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TMI Blog2012 (5) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of interest - ITA No. 4962/Mum/2005 - - - Dated:- 16-5-2012 - SHRI N.V. VASUDEVAN (JUDICIAL MEMBER) AND SHRI N.K. BILLAIYA (ACCOUNTANT MEMBER) For the Appellant: Shri Vijay Mehta For the Respondent: Shri A.C. Tejpal O R D E R PER N.K. BILLAIYA (AM): This appeal by the assessee is directed against the order of Ld. CIT(A)- V dt. 18.4.2005 for assessment year 2001-02. 2. The only grievance raised by assessee relates to confirming the disallowance of interest to the extent of ₹ 9,01,98,977/- with reference to the advances given to M/s. Hy-Grade Pellets Ltd (HGPL). 3. The issue before us finds place at para-10 at page 26 of assessment order. The assessee company is engaged in the business of manufacturing and sale of Hot Rolled Coils, sheets, plates, Hot Briquetted iron etc. The return of income declaring loss of ₹ 108,61,53,400/- was filed on 30.10.2001. The return was selected for scrutiny and accordingly notices u/s. 143(2) and 142(1) were issued and served upon the assessee. 4. During the course of assessment proceedings, the Assessing Officer found that the assessee company had significant investment in equity and preference s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no part of interest payment can be disallowed since the interest expenditure has been incurred on amount borrowed for the purpose of the business. Once the money has been borrowed for the purpose of the business, the interest on such borrowal is allowable as business expenditure as per Sec. 36(1)(iii) of the Income Tax Act, 1961. There is no such condition that interest has to be charged on any money advanced to anybody in that Section for allowability of interest payment. Thus no part of interest payment can be disallowed on account of above reason. In any case, interest has not been charged based on business prudence and in the interest of the business of the Assessee. Further, the advance has become due from HPGL. in the course of business of the Assessee. Thus, no interest can be disallowed in the computation of income of the Assessee. 5. The aforesaid contention of assessee did not find favour with the AO. The AO was of the opinion that since the assessee is maintaining books of account on mercantile system of accounting, the assessee ought to have credited the interest accrued. The AO further observed that the assessee has diverted business funds for non business purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision of Lucknow Bench of ITAT in the case of Shadi Ram and Sons Vs DCIT 92 ITD 22. The assessee strongly contended that the assessee company had its own funds of ₹ 3078.97 crores and therefore there was no question of application of borrowed funds in the amounts due from HGPL. So far as crediting notional interest, assessee relied upon the statement made by the Hon ble Supreme Court in the case of State Bank of Travancore Vs CIT (Ker) 158 ITR 102 wherein it has been held by the Hon ble Supreme Court that what are chargeable to income-tax in respect of a business are profits and gains actually resulting from the transactions of the previous year, that is to say, the real profits and gains and not hypothetical profits or gains on a doctrinaire theory of accrual, that even under the mercantile system of accounting regularly adopted by an assessee, it is only the accrual of real income in the commercial sense which is chargeable to tax at accrual is a matter of substance to be decided on commercial principles have regard to business character of the transactions and the realities of the situation and cannot be determined on any abstract theory of accrual or by adoptin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended by the assessee that item No. 1 2 do not amount to transfer of funds which could lead to disallowance of interest expenses whereas in the case of advances made for the purpose of meeting the operative expenses of HGPL, the same was required to be advanced to receive the unhindered supply of pellet which was the basic raw material of the assessee company without which the company s production could also be hampered and therefore it cannot be said that the amount outstanding from HGPL was for non business purpose. 12. Considering the arguments and submissions of the assessee, the Ld. CIT(A) held that However I find some force in the argument of the appellant that in respect of amount receivable on account of sale of unit and on account of value stock of iron ore given for conversion into pellets, which is not primarily attributable to advancing the fund but in the first case business compulsion whereas in the second case it s a stock of raw materials for conversion and therefore I am in agreement with the appellant that insofar as the amount of interest which is attributable to business debt i.e. receivable on account of raw material supplied for conversion of raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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