TaxTMI 
TaxTMI 
2019 (5) TMI 1895
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.... in its appeals however the crux of the issue is that the Ld.CIT(A) has erred in confirming the order of the Ld.AO who had disallowed the interest on borrowed funds amounting to Rs. 20,66,400/- each for the assessment years 1997-98 & 1998-99 and Rs. 2,12,75,000/- for the assessment year 2004-05 being the proportionate interest on the interest free loan extended to the sister concerns of the assessee. 3. The brief facts of the case are that the assessee is a limited company engaged in the business of manufacturing and trading in chemicals and generation of power, filed its return of income for the assessment years 1997-98, 1998-99 & 2004-05 on 26.11.1997, 30.11.1998 & 01.11.2004 admitting total income of Rs. 51,12,470/-, Rs. 1,21,73,493/- &....
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....oan extended to sister concerns cannot be allowed as deduction because the interest free loan extended by the assessee company out of its interest bearing fund is not for the business purpose of the assessee company. On appeal, the Ld.CIT(A) agreeing with the view of the Ld.AO confirmed his order for all the relevant assessment years. 4. Before us the Ld.AR argued stating that the assessee company's equity capital, general reserves, accumulated profits and surplus exceeded the amount of loan extended to the sister companies. The Ld.AR further argued stating that the assessee's funds arising from its equity capital, general reserves, accumulated profits and surplus are interest free funds of the assessee company and there is no prohibi....
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....ustaining the same. However, the Ld.DR did not dispute with the fact that the assessee's equity share, general reserves, accumulated profits and surplus exceeds the loan extended, however he relied on the orders of the Ld.Revenue Authorities wherein they had held that the equity share, general reserves, accumulated profits and surplus does not reflect the cash liquidity position of the assessee company and if there was cash liquidity from such funds then there was no need for the assessee Company to borrow interest bearing funds. The Ld.DR also relied in the decision of the Hon'ble Juridicitional High Court in the case K,Somasundaram & Bros. V/s. CIT reported in 238 ITR 939. 6. We have heard the rival submissions and carefully perused....
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....nted under the Memorandum of Association of the assessee company and yet carry out its business sourced from interest bearing funds. In an identical situation in the case CIT vs. Reliance Utilities And Powers Ltd., reported in 313 ITR 340 wherein the assessee had equity share capital of Rs. 180 crores, reserves & surplus - Rs. 120.80 crores, depreciation reserves of Rs. 95.39 crores aggregating to Rs. 398.19 crores, the Assessing Officer had recorded a finding that the sum of Rs. 213 crores was invested out of the assessee's own funds and Rs. 147 crores was invested out of borrowed funds and therefore disallowed interest amounting to Rs. 4.4 crores calculated at 12% per annum for 3 months from Jan' 2000 to Mar' 2000, the Hon'ble Bombay High....
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....ly the Hon'ble Jurisdictional Madras High Court held that :- "there was a total amount credited in the partners' capital as well as current account. A sum of Rs. 10,95,010 was arrived at in the partner's account after taking note of all the drawings made by them and the losses that were incurred in the business for the year ended on March 31,1972. Even after debiting the drawings and the loss in the business, the facts showed that there were sufficient funds with the firm to cover the entire advance to the private limited company. The Revenue had not made any attempt before the Tribunal to show that the firm had paid interest on the amount outstanding in the accounts of the partner. There was no finding either by the assessing authority o....
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.... when funds are pooled in together they get intrinsically mixed up and cannot be physically identified as to from which source such funds have been sourced. It is akin to a situation when a pile of water is accumulated from different source then the identity of the source loses its characteristics. In such situation various higher Judiciary has held that when funds from different source such as non interest bearing source(own source) and interest bearing source such as equity share capital, general reserves, accumulated profits, Reserves and interest bearing loan received are mixed up by way of introducing them in the books of accounts then there is a presumption that when interest free loan is extended they are firstly sourced out of ....