TMI Blog2002 (4) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... yr. 1998-99 admitting income of Rs. 68,950. An addition of Rs. 4 lakhs was made by the AO on the ground that the assessee has diverted borrowed funds to sister-concerns and that there is a direct nexus between the borrowal and interest-free advances made to sister-concerns. The learned CIT(A) upheld the order of the AO. Aggrieved of the above, the assessee is in appeal before us. 4. Learned counsel for the assessee submitted that there is no nexus between the amounts borrowed by way of cash credit/overdraft from the assessee s bankers and the amounts advanced to sister-concerns. He submitted a paper book consisting of pages 1 to 15 and argued that the two loans in question advanced to sister-concern which was weighing in the mind of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of sundry creditors Rs. 42,89,850, amount from M/s Atul Enterprises Rs. 1,96,658 in addition to Rs. 12,75,817 being partners capital contributions. Even the loans in question are of two borrowals. He argued, one being cash credit from bank of India and another being loans taken against deposits. He submitted that the loans taken from fixed deposits cannot be taken as borrowings diverted to sister-concerns interest-free as they were not routed through cash credit account. On a query from the Bench, he admitted that this statement requires verification and subsequently confirmed the fact that these loans from fixed deposits were in fact routed through the cash credit account of the assessee-company. Nevertheless, he argued that the loans t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that interest under s. 234B should be charged only upto the date of the first assessment i.e., under s. 143(1)(a) of the Act. 7. Learned Departmental Representative on the other hand vehemently controverted the arguments of the learned counsel for the assessee and submitted that there is clear nexus between the borrowed amounts on which interest was paid and the amounts lent to sister-concerns, which was interest-free. He vehemently contended that the cheques that were issued were out of the cash credit account of the assessee and thus, there is direct nexus in this case. The issue of cheques on the bank overdraft account to the sister-concerns, he argued, thus proves that the amounts were diverted from borrowed funds. He rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the CIT(A) and submitted that the same be upheld. 8. Heard both sides. Read all the papers on record, the orders of the authorities below and the case law cited. What is not disputed by both the parties is the fact that the cheques through which amounts were advanced to sister-concern were from the cash credit account of the assessee and that the disallowance can be made by the Department only when nexus is proved between the amounts borrowed and the amounts advanced. It is well settled that when there are sufficient funds available with the assessee on which no interest was paid, then diversion of such funds by way of interest-free loans to sister-concern does not allow disallowance of interest paid. On the issue of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination of the balance sheet reveals that the assessee does not have any other bank account. Thus, the sole reason that the only bank account for the assessee has been used to advance loans to sister-concern does not, to our mind, prove the nexus in this case. What is to be seen is whether there are substantial interest-free funds with the assessee or not. On a close observation of the balance sheet, it is seen that the assessee has the following interest-free. Rs. 1. Partners capital account 12,75,817 2. Interest free amount from M/s Atul Enterprises 1,96,658 3. Sundry creditors amount to 57,62,325 Against this, on the asset side of the balance sheet the lending to a siste ..... X X X X Extracts X X X X X X X X Extracts X X X X
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