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Commissioner of Income Tax-I Versus M/s Kudu Industries

2015 (8) TMI 283 - PUNJAB & HARYANA HIGH COURT

Disallowance under section 36(1)(iii) - ITAT directing the AO to recompute the disallowance adopting the average cost of debt for the year - Held that:- As rightly held by the Tribunal, the judgment of this Court in Commissioner of Income Tax-I, Ludhiana vs. M/s Abhishek Industries, Ludhiana (2006 (8) TMI 123 - PUNJAB AND HARYANA High Court )as relied upon by AO does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. .....

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absence of anything to indicate that the interest free advance was made only from a particular corresponding advance received by the assessee, the advance made by the assessee would obviously be from the common pool of money. Money lying in a common pool has no identity. The various amounts advanced to the assessee get merged into a common pool. There is no justification then either for the assessee or for the department to take into consideration the rate of interest in respect of a particular .....

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come Tax Appellate Tribunal which pertains to the assessment year 2009-10. 2. By an order dated 25.03.2015, notice of motion was issued in respect of the question of law raised in paragraph 5(i). The order noted that the other questions raised have been answered against the appellant by our order and judgment dated 03.03.2015 in Commissioner of Income Tax-I, Ludhiana vs. M/s Kudu Industries, Ludhiana, ITA No.382 of 2014. 3. The appeal is admitted on the following substantial question of law:- &q .....

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ess. However, advances were made to two parties, namely, Smt. Ritu Saluja and Shiv Narain Investments Private Limited due to their temporary financial requirements. 5. The Assessing Officer following the judgment of this Court in Commissioner of Income Tax-I, Ludhiana vs. M/s Abhishek Industries, Ludhiana, [2006] 286 ITR 1 (P&H) disallowed on a proportionate basis the interest pertaining to the said two advances on the ground that they were not made on account of commercial expediency. In Co .....

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nterest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates .....

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raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for nonbusiness purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed." .....

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