2011 (6) TMI 1025 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) on account of disallowance of interest on interest-free loans to sister concerns.
2. Deletion of addition made by the AO on account of disallowance of interest being pre-operative expenses in respect of total assets of unit-II.

Summary:

Issue 1: Deletion of Addition on Interest-Free Loans to Sister Concerns

The Revenue challenged the deletion of Rs. 3,67,931/- made by the AO by disallowing interest on interest-free loans to sister concerns. The AO had disallowed the interest based on the judgment in M/s Abhishek Industries Ltd. and the assessee's agreement to the addition. The CIT(A) found that the assessee had not borrowed funds for making the advances and that the AO had not correlated any borrowed funds with the advances. The CIT(A) noted that the advances were either made in earlier years or were on behalf of the Managing Partner, and the assessee had sufficient interest-free funds. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had interest-free funds and that the advances were not made from borrowed funds. However, the Tribunal remanded the issue of the advance to M/s Goyal Steels back to the AO for verification of the assessee's claim that it was for the purchase of material.

Issue 2: Deletion of Addition on Pre-Operative Expenses

The Revenue also challenged the deletion of Rs. 10,38,945/- made by the AO on account of disallowance of interest being pre-operative expenses for unit-II. The AO had disallowed interest on the investment in new assets, assuming it was from borrowed funds. The CIT(A) found that the assessee had not borrowed funds for creating the assets and had used cash accruals. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide evidence that borrowed funds were used for the investment.

Conclusion:

The Tribunal partly allowed the Revenue's appeal by remanding the issue of the advance to M/s Goyal Steels for verification but upheld the CIT(A)'s decision on both issues. The order was pronounced in the open court on June 21, 2011.