TMI Blog2009 (2) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,16,41,865 to M/s. Paks on which no interest was charged. The Assessing Officer further noticed that the partnership firm converted into company under the name of Paks Veterinary Drugs Manufacturing Company was out of the partner in that partnership firm. Interest-free funds given by the assessee to that company. The Assessing Officer disallowed Rs. 38,31,920 and Rs. 17,11,417 proportionate interest claim of the assessee on the ground that the assessee has given interest-free funds to its sister/group concern. The CIT(A) has confirmed the disallowances made by the Assessing Officer. 3. The contention of the assessee is that advances were given for the purpose of business in accordance with commercial expediency. The learned AR has relied upon the judgment of Apex Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 . The other contentions of the assessee are that interest funds were given out of interest-free funds available with the assessee. The alternate contention of the assessee is that netting benefit may be allowed. During the hearing, the learned AR tried to demonstrate that his submissions by filing chart but same are subject to verification. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business by giving it interest-free to others like sister concerns and relatives or for personal use, but continue to pay interest out of the income of the business and claim the amount of interest paid as a business expenditure. The payment of interest on the amount not used in the business cannot be regarded as a business expenditure as the business does not derive any benefit by the outgoing by way of interest on an amount which is no longer in the business, but had been diverted from the business. This provision, therefore, cannot be construed as enabling an assessee to burden the business with interest even while taking the amount initially borrowed for the business, but subsequently taken out of the business by diverting it as interest-free loans to sister concerns and relatives or for personal use. 4.3 The amount borrowed for the business remains a liability for the business till its discharge. The fact that the amount borrowed may have been invested in the purchase of machinery or utilised as working capital or used in any other way does not in any way affect the liability for repayment of the amount borrowed. So long as the money borrowed is used in the business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid is claimed as a deduction has not benefited during the year from the capital borrowed by such borrowed amount being used in the business, such interest cannot be regarded as expenditure for the purposes of the business. The assessee may not even while using borrowed funds for its personal purposes and not business purposes claim deduction of the interest paid on the borrowing. In any case if the assessee takes stand that it is business expediency then, heavy burden lies on the assessee to prove such contention and said contention is to be examined by applying deferent criteria. 4.4 A real problem arises in cases where funds are pumped out of business which are comprised of both type of funds, borrowed as well as own funds for non-business purposes. In all such cases where mixed funds are used for both business and other than business purposes, there is no presumption that moneys used for other purposes came out of borrowed funds. It can be said that interest-free funds given are out of own funds to the extent of capital and reserves, and this proposition is supported by the decision of Hon ble Andhra Pradesh High Court in the case of CIT v. Gopikrishna Murlidhar [1963 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] 225 ITR 703. Thus such problem can be resolved by analyzing statement of accounts and in particular balance-sheet. Where details of own capital, borrowed funds and interest-free funds given or utilized for other purposes are available. There is no much difficulties in examination of right to replace own capital to borrow funds in case of individual and partnership firm. But in the case of company, capital is fund of public/shareholders which is managed by the Board of Directors. In the case of company there are certain restrictions under the Companies Act in use of capital/fund for personal benefits. Such replacement is required to be authorized by proper resolution and must be in conformity with the provisions of Companies Act and rules and regulations of regulatory bodies. Same are required to reflect in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 the Assessing Officer is duty bound to examine those material as enough power in this regard provided in IT Act. Needless to mention that the Assessing Officer 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 Assessing Officer to decide the issue afresh in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Special Bench decision of the ITAT after providing opportunity of hearing to the assessee. It is relevant to mention that amount of disallowance must not be exceed the amount originally disallowed by the Assessing Officer. 7. Ground No. 4 is in respect of deduction under section 80HHC. 8. The Assessing Officer calculated deduction under section 80HHC at NIL as there is negative profit. The Assessing Officer did not allow 90 per cent of the provision for doubtful debts written back accumulating of Rs. 9,32,000 and miscellaneous income of Rs. 70,000 while computing profit of business for the purpose of computation of deduction under section 80HHC. 9. After hearing the learned representatives of the parties, we find that the issue is covered by the judgment of the Apex Court in the case of IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521 wherein it has been held that deduction under section 80HHC(3)( c ) can be allowed only if there is positive profit. As regards 90 per cent claim from doubtful debts written off and miscellaneous income, deduction under section 80HHC is required to calculate in the light of a judgment of jurisdictional High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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