2014 (11) TMI 1079 - HC - Income Tax

Disallowance of interest paid on the amount borrowed by the assessee - assessee had lent it to its sister concerns without charging any interest thereon? - Held that - A.O has not proved the nexus between the interest bearing fund and the interest free advances. The funds have not been given to the sister concern during the accounting period of the relevant year. The A.O has to establish direct correlation between the funds borrowed on interest and funds lent without interest.In the absence of such correlation, disallowance was held to be unjustified. - Decided in favour of assessee Addition to the value of closing stock - difference between the value of stock-in- trade as per the books of accounts and the statement which was submitted by the assessee to its banker for availing credit facilities by way of hypothecation of the stock - Held that - the assessee has proved on record that the group of companies were maintaining stock at a common place. The stock of the other group concerns were given in the Bank statement. This fact was also brought to the notice of the Bank. Similarly, a letter given by the Bank Manager to the Director of the assessee was on record, which is indicative of the fact that the assessee has informed the Bank regarding common stock position at one place of the sister concerns. In this way, the assessee has duly discharged the onus of explaining the excess stock and the CIT(A) was justified in deleting the addition. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest paid on loans to sister concerns.
2. Addition to the value of closing stock based on stock discrepancies.

Issue 1: Disallowance of interest paid on loans to sister concerns
The case involved appeals challenging the disallowance of interest paid on loans to sister concerns for the assessment year 1988-89. The Assessing Officer (A.O) disallowed the interest difference, contending that the assessee provided interest-free loans to sister concerns while paying interest to banks for cash credit facilities. The Commissioner of Income Tax (CIT) partly allowed the appeal, stating that no new loans were taken and that the disallowance lacked justification. The CIT also found that the stock inflation was for obtaining larger funds from banks, not for actual excess stock. The Appellate Tribunal upheld the CIT's decision, emphasizing the lack of proven nexus between interest-bearing funds and interest-free loans. The Tribunal's decision was supported by the High Court, ruling in favor of the assessee and against the Revenue.

Issue 2: Addition to the value of closing stock based on stock discrepancies
The second issue pertained to an addition to the closing stock value due to discrepancies between the stock in the books of accounts and that reported to the bank for credit facilities. The assessee demonstrated that the group companies maintained stock at a common place, with stock details provided to the bank and acknowledged by the bank manager in a letter to the assessee's director. The CIT justified deleting the addition, finding the assessee had explained the excess stock adequately. The High Court concurred with the CIT and the Appellate Tribunal, ruling in favor of the assessee and against the Revenue. Consequently, the appeal was allowed in favor of the assessee in both issues.