2011 (6) TMI 920 - AT - Income Tax

Summary

Issues involved:
The appeal challenges the order of CIT(A), Panchkula u/s 143(3) of the I.T. Act, 1961 for assessment year 2007-08 regarding disallowance of interest paid on loans u/s 36(1)(iii).

Grounds of Appeal:
1. Disallowance of interest on Packing Credit and other loans u/s 36(1)(iii).
2. Application of proviso to s.36(i)(iii) without loan for plot purchase.

Facts:
The assessee, engaged in export business, declared loans and advances of &8377; 2062970, including chit-fund advance and balance advances. AO disallowed interest of &8377; 191815 based on High Court precedent. Assessee argued advances were for business, with sufficient capital to cover. CIT(A) upheld disallowance.

Assessee's Arguments:
AR pointed out balance sheet details, emphasizing interest-free advances of &8377; 19,08,610, linked to capital account. Claimed interest on packing credit was business-related. Cited Supreme Court and Tribunal precedents.

Revenue's Response:
DR supported CIT(A)'s order, citing lack of evidence on commercial expediency for loans.

Judgment:
1. Investment in plot for factory justified interest paid, not disallowable. Commercial expediency established, High Court precedent not applicable.
2. Advance to parental firm and withdrawals by assessee not subject to disallowance, being capital-related.
3. Lack of evidence on commercial expediency for advances to parties upheld disallowance. Partly allowed appeal.

Conclusion:
Appeal partly allowed, interest disallowance reduced for certain advances.

Order Date:
21st June, 2011.