Facts of the case:
- Assessee was engaged in the business of educational activities and declared an income of Rs.2,11,15,617/-.
- In the course of the assessment proceedings, it was noticed that assessee had given interest free advances and loans to its sister concerns and claim interest expenses accordingly.
- The assessee was required to explain the allowability of interest expenses in view of above.
- In view of thereof, the assessee was required to explain why expenses on interest on loan be allowed as an expenditure when there is a diversion of funds to Planman Group of Companies by the assessee.
- Considering the reply of the assessee the AO concluded that the assessee has failed to prove commercial expediency for advancing these loans to its sister concern.
- Accordingly, the interest on borrowed capital to the extent of the same was held to be for non-business purposes and an addition by way of a disallowance was made.
- AO further observed that royalty to the extent on Rs.10,08,37,857/- was paid to M/s Planman Consulting India (P.) Ltd. and Rs.16.57 crore as advertisement expenses to M/s Planman Media (P.) Ltd.(both these companies were under the same management).
- Rejecting the same, the AO invoking section 40A(2) made a disallowance of 5% of the amount booked for want of commercial expediency and reasonableness of the payments thereby resulting in the additions of Rs.50,41,892/- and Rs. 82,85,000/- on account of 5% of royalty payment and 5% of advertisement expenses respectively.
Contention of the revenue:
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