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2015 (6) TMI 70 - ITAT HYDERABADDis-allowance of interest on borrowed funds - Interest free advances given - Commercial Expediency - Held that:- It is not disputed that the advance given to M/s Prayag Enterprises Ltd. was directly out of the borrowing from the Bank. According to the assessee M/s Prayag Enterprises Ltd. was appointed as assessee's sales promotion agent/representative throughout the state of Andhra Pradesh for the sale of IML products of UB Group of Companies, manufactured by the assessee. At that time, the assessee was a partnership firm and later on converted into a limited company. This relationship has been continued through the agreements dated 28.10.2004, 1.4.2006, 1.4.2009 and 1.4.2010 and is still continuing. During the period the business relationship of the assessee with M/s Prayag Enterprises Ltd has been very extensive both in volume and value. M/s Prayag Enterprises Ltd has very efficient and vast marketing network in the state of Andhra Pradesh including the UB Group of Companies and is engaged in the services for marketing their products. In our opinion M/s Prayag Enterprises Ltd. may have continued its relationship with the assessee in the course of business of the assessee, but there should be a valid reason and expectation that the amount advanced is for the purpose of the business and the recipient is expected to carry out some specific activities to improve the business of the assessee. In the present case it has been stated that the assessee expected to expand the market reach. It was further stated that the assessee was looking out for fresh acquisition of additional manufacturing facility. The assessee has not explained elaborately as to how Prayag Enterprises Ltd. is expected to expand its market reach and also not brought out any details of specific direct companies which have been identified in connection with fresh acquisition. Hence, a mere statement that advances have been made for these purposes cannot be accepted. Further examination as to the specific services expected to be done either for expanding the market reach or for making fresh acquisition do not appear to have been made by the lower authorities. In SA Builders [2002 (6) TMI 162 - ITAT CHANDIGARH-A],it has been held that the borrowed funds, if advanced to a third party, it should be for commercial expediency if it is sought to be allowed u/s 36()(iii) of the Act. Hence commercial expediency should be established more specifically in this case which requires further examination. The assessee is to be more specific as to what they expect M/s Prayag Enterprises Ltd to do and what exactly M/s Prayag Enterprises has achieved by granting of these advances of ₹ 43.60 crores to the assessee. In these circumstances, we are of the opinion that the matter should be set aside to the file of the AO and the assessee should be given another opportunity to explain in detail the specific reasons and purposes for which the trade advance of ₹ 43.60 crores has been given and what has resulted from the utilisation of the advance - Allowed revenue's appeal for statistical purpose.
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