TaxTMI 
TaxTMI 
2013 (4) TMI 767
X X X X Extracts X X X X
X X X X Extracts X X X X
....rs. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has a capital balance of only Rs. 11,44,483/-, the assessee has unsecured borrowings aggregating to Rs. 66,55,643/-, on which the assessee has paid as high an interest as 12%, the assessee has also extended interest free advances. The Assessing Officer also noted that while the assessee has conducted business only in the last two months, the borrowings were made in the period preceding thereto which, according to the Assessing Officer, showed that "obviously, the interest bearing loans were utilized for some other purpose other than business". The assessee's plea to the effect that the assessee also carried on business in the preceding year as well, that, in any case, the assessee had to organize resources in advance so as to prepare for upcoming business, and that there was no other use of borrowed funds, was simply brushed aside. The Assessing Officer concluded that since assessee's own capital is only Rs. 11,44,483/-, and since borrowed funds are used for advancing interest free loans, the interest paid on borrowings is to be disallowed. 3. Aggrieved, assessee c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on'ble Kerala High Court's judgment in the case of CIT Vs V N Baby & Ors (254 ITR 248) in support of the proposition that an assessee with liquidity cannot claim that it can give interest-free advances to the partners and others and then borrow funds from the bank on interest for business purposes, and that such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. The CIT(A), having noted that the assessee has not demonstrated any commercial expediency in advancing these loans and that there was no nexus in availability of interest free funds and interest free advances, confirmed the disallowance. The assessee is not satisfied and is in further appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. We find that the school of thought canvassed by Hon'ble Kerala High Court in the case of V I Baby (supra), which has been relied upon the learned CIT(A), was also adopted and followed by Hon'ble Punjab & Haryana High Court in the case of CIT Vs Abhishek Industries Ltd (286 ITR 1). Howeve....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... profits and other interest free credits and loans and if the total interest free advances including the debit balance of the partners did not exceed the total interest free funds available with the assessee, interest was not disallowable merely on account of the utilization of the funds for non-business purposes. Thus, as can be seen the Tribunal actually relied on the findings given in case of Torrent Financiers Ltd. (supra) and furthermore there was nothing contrary that could be brought on record by the Department for it to hold otherwise. Factually, it found huge funds were available without any interest liability with the assessee and that there was no evidence to hold that the borrowed money was utilized for the purpose of advance to the sister concern. All these aspects cumulatively led the Tribunal to hold that the disallowance made only on the ground that advances were given out of the borrowed funds, holding the assessee ineligible for allowance of interest by the Assessing Officer of the sum of Rs. 18.66 lacs was not sustainable. The Tribunal has correctly approached the issue which has been proposed in the present Tax Appeal. When there was no evidenc....