TaxTMI 
TaxTMI 
1994 (3) TMI 138
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....dvances to sister concern Copper Strips (P.) Ltd. on which no interest was charged. In the original assessment for 1978-79, the Assessing Officer disallowed interest of Rs. 36,585 pertaining to those advances on the view that there was no indication in the books of account, that they were made against any material received or purchased from the sister concern. 4. On appeal, the then CIT (Appeals) restored the issue to the AO for examining the matter with reference to the balance sheet of the sister concern after giving opportunity to the assessee of being heard. Thereafter, the AO called upon the assessee to furnish the balance sheet of the sister concern but it was not filed. However, a photo copy of the certificate dated 31-12-1977 of sister concern was filed which indicated that raw material weighing 26738.400 kg. was given to the assessee on 31-12-1977 which is relevant for the assessment year 1978-79. However, it is not clear to the AO that the advances were made for the said raw material. He has also referred to the doubt cast in the earlier order by the then CIT (Appeals) on the nexus between the material received for conversion from sister concern and advances made to it....
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....agreement, no charges will be recovered for the material supplied for conversion and the material would lie with the assessee in trust. According to clause (3), in case of delay or default in supply by the assessee, the sister concern would recover the loss in terms of money as settled between the parties. Clause (4) of the agreement is very much relevant which is reproduced here below : "4. The material to be supplied by the first party to the second party for conversion/manufacture, being voluminous, costly and worth of substantial amount of money for which the party of the first part desired to get the same secured and to keep deposit in the current account of the second party. The said deposit may not be of equivalent value of the material but should at least cover 75% to 100% value of the material, supplied and remained with the party of the second part. The party of the second part agree to the said proposal, and confirm to keep deposit as a kind of security towards the material lying with them for conversion/manufacture as per specification of the party of the first part. The said deposit shall not bear any interest as agreed between both the parties. It is, however, f....
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....diency of the business carried on by the assessee because in order to ensure continuous flow of raw material for the purpose of job work, the assessee has been advancing funds and the closing amount of advances remaining unadjusted would represent a fraction of the market value of material lying with the assessee for processing. In this connection, the assessee has furnished certificate from the sister concern showing the quantity of copper material lying in stock for processing. 12. As regards the interest paid on borrowed funds, the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 permits deduction of interest if capital is borrowed by the assessee for the purpose of business and the assessee actually paid interest and claimed deduction. The whole exercise of diversion of borrowed funds to sister concerns came to be performed by the AO only on account of certain observation made by the predecessor CIT (Appeals) in his order dated 23-7-1984. While restoring the matter to the AO, he pointed out that there was no indication in the books of the assessee that the amounts advanced by the assessee to the sister concerns were against any m....
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....n 31-1-1977, the account of sister concern was debited at Rs. 4,18,000 as the material supplied by the sister concern was found to be defective. This resulted in a debit balance of Rs. 1,17,750. We have looked into the relevant account of the sister concern in the books of the assessee. The sister concern had paid back a huge amount and its balance stood at credit of Rs. 32,822.22 as on 9-11-1977. It stood at credit of Rs. 44,822.22 on 30-11-1977. On 31-12-1977, a debit of Rs. 78,430.81 was made to the account towards outstanding labour charges. Thus, almost till the end of November 1977, the account of sister concern has a credit balance and it is only on account of labour charges receivable, several debit entries have been passed in the month of December 1977 resulting debit balance of Rs. 78,430.81. 14. Coming to the Bombay Branch, in the current account, the opening debit balance was Rs. 1,30,893.16 against advances made by the assessee. Lump sum repayments were made by sister concern, viz., Rs. 90,000 on 12-1-1977, Rs. 10,000 on 17-1-1977, Rs. 10,000 on 17-1-1977, Rs. 20,000 on 5-3-1977, Rs. 10,000 on 7-3-1977, Rs. 15,000 on 5-8-1977, Rs. 30,000 on 25-5-1977 and Rs. 15,000 ....
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....e, the material of 222.400 kg. supplied by the sister concern was lying in stock for purpose of fabrication. 17. Coming to the assessment year 1980-81, the assessee's letter dated 8-6-1989 contained at pages 43 and 44 of the paper book explained the case of the assessee. The debit balance of Rs. 5,22,535 in the account of sister concern included Rs. 1,85,063.20 (vide page 56 of the paper book) being outstanding labour charges and which did not represent maximum balance throughout the year. An analysis of Bombay Branch account of the sister concern shows that it had opening debit balance of Rs. 2 lakhs and closing balance of Rs. 2,45,824.29 credit. Even after adjusting debit of Bhopal Branch of Rs. 34,865.22, the net credit balance stood at Rs. 2,10,959.07 (vide page 55 of paper book). 18. In Bhopal Branch advances made to sister concern were Rs. 87,45,000 and repayments received from sister concern were Rs. 96,50,824 resulting in excess receipts of Rs. 9,05,824 and net interest payable by the assessee on the difference of average advances and repayments works out to Rs. 11,323 --- vide page 45 of the paper compilation. 19. The consolidated statement of Bombay and Bhopal Br....