2012 (11) TMI 5 - AT - Income Tax

Addition out of interest expenses - alleged that appellant company has diverted borrowed funds for interest free advance/loans given to associate concerns and directors of the appellant company - assessee submitted that the assessee has Rs.2.13 crores as capital and sundry creditors (without interest) and advances to sister concern was Rs.49.47 lakhs only, and therefore, own funds available without interest with the assessee, were much more than the advance made to the sister concern Held that - Assessee has advanced a sum of Rs.49.47 lakhs to its sister concern without interest which is fully covered with the interest free capital and sundry creditors amount available with the assessee, and therefore, no addition/disallowance in this case is called for - in favour of the assessee Addition on account of salary paid to relative of the Directors Held that - Onus was on the assessee to prove that the salary was paid to the lady directors of the assesseecompany on account of services rendered by them. We find that the assessee could not produce any evidence in support of its case - In the absence of any evidence to prove that two lady directors have rendered some services to the assessee-company - disallowance made was justified

Summary

Issues involved:
1. Disallowance of interest expenses claimed by the appellant company.
2. Addition of salary paid to a relative of the directors.

Detailed Analysis:
Issue 1: Disallowance of interest expenses claimed by the appellant company
The appellant challenged the addition of Rs.5,39,462 as interest expenses by the Assessing Officer (AO) alleging diversion of borrowed funds for interest-free advances to associates and directors. The appellant argued that its own funds without interest exceeded the advances made, citing precedents like Torrent Financiers Vs. ACIT and CIT Vs. Raghuvir Synthetics Ltd. The Department contended that the appellant maintained mixed funds without a nexus between interest-free loans and advances. Upon review, the Tribunal found the appellant had sufficient capital and interest-free creditors to cover the advances made, hence no disallowance was warranted. Relying on the cited court decisions, the Tribunal ruled in favor of the appellant, allowing Ground No.1 of the appeal.

Issue 2: Addition of salary paid to a relative of the directors
The second ground of appeal pertained to the addition of Rs.1,56,600 for salary paid to a relative of the directors. The appellant failed to provide evidence supporting that the salary was for services rendered by the lady directors. As a result, the Tribunal upheld the disallowance, stating that the appellant did not meet the burden of proof. Consequently, Ground No.2 of the appeal was dismissed. In conclusion, the Tribunal partly allowed the appellant's appeal, ruling in their favor on the first issue regarding interest expenses but dismissing the appeal on the second issue of salary addition.