2011 (1) TMI 1476 - AT - Income Tax

Summary

Issues involved: Disallowance of interest u/s 36(1)(iii) for interest-free advance to sister concern M/s. R.M. Patel.

Summary:

Issue 1: Disallowance of interest by CIT(A)
- The appellant, a partnership firm, contested the disallowance of interest amounting to Rs. 14,92,707 by the CIT(A) for not charging interest on dues from sister concern M/s. R.M. Patel.
- The Assessing Officer (AO) disallowed the interest as the nature of transactions were deemed as advances, not sale-purchase of goods.
- CIT(A) upheld the disallowance, stating that the credit balance was not related to trading transactions or for commercial expediency.
- However, interest referable to specific purchases and refunds was directed to be allowed.
- The appellant appealed to the ITAT against this decision.

Issue 2: Business expediency and interest disallowance
- The ITAT found that the appellant had advanced Rs. 86,49,215 to M/s. R.M. Patel as a trade debtor, with the amount being used to repay a loan taken by M/s. R.M. Patel.
- The CIT(A) argued that the funds advanced were not for sale/purchase transactions, as the appellant already had a credit balance with M/s. R.M. Patel.
- The ITAT disagreed, citing a business nexus with the transactions and the principle of commercial expediency.
- Referring to the Supreme Court case of S.A. Builders Ltd., the ITAT held that business expediency justified the interest-free advance to the sister concern.
- Consequently, the disallowance of interest was deleted, as there was a valid business reason for the interest-free loan.

This summary provides a detailed overview of the issues involved in the legal judgment, highlighting the arguments presented by both sides and the final decision reached by the ITAT.