ITAT restored the matter de novo to AO to consider fresh evidence.

1. The assessee firm was dealer in Dial Caliper, Gear Tooth Micrometer etc. It was observed by the learned assessing officer (AO) during the course of assessment proceedings u/s 143(3) (of Income Tax Act, 1961) that an interest free advance of Rs. 4,86,96,890/- has been given by the assessee firm to its sister concern, World Wide Commodities Pvt. Ltd. while the Partner's capital of the assessee firm is Rs.3,47,32,991/- which is not sufficient for advancing interest free loan to the afore-stated sister concern, hence, it was observed by the AO that the said advance has been made by the assessee firm from the borrowed capital on which interest has been paid. An amount of Rs. 10,85,011/- has been claimed as interest expense on the borrowed capital in the profit and loss account. The assessee firm was asked during the course of assessment proceedings to explain why proportionate disallowance should not be made on the same as the borrowed capital has been diverted for non business purpose. In reply, the assessee firm explained that the loans have been forwarded to the sister concern and the interest has not been charged because the said concern is a sick company. The assessee firm submitted that the loan was forwarded for commercial expediency out of the current account, ING Vysya Bank Ltd. and not from the overdraft. The assessee firm relied on the judgment of Hon'ble Bombay High Court in the case of CIT v. Bombay Samachar Ltd., 74 ITR 723(Bom. HC) and submitted that the interest should be allowed as all the conditions have been met as per section 36(1)(iii) (of Income Tax Act, 1961). The A.O. rejected the contentions of the assessee firm holding that assessee firm has not shown any unsecured loan or over draft facility from the ING Vysya Bank in the details filed. The capital of the assessee firm is not sufficient to forward interest free loan to the sister concern and the loan has been forwarded from the borrowed funds. The AO held that no business expediency could be established from the details filed by the assessee firm. The sister concern of the assessee firm was not doing any business for the last nine years. The assessee firm's total sources of funds including partner's capital , secured loans or unsecured loans of the assessee firm comes to Rs. 4,56,44,600 while the assessee firm has advanced loan of Rs. 4.86,96,890/. The assessee firm was specifically asked to explain the purpose for which all the secured and unsecured loans have been taken and when the same have been utilized but the assessee firm could not establish any nexus between the interest free loans advanced and received. In view of the above, since the assessee firm could not establish any business expediency in forwarding interest free loans to the sister concern, and further, because the capital borrowed on interest has been diverted for non business purpose, proportionate disallowance on the interest expenses claimed by the assessee firm is warranted. The AO held that since the conditions laid down in Section 36(1)(iii) (of Income Tax Act, 1961) were not satisfied, proportionate disallowance was made @ 12%. The disallowance worked out to Rs.16,75,668/-. Since assessee firm had debited only an amount of Rs.10,85,012/-, therefore, the disallowance was limited to Rs.10,85,012.

2. CIT(A) dismissed assessee's appeal.

3. On appeal, the ITAT held as under:

"In our considered view and in the interest of justice, the matter needs to be set aside to the file of A.O. for re-determination of the issue de-novo after considering the cogent material/evidences of the assessee firm to be brought on record by the AO to prove its contentions that the interest free funds have been advanced by the assessee firm to the sister concern of the assessee firm and to that extent the assessee firm will be entitled for relief. Further, the A.O. shall also consider the plea of the assessee firm that the interest have been paid on specific and dedicated borrowings such as for acquiring car etc. on which in our considered view, no disallowance of interest paid on dedicated and specific borrowings is warranted. Needless to say that the AO shall give proper and adequate opportunity of being heard in accordance with principles of natural justice in accordance with law. We order accordingly.”

Case Reference - M/s Sanjay Trade Corporation vs Asst. Commissioner of Income Tax- 1 3(3).

IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI

BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND

SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER

I.T.A. No. 8271/ Mum/2011

(Assessment Year : 2008-09)

I.T.A. No. 4969/ Mum/2012

(Assessment Year : 2009-10)