2004 (5) TMI 50 - HC - Income Tax

AO held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed - Tribunal has recorded categorical findings of fact that the amounts advanced by the assessee to its sister concern, had been advanced by utilising the overdrafts account and that on the dates on which the amounts were so advanced, there was no credit balance in the bank account of the assessee. - Assessee has not been able to explain the purpose for which the amount had been advanced - no material on record to show that the assessee had derived any business benefit by advancing the interest-free amounts to its sister concern. - Disallowance made by the Assessing Officer was justified.

Summary

Issues involved:
1. Disallowance of interest made by the Assessing Officer.
2. Reduction in disallowance granted by the Commissioner of Income-tax (Appeals).
3. Disallowance of proportionate interest relatable to advanced amounts.
4. Upholding the disallowance as made by the Assessing Officer.

Issue 1: Disallowance of interest made by the Assessing Officer

The Assessing Officer observed that the assessee had diverted borrowed funds to a sister concern without charging any interest. Consequently, he disallowed a sum of Rs. 5,66,729. The Commissioner of Income-tax (Appeals) partially accepted the claim, reducing the disallowance to Rs. 18 lakhs, which had a clear nexus with the borrowed funds. However, the Tribunal upheld the Assessing Officer's decision, stating that the entire amount of Rs. 82 lakhs had been advanced utilizing the overdraft account, justifying the disallowance. The Tribunal's order was based on factual findings that the amounts were advanced without a business benefit or explanation for not charging interest, leading to the dismissal of the assessee's appeal.

Issue 2: Reduction in disallowance granted by the Commissioner of Income-tax (Appeals)

In the assessment year 1991-92, the Assessing Officer disallowed proportionate interest amounting to Rs. 20,08,836 related to advances made to the sister concern. The Commissioner of Income-tax (Appeals) reduced the disallowance to Rs. 10,03,536 based on the nexus of the advanced amounts with borrowed funds. Despite further relief granted under section 154 of the Act, the Tribunal upheld the Assessing Officer's disallowance, leading to the dismissal of the assessee's appeal in this regard.

Issue 3: Disallowance of proportionate interest relatable to advanced amounts

The Tribunal affirmed the disallowance made by the Assessing Officer, emphasizing that the advanced amounts had been utilized from the overdraft account without any business benefit or interest charges. The factual findings supported the decision to uphold the disallowance, as the assessee failed to provide a satisfactory explanation for the interest-free advances to the sister concern.

Issue 4: Upholding the disallowance as made by the Assessing Officer

The High Court dismissed the appeals, stating that no substantial question of law arose from the Tribunal's order. The Tribunal's factual and legal findings regarding the advances to the sister concern from the overdraft account were deemed satisfactory, leading to the rejection of the appeals without costs.

This detailed analysis of the judgment highlights the various issues involved, the decisions made by different authorities, and the final outcome of the appeals before the High Court.