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M/s Chemical Sales And Services Versus Income Tax Officer, Ward-24 (3) , New Delhi

Disallowance of interest expenses - assessee has allegedly diverted interest bearing funds for non-business purposes - Held that:- The advances have been made to M/s Suresh Goel & Son (HUF) for the purpose of the business and on account of commercial expediency, and it has not been established by the learned Assessing Officer that advances are for non - business purposes and as such, disallowance made by the learned Assessing Officer is unsustainable in law. Therefore, delete the addition in dis .....

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ew Delhi asstt. year 2010-11 and the following grounds have been raised:- "1. That the learned CIT(A) has grossly erred both in law and on facts in upholding the disallowance of ₹ 10,54,790/- out of the interest expenses of ₹ 21,81,286/- on the ground that the assessee has allegedly diverted interest bearing funds for non-business purposes. The submission made an evidence furnished has arbitrarily been brushed aside. 2. The learned CIT(A) has failed to appreciate that the assess .....

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ss purposes", is factually incorrect because no such submission had ever been made and the submission made has been totally misunderstood by learned CIT(A). 3. That in absence of any material to show that the interest bearing borrowed funds were diverted for nonbusiness purposes, the disallowance as upheld is deserves to be deleted and the interest expenses as claimed deserves to be allowed as revenue expenditure. 4. That in any case the learned CIT(A) has erred in not granting a fair and p .....

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142(1) of the Income-tax Act, 1961, which were served. Assessee firm was engaged in the business of trading of chemicals and during the year under consideration assessee had shown Gross Profit of ₹ 32,62,452/- on total turnover of ₹ 13,08,67,820/- yielding a GP rate of 2.52%. It was observed by the Assessing Officer that assessee had paid interest of ₹ 21,81,286/- on secured loan of ₹ 1,72,49,345/-. The break-up the interest paid was ₹ 17,83,463/- interest on loan, .....

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7; 1,74,49,345/- as on 3.1.3.2010 as against the figure ofRs.1,25,47,750/- as on 31.3.2009. Considering these facts in view it was observed by the Assessing Officer that assessee was paying interest on secured loans other than for business purposes. Therefore, Assessing Officer asked the assessee to explain why interest related to the debit balance of M/s Suresh Goel and Sons, HUF should not be disallowed u/s 36(1)(iii) of the Act on proportionate basis. In response to this, assessee filed his r .....

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hat it has given interest-free loan of ₹ 61,40,000/- to M/s Suresh Goel and Sons, HUF out of its secured loans of ₹ 1,17,07,384/-. Which clearly shows that assessee was diverting its interest-bearing funds to non-interest bearing loan to one of its partners fox his undue enrichment. To decide the issue involved in the case, Assessing Officer examined the same considering the fact whether diversion of interest bearing loan to non-interest bearing loan was for commercial expediency? To .....

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ng loan to interest free loans. Thus, he held that loans given to M/s Suresh Goel and Sons, HUF were not for business purpose. Thus, he held that loan given to above partner is not allowable either U/S 36(1)(iii) or 37(1) of the Act. Therefore, Assessing Officer disallowed a sum ofRs.10,54,790/- being 13% on debit balance of capital of ₹ 81,13,770/-, which was added back to the taxable income of the assessee for the year under consideration. Thus, total taxable income of the assessee was c .....

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y diverted interest bearing funds for nonbusiness purposes. He submitted that the submission made an evidence furnished has arbitrarily been brushed aside. He further submitted that the Ld. CIT(A) has failed to appreciate that the assessee firm had advanced fund to one of its partner namely M/s Suresh Goel & Sons HUF for construction of a building on the plot owned by the partners and was to be used by the assessee firm for its business purposes. The finding of the learned CIT(A) that in rep .....

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re diverted for non-business purposes, the disallowance as upheld is deserves to be deleted and the interest expenses as claimed deserves to be allowed as revenue expenditure. 5. On the contrary, Ld. DR relied upon the orders of the lower authorities. 6. I have heard the both the parties and perused the records especially the orders of the revenue authorities. I find that the AO vide order dated 11.02.2013 in disregard to the documentary evidences filed by the assessee and without conducting any .....

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ucting or directing any investigation sustained the disallowance so made by learned AO. I further find that the since the formation of the firm, the assessee has been carrying on its business activities of trading in chemicals from the agricultural property owned by the partners and no rent has been charged by the partners in respect of such premises. It is submitted that the appellant also entered into an agreement with M/s Suresh Goel & Son (HUF) on 16.3.2009 for construction of building t .....

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ing. Thus, in my opinion, the finding of learned CIT(A) that the assessee could not have conducted business from residential premises does not stand to reason in as much as, there is no prohibition in law to conduct such business nor any material has been brought on record by learned CIT(A) in this regard. 6.1 I further note that during the assessment proceedings the assessee had specifically stated as under that assessee firm has been running its business activities so far from agricultural pro .....

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w thereof, it was submitted by the Ld. Counsel of the assessee that the purchase of plot and construction of building on it for being used as office of the assesssee firm is business activity and interest paid on fund borrowed is for the purpose of business and is allowable as deduction u/s 36(1)(iii) of the Act. That is why interest paid on secured loans must not be disallowed. 6.2 I find that the lower authorities have failed to appreciate that the only condition for claiming deduction under s .....

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o be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency, However, money can be said to be advanced to a sister concern for commercial expediency in many either circumstances (which need not be enume .....

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lls Ltd reported in 334 ITR 377 wherein the Hon'ble Apex Court judgment in the case of SA Builders vs. CIT (Supra) has been followed. The Hon'ble High Court of Madras while following the Hon'ble Apex Court judgment as aforesaid, has held that where assessee having borrowed money, utilized it as advance to its managing director for purchase of land for business purpose, interest paid on said borrowing was to be allowed as deduction. The finding of the Hon'ble High Court was as und .....

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ing the principles in the above judgment, it is clear that in the present case, the amount was given to the managing director and other persons only for the purchase of the land and also for business purposes and there is no transaction of loan involved in this case. In these circumstances, I do not find any error or illegality in the order of the Tribunal so as to warrant interference. It is a question of fact. It is not a perverse order. The order passed by the Tribunal is based on valid mater .....

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