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2009 (2) TMI 504 - AT - Income TaxDisallowance of interest expenditure u/s 36(1)(iii) - interest free loan to sister concern - interest bearing borrowed funds and own capital has lost its separate identity as both are mixed - contention of the assessee is that advances were given for the purpose of business in accordance with commercial expediency. From the judgment of High Court in the case of CIT v. Gopikrishna Murlidhar [1961 (11) TMI 68 - ANDHRA PRADESH HIGH COURT], We find that the assessee has right to replace his own capital with borrowed funds which were already used for the purpose of business in acquiring assets and other. With the help of this ratio of the judgment such problem can be resolved by examination and analyses of financial statements prepared on the basis of books of account maintained by the assessee. It is well accepted proposition that for the purpose of ascertaining profit and gains, the normal principles of commercial accounting should be applied, so long as they do not conflict with any express statutory provisions as held by the Hon’ble Supreme Court in CIT v. UP State Industrial Development Corpn.[1997 (4) TMI 2 - SUPREME COURT]. Thus such problem can be resolved by analyzing statement of accounts and in particular balance-sheet. The onus is on the assessee to furnish the relevant material regarding replacement of borrowed funds by own capital and interest-free funds available with the assessee. The presumption of availability of interest-free funds in the form of capital in case of company can be drawn on material furnished by the assessee-company. Considering the corporate sections, it is important and relevant to state that in case of company governed by Companies Act, such interest-free, if the same is not found in conformity with the provisions of the Companies Act and regulatory bodies to that extent, it cannot be presumed that the assessee has given interest-free funds out of interest funds available with the assessee in the form of capital and reserve. The owner of capital and reserve of a company is shareholders and their consent for giving interest-free funds only can be presumed that the interest-free loans are given in conformity with above discussion. The commercial expediency is also required to be established by the assessee by furnishing relevant material based on which it can be said that interest-free funds given to sister concern are in conformity with provisions of Companies Act and provisions of regulatory bodies. Before disallowing such interest AO is duty bound to examine those material as enough power in this regard provided in IT Act. Needless to mention that AO should record all such facts clearly by passing a speaking order. Since in the case under consideration, such complete details are not found on record we, therefore, remit both the grounds of appeal to the file of AO to decide the issue afresh in accordance with law keeping in above discussion and guidelines. AO is further directed that though the CIT(A) has also directed that netting claim also be examined, whether the same is allowable in accordance with law or not has to be found out by AO. The appeal of the assessee is treated as allowed for statistical purposes.
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