2009 (12) TMI 983 - HC - Income Tax

Summary

Issues involved:
1. Utilization of interest bearing funds for advancing interest free loans.
2. Disallowance of interest payment made to DDA.

Utilization of interest bearing funds for advancing interest free loans:
The Tribunal observed that the AO alleged the assessee utilized interest bearing funds for advancing interest free loans, but failed to establish any nexus to support this claim. The assessee demonstrated that the interest bearing funds were not used for interest free advances, as the interest paid on overdrafts and inter-corporate deposits were not linked to such advances. Additionally, the assessee had sufficient share capital and reserves to cover these interest free advances. The revenue did not provide any evidence to counter these assertions. Consequently, the Tribunal upheld the CIT(A)'s decision that disallowance was made on incorrect grounds, as no link was found between interest bearing funds and interest free advances. The disallowance of Rs. 37,76,204 was upheld, and no question of law arose.

Disallowance of interest payment made to DDA:
Regarding the interest payment of Rs. 9,64,267 made to DDA, it was argued that this payment was non-penal in nature and resulted from delayed payment of arrears of ground rent. The Tribunal held that unless the expenditure contravened any law, it could not be disallowed. The CIT(A)'s decision that this payment was not penalty in nature and therefore could not be disallowed was upheld. The Tribunal declined to interfere with the deletion of this disallowance as well.

Separate Judgement:
No separate judgement was delivered by the judges.