Section 38(2) of the Income Tax Act
The decision most relied on for Section 38(2) is CIT v. Radico Khaitan Ltd. (274 ITR 354), cited in 56 of the 60 judgments on BharatTax that turn on this section.
Leading authorities on Section 38(2)
Where an assessee has mixed funds (borrowed and interest-free) and makes interest-free advances, it is presumed that such advances are made from interest-free funds if sufficient interest-free funds are available. This principle guides the disallowance of interest on borrowed capital under Section 36(1)(iii) if funds are diverted for non-business purposes without business expediency.
Proceedings under section 147 can be initiated if the Assessing Officer has reason to believe that income has escaped assessment. The satisfaction required for initiating reassessment proceedings under section 147 must be that of the Assessing Officer himself, based on recorded reasons, and any satisfaction required under section 151 must be endorsed on the Assessing Officer's reasons.
Commercial expediency is not relevant to the allowability of interest-free advances when the advances are not made out of interest-bearing funds. The utilization of funds for capital investment in building constitutes commercial expediency.
Where an Assessing Officer (AO) seeks to reject an assessee's book results and make an assessment based on best judgment, they must first identify specific defects in the books of account and seek an explanation from the assessee. If the assessee fails to explain these defects, the AO may then compute income by estimation. Ad hoc disallowances are not justified if no defects in the books are pointed out.