TMI Blog2012 (12) TMI 246X X X X Extracts X X X X X X X X Extracts X X X X ..... d 26-02-2009 for the assessment year 2005-06. The assessee, in this appeal has raised the following grounds of appeal:- 1. That the learned Commissioner of Income-tax (Appeals) has erred in confirming the addition of Rs.3,10,812 out of interest expenditure made by the learned A.O the said addition is against law, facts and evidence on record. 2. That the learned Commissioner of Income-tax (Appeals) did not consider the submissions of the appellant that the interest expenditure was wholly business expenditure and no part of thereof should have been disallowed. 3. That the learned Commissioner of Income-tax (Appeals) did not appreciate the submissions and arguments that the learned A.O having not established correlation and direct nexus between the amount given to the sister concern and the borrowings made by the company more so he did not appreciate the contention of the appellant that the company had interest free funds which could have been part of the mount given hence whole of the expenditure was not relating to interest bearing funds and therefore Rs.3,10,812 disallowed was excessive and no reasonable to the facts and circumstances of the case. 4. The appellant submits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any direct nexus between loan and borrowed finance received and amount advanced to the said company. Ld. AR submitted that assessee has earned cash profit during the year of Rs.1,04,59,353/- besides having share capital of Rs.2,27,240/- and free reserves of Rs.1,64,81,890/- at the beginning of the year i.e. on 01-04-2004. Thus, the total fund free of interest was of Rs.4,96,87,483/-. It is submitted by Ld. AR that assessee-company has sufficient interest free funds available for making advances. The order of Ld. CIT(A) is therefore erroneous. Ld. AR relied upon various decisions in support of her contention that where no nexus is established between the borrowed fund and advances, in such circumstances no disallowance of interest can be made. Ld. AR submitted that if advances are made to third party without interest from funds other than borrowing. It would not be a case of diverting borrowings to non-business purpose and so no part of interest on borrowing should be disallowed. Ld. AR relied upon the decision of Hon ble Allahabad High Court in the case of CIT v. Dhampur Sugar Mills Ltd. (No.2) (2005) 274 ITR 370 (All). It is submitted that in the case of CIT v. Prem Heavy Engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Inamulhaq S Iraki Abdulhaq S IRaki v. ACIT order dated 31-01-2012. 6. We have heard the rival submissions, perused the materials available on record and the judgments cited by the parties. The contention of Ld. AR is that the assessee has sufficient interest free funds and the advances were given from such funds, therefore no disallowance of interest expenditure claimed on borrowed funds can be made. On the other hand, Ld.SR-DR contended that even in the case where mixed funds are utilized, the assessee has to establish commercial expediency and demonstrate that such advances were essentially for the business purposes. On the other hand, the contention of Ld. AR for the assessee is that the Assessing Officer has failed to establish any nexus between the borrowed funds and the funds utilized for giving advances to sister concern. These two rival submission needs to be examined in the light of judicial pronouncements as relied by the respective parties. The Hon ble Apex Court in the case of S.A. Builders Ltd. (supra) has clarified that it was not the opinion of the Hon ble Supreme Court that in every case interest on borrowed loan has to be allowed if the assessee advances i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of interest only relating to the sum of Rs.18 lacs, and the disallowance was reduced accordingly. 7.Both the assessee as well as the Revenue filed appeals before the Income-tax Appellate Tribunal (hereinafter referred to as the Tribunal ). The Tribunal by its order dt. 20th June, 2002 allowed the appeal for the Revenue, and held that the entire amount of Rs.82 lacs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the AO was justified. Accordingly, the appeal filed by the Revenue was allowed and the appeal filed by the assessee was dismissed. 8. Against the order of the Tribunal, the assessee filed appeals in the High Court which were dismissed by the impugned judgment. 7. The Hon ble Delhi High Court in the case of Punjab Stainless Steel Inds. (supra) has held in para-11 12 of its judgment as under:- 11. In view of the provisions contained in s. 36(1)(iii) of IT Act, the interest paid by the assessee in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction. Hence, the question to be considered in a case such as the one before us is as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was extended for any commercial expediency or not and, therefore, it would be immaterial whether the assessee firm had interest-free funds available to it or not. 8. The Hon ble co-ordinate Bench of this Tribunal in ITA No.243/Ahd/2011 ITA No.3512/Ahd/2010 order dated 31-01-2012 has observed in para-11 as under:- 11. We find that as per this judgment of Hon ble Delhi High Court, where mixed funds are used for the purpose of giving interest free advances, the only relevant test is as to whether such interest free advances are due to commercial expediency or not. In the present case also, the funds are mixed funds and the assessee could not establish any commercial expediency and hence, in our considered opinion, this issue is squarely coverd against the assessee by this judgment of Hon ble Delhi High Court and respectfully following the same, this issue is decided against the assessee. From the judgment of Hon ble Delhi High Court in the case of Punjab Stainless Steel Inds. (supra) as followed by the Hon ble co-ordinate Bench in ITA No.243/Ahd/2011 ITA No.3512/Ahd/2010 (supra) it can be gathered that where mixed funds are used for the purpose of giving interest free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey was utilized for the purpose of advance to the sister concern. All these aspects cumulatively led the Tribunal to hold that the disallowance made only on the ground that advances were given out of the borrowed funds, holding the assessee ineligible for allowance of interest by the Assessing Officer of the sum of Rs.11.66 lacs was not sustainable. The Tribunal has correctly approached the issue which has been proposed in the present Tax Appeal. When there was no evidence brought on record by the Department for the Tribunal to hold otherwise than what has been concluded by way of any material, we hold that the issue is appropriately concluded in favour of the assessee and against the Revenue. 9. Admittedly in the case in hand, the assessee has both borrowed and interest free funds. It is transpired from the balance-sheet of the assessee-company as on 31-03-2005 that it had sufficient interest free funds. It is not disputed that the assessee-company had sufficient interest free fund could be used towards loan and advances to sister concern. The Revenue has not demonstrated as to how the interest bearing funds have been used towards loan/advances to the sister concern. In the abs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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