9911796707
Advanced Search 
TMI Blog2012 (3) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of Rs. 7,88,215/- on account of alleged inflated labour & transportation expenses. The ld. CIT(A) has erred in confirming the addition to the extent of Rs. 2,50,000/-." 3. At the time of hearing, the ld. A.R. submitted that ground No.1 is general in nature and ground Nos.3 and 4 are not pressed. Therefore, same are dismissed. Now effective ground remains to be considered is in respect of disallowance of interest of Rs. 15,66,180/-. During the assessment proceedings, the AO noticed that the assessee has given interest-free advances for Rs. 1,30,51,504/- to 13 parties of which details have been given at page-2 of the assessment order. The AO calculated interest by applying 12% rate of interest and calculated Rs. 15,66,180/- and same was added to the total income by disallowing interest claim of the assessee. The CIT(A) confirmed the order of the AO. The assessee relied upon a decision of ITAT, Ahmedabad in the case of Torrent Financiers v. Asstt. CIT [2001] 73 TTJ 624 wherein a formula laid down that to the extent of share capital and reserves being interest free, the interest free advances given, interest is not disallowed. The CIT(A) did not accept this order of the ITAT rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is, therefore, necessary for the purpose of running the business. 4.3 The object of the provision is not to enable an assessee to make a large borrowing and create a liability for payment of interest thereon not only in the year in which the borrowing was made, but the subsequent years as well, keep the loan outstanding and thereafter, divert the amount borrowed by taking it out of the business by giving it interest-free to others like sister concerns and relatives or for personal use, but continue to pay interest out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the business is clearly established from the facts on record, does not entitle the assessee to claim the benefit of deduction in respect of interest paid on the amounts borrowed but not presently used in its business. The time at which the diversion takes place is not the only relevant criterion but it is the fact of the diversion which is material and once it has been shown that there has been diversion of interest on the amount borrowed, but subsequently diverted would not qualify for deduction. Any view to the contrary would not in the least sub serve the object of the legislative provision, but it would only open the gates for the assessees to borrow merrily and after ostensibly using it in the business for a short period and at a subsequent point of time divert the funds in whole or part, for non-business purposes and continue to claim the interest on the borrowing as a deductible item of expenditure. The objects of the section would not in any way be advanced by the adoption of such a view. If a business for which the interest 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to time various sums of money aggregating to Rs. 1,77,984 from the business. It is not a case where any particular sum purporting to be borrowed on behalf of the business was spent for household expenses. This is a case where the loans were taken for carrying on the business but the family used to withdraw some amounts from the business whenever occasions arose. The family was surely entitled to withdraw from the capital supplied by it with the result of the capital being depleted. There is, therefore, no substance in the submission that the fact that part of the amount borrowed was later on used for personal expenses, would deprive the assessee of the benefits." 4.7 From the above judgment of Hon'ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own interest funds. This proposition is fortified by the decision of ITAT in the case of Torrent Financiers (supra), judgment of Allahabad High Court in the case of Prem Heavy Engg. Works (P.) Ltd. (supra) and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corpn. (supra). It is to note that decisions of the Hon'ble Punjab and Haryana High Court in Munjal Sales Corpn. (supra) wherein the Hon'ble Punjab and Haryana High Court followed CIT v. Abhishek Industries Ltd. [2006] 156 Taxman 257 have been reversed by the Hon'ble Supreme Court. Thus the decision of the Punjab and Haryana High Court in the case of Abhishek Industries Ltd. (supra) has been impliedly reversed on the issue.
5. In the light of above discussion, we find that in the case under consideration, the assessee was having sufficient interest free fund in the form of capital and reserves Rs. 5.48 crores against interest-free advances of Rs. 1.30 crores. Since the assessee has having sufficient interest-free funds to interest free advances, we therefore, delete the addition of Rs. 15,66,180/-
6. In the result, appeal of the assessee is partly allowed as indicated above. X X X X Extracts X X X X X X X X Extracts X X X X
|
