2015 (8) TMI 283

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... gainst the appellant by our order and judgment dated 03.03.2015 in Commissioner of Income Tax-I, Ludhiana vs. M/s Kudu Industries, Ludhiana, ITA No.382 of 2014. 3. The appeal is admitted on the following substantial question of law:- "i) Whether on the facts and in the circumstances of the case, the Hon'ble ITAT was right in law in directing the AO to recompute the disallowance under section 36(1)(iii) of the Act by adopting the average cost of debt for the year." 4. The assessee was engaged in the manufacturing, trading and job work of yarn and fabrics. The assessee had made interest free advances to various parties including by way of advances to suppliers and employees. These were in the normal course of business. However, advance .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... verted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for nonbusiness purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 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 consid .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X