Hon’ble Allahabad High Court has in the case of CIT v/s M/S Ghari Industries Pvt. Ltd in ITA No 26 of 2017 vide order dated 1.3.2017 has dismissed the appeal of the department as no disallowance can be made under Section 40A(2)(b) read with Section 36 of the Income Tax Act of interest paid on borrowed funds for trade advance given out of commercial expediency to sister concerns.
Brief Facts of the case are that
The appellant was engaged in the manufacture and sale of leather shoe, leather and trading of detergents. It had got certain quantities of detergent manufactured by a sister concerned M/s Calcutta Detergent Pvt. Ltd. During the course of assessment proceedings the assessing officer noticed that the appellant had advanced money to M/s Calcutta Detergent Pvt. Ltd. Against the aforesaid advance, M/s Calcutta Detergent Pvt. Ltd made supplies of the detergent to the appellant and the balance remained by way of advance under the head of sundry creditors. M/s Calcutta Detergent Pvt. Ltd was a sister concern and no interest had been charged therefrom. Therefore a disallowance was made under Section 40A(2)(b) read with Section 36 of the Income Tax Act on interest paid on borrowed funds by the assessing officer. Whereas appellant contested that M/s Calcutta Detergent Pvt. Ltd. was engaged in the activity of manufacturing branded detergent exclusively for the appellant and therefore the advance was done for commercial expediency purpose. The Hon’ble CIT(Appeals) as well as the Hon’ble Tribunal had accepted the appellant’s version. The Hon’ble Allahabad High Court has also dismissed the appeal as it was not disputed that M/s Calcutta Detergent Pvt. Ltd was engaged solely in manufacturing the goods namely branded detergent for the exclusive use of the appellant just because the amount of advance made is disproportionate for the sale of goods of M/s Calcutta Detergent Pvt. Ltd cannot be a ground to make any disallowance.