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TMI Blog2013 (1) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... 66 (9) TMI 30 - SUPREME COURT) - Decided against the assessee. Disallowance of Interest - loan from Motilon Synthetics (sister concern) - assessee has given interest free advance to Baba Synthetics (also its sister concern) - Held that:- Considering the undisputed fact that the assessee has paid interest on borrowed funds and had also lend interest free loan to its sister concern. CIT(A) while upholding the decision of AO has given a finding that assessee has not been in a position to prove the commercial expediency whereby it was required to give interest free loans to Baba Synthtics. As assessee could not controvert the findings of CIT(A) by bringing any material on record no reason to interfere with the order of CIT(A) - against assessee. - ITA No.713/Ahd/2010 - - - Dated:- 28-12-2012 - G.C. Gupta and Anil Chaturvedi, JJ. Appellant Rep by: Shri T. Sankar, Sr. DR Respondent Rep by: Shri R.N. Vepari, AR ORDER Per: Anil Chaturvedi: This is assessee s appeal against the order of ld. CIT(A)-1, Surat dated 27.01.2010. 2. The facts as culled out from the orders are as under:- Assessee is a company engaged in the business of trading of yarn and high s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be considered to be a justification for making the payment to sister concern and therefore for the purpose of business. He further observed that M/s Motilon Synthetics did not engage itself in any activity other than the alleged high seas sales and had no other income except the income from the assessee which proves that the sister concern had no experience as regards the high seas sales and therefore the payment of commission was wholly unjustified. He further held that all efforts of high seas sales were in fact made by the assessee himself. He further concluded that no service was rendered by Motilon synthetics and the payment was purely for extra commercial considerations. He further observed that in the preceding year (F.Y.1999- 2000) and in subsequent financial year (F.Y. 2001-02) assessee had not shown any payment by way of commission to Motilon Synthetics. He thus held that the payment of commission of Rs.1720403/- shown as business expenditure did not satisfy the test of commercial expediency and therefore it cannot be allowed as permissible deduction. Aggrieved by the action of AO, assessee preferred appeal before CIT(A). CIT(A) dismissed the appeal of the assessee aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling agent. This also shows that the entire payment was nothing but a device to evade the tax. In view of the above reasons, the disallowance made by the A.O. is upheld and this ground of appeal is dismissed. Against the aforesaid order of CIT(A), the assessee is now in appeal before us. 4. Before us, the Ld. A.R. submitted that the assessee had paid commission at the rate of Rs.0.50 per kg on high seas sales to Motilon synthetics. He pointed out that in the year preceding and succeeding the present assessment year, no commission was paid to Motilon synthetics which had resulted in fall in turnover which goes to prove that only because of the utilisiation of services of Motilon, the assessee could increase its sales. He further submitted that for year ending 31st march 2002 and 2003, Motilon has earned commission from other parties which proves that it had the capacity to act as brokers. He pointed at page 8 of the paper book the turnover of assessee and commission income of Motilon. He thus submitted that the disallowance u/s 40A(2) cannot be made as the required conditions have been satisfied by the assessee (namely legitimate business, benefit derived in form of increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is seen that Motilon has earned the commission only from the assessee. It has not earned any commission from any other party and therefore it could not be established that Motilon is in the business of commission agency and has also earned commission from other parties. Further, from the schedule attached to the balance sheet it is seen that the firm (Motilon synthetics) was having brought forward loss of Rs.38.35 lacs and even after adjusting the profits of Rs.21.19 lacs, the firm was having losses of Rs 17.15 lacs to be carried forward. In view of the totality of aforesaid facts we find no reason to interfere with the order of CIT(A) and thus we dismiss this ground of assessee. 7. 2nd ground is with respect to disallowance of interest: AO noticed that assessee has taken loan from Motilon Synthetics (its sister concern) and paid interest of Rs.557130/-. He also noticed that assessee has given interest free advance of Rs.3850000/- to Baba Synthetics (also its sister concern). The assessee was asked to explain as to why the interest not be disallowed. After considering the submissions and material before him, AO concluded that the interest bearing funds were passed on by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability to pay tax is being advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 8. Before us, the Ld. A.R. submitted that assessee had sufficient interest free funds at its disposal from which it had lent the amount to Baba Synthetics and not out of interest bearing funds. He thus urged that the disallowance made by the AO be deleted. 9. On the other hand the Ld. D.R. supported the order of AO and CIT(A). 10. We have heard the rival submissions and perused the material on record. The undisputed facts are that the assessee has paid interest on borrowed funds and had a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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