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Issues involved: Disallowance of funds paid by the assessee to bank on its overdraft account due to diversion of borrowed funds to sister-concerns, and levy of interest under section 234B.
Disallowed Funds Issue: The assessee, a partnership concern in the business of welding, contested the disallowance of Rs. 4,00,000 out of Rs. 4,26,750 paid to the bank on its overdraft account, alleging diversion of borrowed funds to sister-concerns. The dispute centered on the nexus between borrowed amounts and interest-free advances to sister-concerns. The assessee argued that certain amounts were not loans but liabilities discharged, and substantial interest-free funds were available, negating the diversion claim. The Departmental Representative contended that cheques issued from the cash credit account proved diversion, citing various judgments to support the disallowance. Interest Levy Issue: The second ground concerned the levy of interest under section 234B, with the assessee arguing for its charge only up to the first assessment under section 143(1)(a) of the IT Act, 1961. Judgment: The Tribunal found that the cheques for advances to sister-concerns were from the cash credit account, but the presence of substantial interest-free funds with the assessee contradicted the diversion claim. The balance sheet analysis revealed surplus interest-free funds, matching the advances made, leading to the allowance of the interest amount. Regarding the interest levy under section 234B, it was held to be consequential and chargeable only up to the first assessment. Consequently, the appeal of the assessee was allowed.
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