2010 (5) TMI 53 - HIGH COURT OF DELHI

Disallowance of interest - diversion of the funds borrowed by the assessee - AO disallowed the interest paid by the assessee firm to the extent of ₹ 30,92,266/-, taking the rate of interest at 14.45% per annum, which was the rate at which interest was being paid by the assessee firm to the bank in CC 40 account - CIT(A) held that interest free advances were given out of the cash from account with the bank, which had debit balance, on which the assessee firm was required to pay interest and, therefore, there was a direct nexus between the interest bearing funds borrowed by the assessee and interest free advances given by it to its sister concern. He rejected the explanation that interest free advances were made out of interest free funds available with the assessee firm, as he found that the advances were made out of the overdraft bank account maintained with Punjab & Sind Bank. He, accordingly, upheld the disallowance made by the Assessing Officer. - The Tribunal did not find any commercial expediency in making interest free advances to the sister concern. It was noted by the ITAT that no material had been brought to its notice to show that the interest free advances had been given for the purpose of business or that by giving interest free advance, the business of the assessee would be served better. The Tribunal rejected the argument of the assessee that there was business connection.

Held that: . The commercial expediency, in our view, would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee firm - Some business objective should be sought to have been achieved by extending such interest free advance when the assessee firm/company itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which included borrowed funds. - Assessee fails to pass the test - decided in favor of revenue.