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2014 (1) TMI 1490 - HC - Income TaxDisallowance u/s 36(1)(iii) - Held that - The rate of interest which was paid to the Bank was between 15% to 18% while interest on the loans which were advanced out of borrowed funds was charged at the rate of 18% - The CIT (A) held that the business expediency for furnishing the loan was duly established with reference to Shree Krishna Ship Breaking Industries - No disallowance was required to be made. In regard to M/s Neuromed Imaging Centre (P) Ltd. it was found that an amount of Rs.1 crore was paid by way of loan at a rate of 12% immediately after a loan of Rs.77.50 lacs was taken at a much higher rate - There was no business expediency and the amount which was obtained at a higher rate of interest was passed on to the sister concern at a lower rate of interest without utilizing it for its own business - The Tribunal has not considered this part of the order of the Tribunal - The issue has been restored for fresh adjudication.
Issues:
- Appeal by the revenue under Section 260-A of the Income Tax Act, 1961 - Questions of law framed by the revenue regarding deletion of additions under Section 36(1)(iii) - Assessment year A.Y. 2009-10 - Disallowance of interest by the Assessing Officer - Business of ship breaking - Disallowance made based on diversion of funds to sister concerns - CIT (A) decision on lack of nexus between borrowed funds and loans - Loans granted to specific parties - Tribunal's consideration of departmental appeal and cross objection - Justification of CIT (A) decision - Restoration of proceedings by the High Court Analysis: The High Court heard an appeal by the revenue under Section 260-A of the Income Tax Act, 1961, related to the assessment year A.Y. 2009-10. The revenue framed questions of law regarding the deletion of additions made under Section 36(1)(iii) by the Assessing Officer. The Assessing Officer disallowed interest amounting to Rs.38.79 lacs based on the diversion of funds by the assessee to sister concerns at lower interest rates. The CIT (A) held that there was no established nexus between the borrowed funds and the loans provided, especially concerning loans to M/s Neuromed Imaging Centre (P) Ltd. and M/s Shree Krishna Ship Breaking Industries. The CIT (A) found that the disallowance was made on a general method without proper substantiation. Specifically, loans to M/s Shree Krishna Ship Breaking Industries were considered to be for business purposes, while loans to M/s Neuromed Imaging Centre (P) Ltd. lacked business expediency. The Tribunal reviewed both the departmental appeal and the cross objection, following its own order for the previous assessment year. The Tribunal upheld the CIT (A) decision, stating that the conditions under Section 36(1)(iii) were satisfied. Regarding the revenue's departmental appeal, the High Court noted that the CIT (A) provided detailed reasons for deleting the disallowance, emphasizing the lack of evidence linking borrowed funds to loans. The High Court found the Tribunal's decision justified, as it aligned with the conditions of Section 36(1)(iii). However, concerning the cross objection by the assessee, the Tribunal failed to consider the facts adequately. Therefore, the High Court decided to restore the proceedings back to the Tribunal for reevaluation of the cross objection. In conclusion, the High Court disposed of the appeal by restoring the proceedings related to the cross objection to the Tribunal for further consideration. The rest of the Tribunal's order affirming the CIT (A) decision was upheld, with no substantial questions of law arising.
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