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In the case of Gujarat Narmada Valley Fertilisers Co. Ltd. V. Dy. CIT (108TAX213) the assessing officer disallowed part out of the interest claimed by the assessee on the pretext that certain interest free advances made by the assessee company to three associate concerns were made out of interest bearing borrowed funds. The Commissioner (Appeals) confirmed the addition. The Tribunal found that the share capital and the reserves and surplus together with the accumulated depreciation would far exceed the loans and advances made to the three concerns. In this case both the AO and Commissioner (Appeals) has failed to prove any direct nexus or clear evidence between the interest bearing loans taken and the interest free advances given. The Tribunal thus deleted the addition.


Further in the similar circumstances the Chandigarh Bench of the Tribunal in the case of Dy. CIT v. Shivalik Agro Poly Products Ltd. (108TAX219) found that the assessee had advanced moneys to sister concerns keeping in mind the diversification and the expansion of the company’s business. Further, the Tribunal held that much less ad hoc disallowance, as made by the assessing officer without proving any nexus between borrowed funds and advances made to sister concerns does not hold any ground.


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