1978 (7) TMI 7 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in holding that the departmental authorities were entitled to support the disallowance or addition on account of huge debits in the name of Shri Ram Deo Marolia.
2. Whether the Tribunal was justified in sustaining the disallowance of interest for the specified amounts.

Summary:

Issue 1: Disallowance or Addition on Account of Huge Debits
The Tribunal held that the departmental authorities were entitled to support the disallowance or addition on account of huge debits in the name of Shri Ram Deo Marolia. The firm had charged no interest on the amounts withdrawn by Ram Deo Marolia, leading the ITO to make additions for the assessment years 1964-65 to 1968-69. The AAC dismissed the assessee's appeals, and the Tribunal remanded the case for reconsideration. Upon further review, the Tribunal found that the borrowings obtained by the assessee were not utilized for business purposes, thus justifying the disallowance of interest on the borrowings.

Issue 2: Sustaining the Disallowance of Interest
The Tribunal sustained the disallowance of interest for the specified amounts because the borrowed capital was not utilized for business purposes. According to Section 36(1)(iii) of the I.T. Act, the deduction on the amount of interest paid is allowable only if the capital is borrowed for business purposes. The Tribunal found that a large amount of the borrowings had been given to Ram Deo Marolia for personal purposes. Therefore, the deduction claimed by the assessee-firm was not admissible. The Tribunal's decision was supported by the principle that an assessee-firm cannot claim deduction on amounts not used for business purposes but given to partners for personal use.

Appellate Powers of the Tribunal
The Tribunal's jurisdiction under Section 254(1) of the I.T. Act allows it to pass such orders as it thinks fit on the appeal. The Tribunal can permit a party not filing an appeal to raise a ground to support the judgment, provided it does not enhance the tax liability. The Tribunal's decision to disallow the deduction of interest on borrowings given to Ram Deo Marolia for personal use was within its jurisdiction and power, as the two matters were inseparably connected.

Conclusion
Both questions were answered in the affirmative, in favor of the department and against the assessee. The department was entitled to costs assessed at Rs. 200.