TMI Blog2011 (5) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing of computer stationary. Return of income was E-filed on 29.11.2006 returning total income at ₹ 11,03,064/-. The return was selected for scrutiny. During the course of scrutiny, the assessee was found to have given loans and advances amounting ₹ 3,11,22,866/- to its directors, relatives of directors and sister concerns in which the Directors had substantial interest without charging any interest on them while the assessee-company was paying interest on loans taken from banks and other financial institutions. The AO considered the aforesaid advances given to the directors, relatives of directors and the sister concerns as diversion of funds by the assessee and therefore, disallowed a sum of ₹ 13,61,450/- being interest paid on loan taken on pro rata basis. The finding recorded by the AO in this behalf reads as under:- The company is engaged in the business of manufacturing of computer stationary. During the course of the assessment proceedings, it was noticed that an amount of ₹ 3,11,22,866/- has been given as advance to Directors, relatives of Directors and to companies in which Directors have substantial interest and no interest has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at Dera Bassi to subsidiary company. 4. Aggrieved by the order passed by the ld. CIT(A) the Department is now in appeal before this Tribunal. In support of appeal, the ld. DR invited our attention to paragraph 4 of the auditors report (page 22 of the 14th Annual report for 2005-06) to the Members of the assessee-company for the year under appeal and submitted the auditors have themselves stated in the said paragraph that the assessee-company has given unsecured loans amounting to ₹ 3,11,22,866/- to four parties without any stipulation regarding repayment of principal amount of loan and interest and that the aforesaid loans and advances were therefore prejudicial to the interest of the assessee-company. Inviting our attention to the details of unsecured loans as given in the balance sheets, the ld. DR submitted that a sum of ₹ 49,38,930/- was given as interest-free loan to Shri A.S. Bhatia, maternal uncle of Managing Director of the assessee-company and a sum of ₹ 2,19,82,821/- was given as unsecured loan to Punjab Biotechnology Plant Ltd., a sister concern of assessee-company. She further submitted that the aforesaid advance were clearly in the nature of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the impugned loans and advance were given out of interest-free funds internally available with the assessee. 6. We have heard both the parties and carefully considered their submissions. Perusal of balance sheet together with its schedule appended thereto shows that a sum of ₹ 49,38,930/- has been treated by the assessee-company itself as loan and advance given to Shri A.S. Bhatia, maternal uncle of Managing Director of the assessee-company and that a further sum of ₹ 2,19,82,821/- has been shown as unsecured loan recovered from Punjab Biotehnology park, a subsidiary company of the assessee. 7. In para 4 of their report, the auditors have commented upon the aforesaid loans and advances as under: The company has given unsecured loan to firms or other parties listed in register maintained u/s 301 of the Companies Act, 1956. No of parties 4 (four) amount ₹ 311.23 lacs out of this ₹ 219.83 (159.18) has being to subsidiary company. The loans are without any stipulation regarding repayment of principal amount of loan and interest. Where loan outstanding amount is more than Rs. One lacs the company needs to take steps to recover the amount. The loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy. 10. It was submitted on behalf of the assessee that the aforesaid amount would be fully covered by internal accruals and interest-free funds available with the assessee. Similar argument was made before and rejected by the Hon'ble Jurisdictional High Court in CIT v. Abhishek Industries Ltd, 261 ITR 1 (PH). Relevant observations made by the Hon'ble High Court read as under:- The entire money in a business entity comes in a common kitty. The monies received as share capital, as term loans, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business they have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowings to the extent the amount is lent to a 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. In case the assessee has some surplus amount which according to it, could not be repaid p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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