. After considering the submissions of both parties and the material on record it is noticed that the facts of the present issue are similar to the facts involved in the issue raised vide ground no. 2, even the rival submissions were also similar. Therefore, our findings given in respect of ground no. 2 in former part of this order shall apply mutatis mutandis for this issue. In that view of the matter the addition of Rs. 55,000/- made by the AO and sustained by the ld. CIT(A) is deleted. 22. The last issue vide ground no. 6 relates to the confirmation of adhoc disallowance of Rs. 1,00,000/-, made by the A.O. out of the various expenses. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed various expenses as per following details :- Expenses Amount Miscellaneous Exp. 97,543/- Printing & Stationery 1,91,518/- Salary 74,31,171/- Staff Welfare ....