Utilization of borrowed funds for interest-free advances without business benefit can lead to disallowance of interest.

N.K.Sud, J.

1. This order will dispose of four appeals, viz., I. T. A. Nos. 6, 7, 119 and 120 of 2003, involving common questions of law and fact.

2. These appeals have been filed by the assessee-company against the order of the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short "the Tribunal"), dated June 20, 2002, for the assessment years 1990-91 and 1991-92. Although in the memorandum of appeals findings of the Tribunal on several issues have been questioned, but at the time of arguments counsel for the appellant confined his challenge to the finding whereby disallowance out of interest made by the Assessing Officer has been sustained. During the course of proceedings for the assessment year 1990-91, the Assessing Officer observed that the assessee had diverted huge amounts to M/s. S. A. B. Credits Limited, a company under the same management. He further observed that during the year under assessment, a sum of Rs. 82 lakhs had been advanced out of the cash credit account of the assessee-company in which there was a huge debit balance. He, therefore, held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed. Accordingly, he disallowed a sum of Rs. 5,66,729 on this score.

3. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Chandigarh (for short the "CIT(A)") who vide his order dated April 15, 1993, partially accepted the claim of the assessee. According to the Commissioner of Income-tax (Appeals), out of the total amount of Rs. 82 lakhs advanced during the year under assessment to M/s. S. A. B. Credits Limited, only a sum of Rs. 18 lakhs had a clear nexus with the borrowed funds as the balance amount had been paid out of the receipts from the other parties to whom no interest had been paid. Accordingly, he directed the Assessing Officer to calculate disallowance of interest only relating to the sum of Rs. 18 lakhs. The disallowance was accordingly reduced to that extent.

4. Both the assessee as well as the Revenue filed appeals before the Tribunal. The Revenue questioned the reduction in disallowance granted by the Commissioner of Income-tax (Appeals) whereas the assessee claimed that the entire disallowance deserved to be deleted. The Tribunal vide order dated June 20, 2002, accepted the case of the Revenue and held that the entire amount of Rs. 82 lakhs had been advanced by utilising the overdraft account and, therefore, disallowance made by the Assessing Officer was justified. Accordingly, the Revenues appeal on this issue was allowed and the assessees appeal was dismissed. I. T. A. Nos. 6 and 7 have, therefore, been filed by the assessee against these findings in the assessment year 1990-91.

5. Similarly, in the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of Rs. 82 lakhs advanced in the assessment year 1990-91, a further sum of Rs. 37,85,000 had been advanced to M/s. S. A. B. Credits Ltd., which also had a clear nexus with the amounts borrowed by the assessee on payment of interest. Accordingly, he disallowed proportionate interest relatable to these amounts amounting to Rs. 20,08,836.

6. On appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld the finding of the Assessing Officer that the sum of Rs. 37,85,000 advanced during the assessment year 1990-91 was relatable to the borrowed funds. However, in view of the findings of her predecessor in the assessment year 1990-91 that out of Rs. 82 lakhs advanced during that year, advance of Rs. 64 lakhs had no nexus with the borrowed funds, she reduced the disallowance from Rs. 20,08,836 to Rs. 10,03,536 vide her order dated July 28, 1994. The assessee was granted further relief of Rs. 1,48,464 by the Commissioner of Income-tax (Appeals) vide order dated September 6, 1995, under Section 154 of