TMI Blog2007 (1) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence brought on record, nor has he distinguished the case relied during the assessment from the ones relied on by the assessee. 2. As per the assessment order, the assessee is a registered firm dealing in sale and purchase of hides and skins. In the year under consideration, the assessee made total sales of ₹ 2,06,26,691, as against those of ₹ 1,65,05,297 in the immediately preceding assessment year. GP shown was of ₹ 13,55,220, as opposed to that of ₹ 9,26,233 in the earlier year. The sales and purchases were found to be vouched. The GP rate was observed to have improved from 5.65 per cent for the last year to 6.57 per cent this year. According to the balance sheet, the assessee had raised secured loans from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Sat Paul and Shri Davinder Pal were husband and son, respectively, of Smt. Kamlesh Rani, one of the partners of the assessee firm. 5. From the agreement dt. 15th May, 1995 (supra), the AO observed that as per cl. 3 thereof, the company had agreed to sell 25 per cent of a commercial complex, to be constructed, to the assessee firm, for ₹ 90,00,000 and the assessee firm was, in lieu thereof, to pay to the company an advance of ₹ 28,50,000, a sum of ₹ 30,00,000 on or before 31st May, 1997, or on the completion of the first floor of the commercial complex, whichever was earlier, and a sum of ₹ 31,50,000 on or before the completion of the commercial complex. 6. The AO opined that since the assessee had failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poration, Jalandhar, for construction of the commercial complex; that it was beyond the power of the assessee to get back the amount from the company earlier than 2003, when it was returned after repeated requests; that even otherwise, the addition was not called for, since the assessee did not suffer any interest loss, as the assessee had accepted family deposits of ₹ 18,78,905, on which, no interest was paid and further, there was sufficient credit balance of the partners, i.e., opening capital of ₹ 39,88,498 and closing capital of ₹ 44,00,744; that the partners could have got interest @ 18 per cent, but were paid interest only @ 8 per cent, on the net balance; that the notional interest on the capital short-charged by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e impugned order, has supported the order of the AO. It has been submitted that as found by the AO, the assessee diverted interest bearing borrowed funds interest-free for non-business purposes and that therefore, the addition was rightly made by the AO. Distinguishing the facts of the year under consideration from those concerning the asst. yr. 1998-99, it has been contended that till that time, a business purpose of the assessee was there, but for the year under consideration, there is no such purpose. 9. On the other hand, the learned counsel for the assessee has vehemently supported the CIT(A)'s order. Written submissions have also been filed. It has been contended that here, it is not an interest-free advance or loan given by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had failed to pay the second instalment to the company and that the company had failed to return the advance amount of ₹ 28,50,000 to the assessee. It is seen that as observed by the learned CIT(A), the advance was treated by the AO as a non-business advance, without calling for further details. No nexus between the interest bearing funds and the interest-free advances stands made out. The amount in question was advanced in the asst. yr. 1995-96. The secured loans were taken in the asst. yr. 1996-97. This has not been controverted by the AO. At that point of time, the assessee had interest bearing advances, credit balances of the partners, and also substantial sundry creditor. Even the limit was available in the asst. yr. 1995-96. Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ics (P) Ltd. vs. Asstt. CIT (supra), it has been held, inter alia, that no disallowance should be made when money had been advanced in earlier years and no addition was made in the earlier years on such advances on account of interest-free advances. 12. This is also the ratio of the decision in the case of Malwa Cotton Spinning Mills vs. Asstt. CIT (supra) and CIT vs. Sridev Enterprises (supra) wherein it was held, inter alia, that where the AO had failed to establish any nexus between funds borrowed on interest and amount invested in the plot, there was no justification for making any disallowance out of interest expenditure. 13. Then, where no nexus is established between the borrowed funds and the interest-free advances, no disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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