CHANDRASHEKHAR N. TRIVEDI,THANE vs. ITO 2(3), THANE

The appeal of the assessee is directed against the order dated 12.12.2012 passed by Ld CIT(A)-II, Thane and it relates to the assessment year 2009-10. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the addition of Rs.36.24 lakhs relating to Notional interest.

We heard the parties and perused the record. The assessing officer, on noticing that the assessee has given interest free advances to various concerns, computed interest on such advances at Rs.36,24,474/- and added the same to the total income of the assessee. The assessee had incurred financial charges of Rs.1,02,47,913/- and earned interest income

The Ld A.R submitted that the “financial charges” are not interest expenditure, but they represent bill discounting charges. The Ld A.R submitted that the sales bills were discounted by the assessee and the proceeds were utilized to repay the creditors except one instance, where the assessee has withdrawn the same. Accordingly he submitted that there is no nexus between the interest bearing funds and interest free advances and hence the AO was not justified in disallowing part of interest expenditure in the form of notional interest. He further submitted that the assessee has held sufficient own funds and the same was more than the interest free advances. Accordingly he submitted that the Ld CIT(A) was not justified in computing notional interest and adding the same to the total income.

We notice that the details of utilization of borrowed funds were not examined by the tax authorities. The Ld A.R strongly contended that the amounts borrowed through bill discounting have been utilized to repay the sundry creditors. If there is no nexus between the interest bearing funds and the interest free advances, then there is no requirement of disallowing part of interest expenditure. Further, the assessee claims that the own funds available with the assessee is more than the interest free funds. Hence, we are of the view that the factual aspects relating to the issue under consideration require fresh examination. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to re-examine this issue afresh by duly considering the information and explanations furnished by the assessee and also in the light of discussions made supra.

In the result, the appeal of the assessee is treated as allowed for statistical purposes.