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2016 (1) TMI 857

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..... ee loan was advanced was sold to the assessee. This very fact reveals that assessee has a business interest in the sister concern, therefore, advancement of interest free loan to the sister concern can be considered to be for commercial expediency. In view of the aforesaid, we delete the addition made by the Assessing Officer on account of disallowance of interest expenditure - Decided in favour of assessee Disallowance under section 14A - Held that:- Considering the fact that the assessee has not challenged the disallowance before the first appellate authority, and a plea was taken before us by the learned counsel that the assessee did not earn any exempt income during the impugned assessment order, hence, no disallowance under section .....

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..... he I.T. Act. 3. The Assessing Officer erred in disallowing ₹ 2,76,251 under section 14A of the Act without appreciating that there was no exempt income earned during the year and therefore there could have been no disallowance under section 14A. 2. Grounds no.1 and 2, relate to disallowance of interest expenditure amounting to ₹ 38,31,920 and ₹ 17,11,417 under section 36(1)(iii). 3. Briefly stated the facts are, assessee a company, filed return of income for the year under consideration on 31st October 2001, declaring total income at nil. Assessment in assessee s case was completed under section 143(3) of the Income Tax Act, 1961 (for short the Act ) on 10th February 2004, by determining total income of  .....

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..... the assessee claimed that it had sufficient surplus funds amounting to ₹ 39, crore out of which the interest free loan was given to the sister concern, however, he alleged that the assessee did not furnish any evidence to back its claim. He, therefore, relying upon certain judicial precedent held that as the assessee has failed to establish the nexus between the interest free funds available and loan advanced to the sister concern and also could not prove the commercial expediency in advancing such loan to sister concern, the interest expenditures of ₹ 38,31,920 and ₹ 17,11,417 have to be disallowed, as done by the Assessing Officer in the original assessment order. 5. The first appellate authority also sustained the d .....

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..... antial interest free fund available to make the advance to sister concern. He submitted as far as loan obtained from banks are concerned, they are for specific purpose, hence, could not have been diverted for any other purposes. Further, the learned counsel submitted that as far as commercial expediency is concerned, it is proved from the fact that almost entire products manufactured by the sister concern was sold to the assessee which proves that the assessee has an intimate business connection with the sister concern. 7. The learned Departmental Representative, on the other hand, relying upon the order of the learned Commissioner (Appeals), submitted that as the assessee has failed to establish a nexus between surplus fund and the inte .....

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..... he Courts, when the assessee had sufficient interest free funds available with it, the plea of the assessee that it has advanced the interest free loan to the sister concern out of such non interest bearing funds is acceptable. Therefore, in our view, no disallowance of interest expenditure can be made. As far as commercial expediency is concerned, it has been brought to our notice by the learned Counsel for the assessee that almost the entire product manufactured by the sister concern to which interest free loan was advanced was sold to the assessee. This very fact reveals that assessee has a business interest in the sister concern, therefore, advancement of interest free loan to the sister concern can be considered to be for commercial ex .....

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..... dispute in the earlier round of litigation but is also a subject matter of disallowance by the Assessing Officer in the second round. Therefore, in our view, the issue emanates from the assessment order. However, considering the fact that the assessee has not challenged the disallowance before the first appellate authority, and a plea was taken before us by the learned counsel that the assessee did not earn any exempt income during the impugned assessment order, hence, no disallowance under section 14A is called for, we consider it appropriate to restore the issue to the file of the Assessing Officer for examining assessee s claim and decide it in accordance with law after due opportunity of being heard to the assessee. This ground is, the .....

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