2010 (1) TMI 1173 - AT - Income Tax

Summary

Issues Involved:
1. Interest-bearing funds diverted to interest-free funds for sister concerns.
2. Advances or loans given to sister concerns out of commercial expediency.
3. Disallowance of interest at 12% instead of 9% charged by the appellant.
4. Taxation of real income versus notional income.
5. Breach of law and Principles of Natural Justice.
6. Levying interest u/s 234B/C/D of the Act.
7. Initiation of penalty proceedings u/s 271(1)(c) of the Act.

Summary:

1. Interest-bearing funds diverted to interest-free funds for sister concerns:
The learned CIT(A) confirmed the AO's decision that the appellant diverted interest-bearing funds to sister concerns without charging interest. The AO disallowed interest at 15% for M/s Kinariwala RJK Industries and 6% for M/s Utkarsh Fincap Pvt. Ltd. and M/s Kinariwala Spinners.

2. Advances or loans given to sister concerns out of commercial expediency:
The appellant argued that advances to sister concerns were out of commercial expediency and for business purposes. The learned CIT(A) rejected this, stating the appellant did not prove that funds advanced were from interest-free capital.

3. Disallowance of interest at 12% instead of 9% charged by the appellant:
The appellant contended that the balances with M/s Kinariwala RJK Industries were old trade balances, and no new money was advanced. For the other two parties, the appellant claimed sufficient interest-free capital to cover the advances. The Tribunal found the appellant's argument valid, noting the Revenue failed to show the funds were from interest-bearing borrowed capital.

4. Taxation of real income versus notional income:
The appellant argued that only real income should be taxed, not notional income. The Tribunal agreed, citing the Supreme Court's decision in S A Builders vs. CIT, which supports no disallowance of interest if the advances are for business purposes.

5. Breach of law and Principles of Natural Justice:
The appellant claimed the lower authorities ignored submissions and explanations, breaching the Principles of Natural Justice. The Tribunal did not specifically address this issue but ruled in favor of the appellant based on the merits of the case.

6. Levying interest u/s 234B/C/D of the Act:
The learned CIT(A) upheld the AO's action of levying interest u/s 234B/C/D. The Tribunal did not specifically address this issue in the judgment.

7. Initiation of penalty proceedings u/s 271(1)(c) of the Act:
The learned CIT(A) upheld the initiation of penalty proceedings u/s 271(1)(c). The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The Tribunal ruled in favor of the appellant, finding that the Revenue failed to prove the nexus between interest-free advances and interest-bearing borrowed funds. The appeal by the assessee was allowed.