1983 (6) TMI 50 - AT - Income Tax

Summary

Issues: Disallowance of interest attributable to loans advanced to sister concern for non-trading purposes.

Analysis:
The revenue appealed against the CIT(A)'s decision to delete the disallowance of Rs. 19,690 on account of interest related to loans advanced to a sister concern for non-trading purposes. The assessee, engaged in printing and selling saris, had advanced Rs. 3,51,219 to the sister concern without charging interest, justifying it as a means to obtain work at lower rates and prompt service. The ITO disallowed Rs. 19,690, representing 12% annual interest on the amount advanced, citing reasons in the assessment order. However, the CIT(A) noted that the partners had sufficient capital balance to advance the loan for business purposes and upheld the assessee's claim, emphasizing the business consideration for the loan.

The revenue contended before the tribunal that there was no evidence to prove that the borrowed funds were not diverted for non-business use, highlighting the difference between partner drawings and the loan amount. The revenue argued that the interest claim of Rs. 63,608 was not entirely related to business purposes. In response, the assessee presented detailed accounts showing the amounts owed by the sister concern, emphasizing that the net cash advance was significantly lower than the partners' capital balance. The assessee asserted that no interest-bearing loans were specifically taken for the loan to the sister concern, refuting the revenue's claim of diversion for non-business purposes.

Upon review, the tribunal found that the revenue failed to establish that any borrowed funds were diverted for non-business purposes. The tribunal noted that the advances to the sister concern were funded from the assessee's cash balance, and the partners' credit balance consistently exceeded the total advances made. Consequently, the tribunal concluded that the interest-bearing loans were not diverted for non-business purposes. Therefore, the tribunal upheld the CIT(A)'s decision and dismissed the revenue's appeal, stating that no interference was warranted in the CIT(A)'s order.