2012 (1) TMI 237 - AT - Income Tax

Interest free advances - busniss expediency - Held that - As the funds are mixed funds and the assessee could not establish any commercial expediency and hence, in our considered opinion, this issue is squarely covered against the assessee

Summary

Issues Involved:
1. Disallowance of interest expenses claimed by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses:

Facts and Background:
Both appeals pertain to the disallowance of interest expenses claimed by two different assessees for the assessment year 2007-08. The appeals challenge the orders of CIT(A) XVI, Ahmedabad, which upheld the disallowance made by the Assessing Officer (AO). The core issue in both appeals is the disallowance of interest expenses on the grounds that the assessees had given interest-free advances to certain parties.

Assessee's Arguments:
The assessees argued that the interest-free advances were given for business purposes. They contended that the advances were not made in the current year but in earlier years and that these should not be disallowed.

Assessing Officer's Findings:
The AO noted that the assessees had given substantial interest-free advances to certain parties while simultaneously incurring interest expenses on unsecured loans. The AO disallowed the proportionate interest attributable to these interest-free advances, reasoning that the advances were not for business purposes as there were no business transactions with the parties involved.

CIT(A)'s Decision:
CIT(A) upheld the AO's disallowance, agreeing that the interest-free advances were not for business purposes and that the assessees failed to demonstrate any business connection or commercial expediency.

Tribunal's Analysis:
The Tribunal examined the arguments and evidence presented by both sides. It noted that the assessees did not provide any evidence to show that the interest-free advances were given out of interest-free funds or for business expediency. The balance sheets of the assessees indicated that there were no sufficient interest-free funds available for making such advances.

Judicial Precedents:
The Tribunal considered various judicial pronouncements cited by both parties:
- CIT vs. Prem Heavy Engineering Works P. Ltd. (285 ITR 554): Not applicable as the facts differed.
- CIT vs. Tin Box Co. (260 ITR 363): Not applicable due to different facts.
- CIT vs. Motor Sales Ltd. (304 ITR 123): Not applicable as the facts differed.
- Madhu Industries vs. ITO (132 TTJ 233): Not applicable as the advances in that case were business advances.
- CIT vs. Reliance Utilities & Power Ltd. (313 ITR 340): Not applicable due to different facts.
- Punjab Stainless Steel Industries vs. CIT (324 ITR 396): Applicable, as it held that disallowance of interest is justified when interest-free advances are made from borrowed funds without establishing commercial expediency.

Conclusion:
The Tribunal concluded that the assessees failed to establish any commercial expediency for the interest-free advances and that no sufficient interest-free funds were available for making such advances. It held that the issue is squarely covered against the assessees by the judgment of the Delhi High Court in Punjab Stainless Steel Industries vs. CIT, where it was held that the relevant test is the purpose for which the advances were extended, not the source of the funds.

Decision:
Both appeals were dismissed, and the disallowance of interest expenses was upheld.

Order Pronouncement:
The order was pronounced in the open court on the date mentioned in the judgment.