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2015 (8) TMI 283 - HC - Income TaxDisallowance under section 36(1)(iii) - ITAT directing the AO to recompute the disallowance adopting the average cost of debt for the year - Held that - As rightly held by the Tribunal, the judgment of this Court in Commissioner of Income Tax-I, Ludhiana vs. M/s Abhishek Industries, Ludhiana (2006 (8) TMI 123 - PUNJAB AND HARYANA High Court )as relied upon by AO does not deal with the question of the rate of interest to be applied in cases where the assessee has mixed funds available with it. We agree with the Tribunal s view that where mixed funds are diverted towards interest free advances the disallowance should be made up to the level of the average cost of debt to the assessee. There is no justification in taking into consideration the rate of interest in respect of any particular transaction whereunder an assessee avails advances on interest. An assessee may avail several advances from the same lender or from different lenders and at varying rates of interest. In the absence of anything to indicate that the interest free advance was made only from a particular corresponding advance received by the assessee, the advance made by the assessee would obviously be from the common pool of money. Money lying in a common pool has no identity. The various amounts advanced to the assessee get merged into a common pool. There is no justification then either for the assessee or for the department to take into consideration the rate of interest in respect of a particular advance or advances to the assessee. The only logical approach is to take into consideration the average interest rate at which the assessee has availed of the advances. - Decided in favour of assessee.
Issues:
1. Appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2009-10. 2. Disallowance of interest on advances made for non-business purposes. 3. Application of the average cost of debt for computing disallowance under section 36(1)(iii) of the Act. Issue 1: Appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2009-10 The judgment pertains to an appeal against the order of the Income Tax Appellate Tribunal for the assessment year 2009-10. The notice of motion was issued to address the question of law raised in the appeal. The appeal was admitted based on the substantial question of law regarding the computation of disallowance under section 36(1)(iii) of the Act. Issue 2: Disallowance of interest on advances made for non-business purposes The assessee, engaged in manufacturing, trading, and job work, made interest-free advances to various parties, including Smt. Ritu Saluja and Shiv Narain Investments Private Limited for temporary financial requirements. The Assessing Officer disallowed the interest on these advances following a previous judgment, as they were not made on account of commercial expediency. The disallowance was based on the premise that all funds of the assessee are in a common pool, making it challenging to separate borrowed funds from its own funds. The interest was computed at 11.5% and added back to the income of the assessee. Penalty proceedings under Section 271(1)(c) were also initiated and upheld by the CIT (Appeals). Issue 3: Application of the average cost of debt for computing disallowance under section 36(1)(iii) of the Act The Tribunal set aside the order of the CIT (Appeals) regarding the disallowance of interest on advances. It was noted that the previous judgment did not address the rate of interest to be applied when mixed funds are available. The Tribunal held that in cases of interest-free advances from mixed funds, the disallowance should be up to the level of the average cost of debt to the assessee. It was emphasized that money lying in a common pool has no identity, and therefore, the average interest rate at which the assessee has availed advances should be considered. The Tribunal's decision was upheld, and the appeal was dismissed, affirming the application of the average cost of debt for computing the disallowance under section 36(1)(iii) of the Act. This detailed analysis of the judgment highlights the issues involved, the arguments presented, and the final decision rendered by the High Court.
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