K.K. Boliya, A.M. - (1.)THESE two appeals filed by the assessee and relating to Assessment years 1995-96 and 1996-97 are disposed off by this common order as issues involved are identical.
(2.)The first ground of appeal which is common for both the Assessment years pertains to disallowance of interest paid by the assessee to the bank on the ground that the assessee advanced interest-free loan to Maharashtra Trading Agency and, thus, the interest-bearing borrowed funds were diverted for non-business purpose. During the course of appellate proceedings before the learned Commissioner (Appeals) the assessee filed detailed written submissions claiming that the assessee was having interest-free funds to the extent of Rs. 67.64 lakhs. It was further pointed out that the assessee was having business transactions with M/s. Maharashtra Trading Agency. The assessee was making sales and was also doing job work on behalf of the aforesaid concern. The assessee was to receive job work charges from M/s. Maharashtra Trading Agency and substantial portion of the outstanding amount comprise of such job charges. During the course of business transactions the assessee gave trading advances of Rs. 22.43 lakhs to Maharashtra Trading Agency. The learned Commissioner (Appeals) rejected the submission and confirmed the disallowance for both the assessment years.
The learned counsel attending on behalf of the assessee reiterated similar arguments before us and pointed out that during the year no advances were made by the assessee to M/s. Maharashtra Trading Agency and that the outstanding amounts have been brought forward from earlier years. It is also contended that whatever amounts are outstanding are only on account of business transactions and further that interest-bearing borrowed funds have not been utilized for making any interest-free advances to Maharashtra Trading Agency. The learned Departmental Representative supported the orders of the revenue authorities.

(3.)AFTER carefully considering the rival submissions, in our view this issue must go back to the assessing officer for proper verification and reconsideration. The disallowance of interest on borrowed funds can be made only when the borrowed funds have been utilized by the assessee for non-business purposes. The assessing officer must examine as to whether any interest-bearing borrowed funds have been diverted for making interest-free advances to Maharashtra Trading Agency which are not for business purposes. If the amounts outstanding are on account of job work charges receivable by the assessee, no disallowance of interest can be made. The assessing officer shall allow opportunity to the assessee to establish the source of any advances made to Maharashtra Trading Agency. AFTER considering the entire facts the issue will be re-decided by the assessing officer.