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2013 (3) TMI 13 - HC - Income TaxDisallowance of equivalent of interest on borrowed capital which was debit balances existing in the names of directors and their family members - ITAT deleted the addition - Held that:- It is established that the borrowed funds on interest will have to be utilized only for the purposes of business. But in the case in hand, it was not done so. Had the Directors or relatives have repaid the loan to the Company, certainly proportionate borrowing liability might have been reduced. It makes no difference that the loan was borrowed in the earlier assessment years. The principle of res judicata is applicable as per the ratio laid down in CIT vs. Brij Lal Lohiya [1971 (7) TMI 13 - SUPREME COURT]. Further, in the case of Radha Swami Satsang vs. CIT [1991 (11) TMI 2 - SUPREME COURT] it was observed that where a fundamental aspect permitting through the different assessment years had been found as a fact, one way or the other and parties have allowed that decision to be sustained by not challenging the order, it would not be at all to appropriate to allow the decision to be changed in the subsequent orders, but in the instant case, it is evident that borrowers i.e. Director and relatives have made no attempt to repay the amount. They utilized the interest free advances for their personal purposes, which has no connection with the business activity of the Company. In other words, the funds were utilized for the purpose of non-business purposes. At the same time, a huge amount has been borrowed @ 20% interest. No attempt was made to reduce the said borrowing. The Commercial expediency 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. Thus there has to be a nexus between the advancing of funds and business interest of the assessee. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee and working solely in the interest of the assessee, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advance when the assessee 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 the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. In the light of above discussion,impugned order passed by the Tribunal is set aside and restored the order passed by the assessing officer in this regard for the assessment years mentioned above - against assessee.
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