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In the case of CIT v. India Carbon Ltd. (2001) 118TAX207 the assessing officer could only prove that the interest free advances to subsidiaries were made out of cash credit account, which consisted of both interest bearing borrowings and internal accruals. In other words he failed to prove the one to one correlation or nexus between the amount borrowed and amount advanced in the absence of which the assessee won the case before the Gauhati High Court. Looking at the financial position the High Court pointed out that the assessing officer failed to take into account the share capital of the company, depreciation reserve, other reserve and cash profit generated during the previous year.

Also the MP High Court in another ruling on this subject in the case of R D Joshi & Co. v. CIT (2001) 118TAX394 held that in making any disallowance of such nature it is desirable for the authorities below to demonstrate the nexus between the borrowings and withdrawals and in this regard further pointed out that mere brushing conclusions by the appellate authority like Tribunal can never be called legal.

It is therefore advisable to advance monies always from the common pool of funds and as far as possible one should avoid back-to-back transactions in such cases.

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