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Issues involved: Disallowance/addition of proportionate interest for interest-free loans given by the assessee to subsidiary companies and others for assessment years 1979-80, 1980-81, and 1981-82.
Assessment Year 1979-80: The Assessing Officer disallowed Rs. 41,722 as the assessee did not charge interest on loans given to subsidiary companies. The assessee argued that since loans were for business purposes, full interest claimed should be allowed. The Tribunal found no nexus between loans obtained and loans given interest-free. The disallowance was deemed unjustified, and the appeal was allowed. Assessment Year 1980-81: Rs. 4,89,857 was disallowed by the Assessing Officer. The assessee contended that interest paid on borrowings for business purposes should be fully allowed. The Tribunal held that the Assessing Officer failed to establish a connection between borrowed funds and interest-free loans given. The disallowance was considered improper, and the appeal was allowed. Assessment Year 1981-82: Disallowance of Rs. 13,71,080 was made by the Assessing Officer. The assessee maintained that interest on borrowings for business should be fully deductible. The Tribunal noted the lack of evidence linking borrowed funds to interest-free loans given. The disallowance was deemed unwarranted, and the appeal was allowed. Conclusion: The Tribunal found in favor of the assessee, stating that the Assessing Officer did not prove a direct link between borrowed funds and interest-free loans given. It was emphasized that an assessee should not be taxed on hypothetical income. The Tribunal reversed the first appellate authority's decision and directed the Assessing Officer to delete the additions made for each of the years under appeal. The appeals were allowed.
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