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In the case of CIT v. Sahni Silk Mills (P.) Ltd. (119TAX133) it was found that the assessee, a manufacturing concern had paid 16% PA interest on borrowed funds. In year 1 the assessee did not charge interest on advances to certain parties. The assessing officer made disallowance out of interest paid in respect of such advances, which was upheld in appeals. In a corrective action the assessee charged interest @ 12% PA from such parties in the succeeding year 2. The assessing officer again attempted to disallow proportionate interest on the basis of difference in interest rates paid and charged.

The matter again reached the Tribunal in year 2. In disregard of its previous year order confirming addition the Tribunal held that interest paid/charged cannot be the subject matter of the test of reasonableness and the ITO cannot determine the rate of interest in this regard.

Now this case is a clear indicator to the fact that some interest must be charged on advances made out of borrowed funds to prevent any disallowance. Further this case provides a clue that it is wise to review certain claims and deductions from year to year for any corrective measures.

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