2015 (12) TMI 99

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....e brief facts of the case are as under : The assessee is a proprietor of Adityam Polymers and is engaged in the business of manufacture and sale of moulds, plastic injection moulding goods etc. He is also co-partner in M/s. Adityam Technoplast (P) Ltd. where he is a co-owner. It is observed from balance sheet that the assessee has raised unsecured loan of more than Rs. 50.00 lacs apart from cash credit loan of ICICI bank amounting to Rs. 46,63,335/- and secured loan of Rs. 2,58,375/- whereon he is paying interest. He has claimed interest amounting to Rs. 5,05,692/- in the Profit and Loss account. The assessee has advanced a interest free loan of Rs. 24,86,550/- to Adityam Technoplast Pvt. Ltd. in the following manner : Date Amount ....

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....ness activity carried on by the assessee. It was submitted that the proprietorship of the assessee is not a separate legal entity, hence, no disallowance of interest can be made on account of advances given by him. He further submitted that the settled legal position in this regard is that if the advances are made out of own funds which are non-interest bearing and the interest bearing funds are used in the business only, then no disallowance of interest can be made. Out of total loan amount of Rs. 24,86,550/- advanced to Aditya Polymers Pvt. Ltd., as reproduced above, a sum of Rs. 6,60,000/- was advanced out of Rs. 3,50,000/- deposited in case on 10.04.06 out of own fund and Rs. 2,25,000/- taken as unsecured loan on 12.04.2006 @ 8% interes....

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....of the proprietary concern, the value of which as on 31.03.2007 is of Rs. 78,11,751/-. It was submitted that the loan from M/s. Pragya Enterprises was raised in the month of February and March which has no direct nexus with the loan advanced to M/s. Adityam Technoplast (P) Ltd. He further submitted that interest on borrowed money is allowed as a deduction from the business only if the assessee satisfies the condition laid down in section 36(1)(iii) of the Act only if the same has been used for the purpose of business. Where the money borrowed was diverted for giving interest free loans to sister concern, the proportionate interest attributable to such loans could be legitimately disallowed by the AO. He also relied on the following judgment....