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Appeal against CIT(A) order on disallowance of interest on borrowed funds. Analysis: The appeal before the Appellate Tribunal ITAT Cochin involved a partnership firm engaged in the rubber and hill products business disputing the disallowance of Rs. 75,351 out of the interest claimed on borrowed funds for the assessment year 1987-88. The Assessing Officer (AO) observed that the firm had transactions with a sister-concern, Chandysons Latex, with a balance due of Rs. 12,32,920 as of March 31, 1987. The AO concluded that borrowed funds were diverted to the sister-concern, leading to the disallowance of a proportionate interest amount. The CIT(A) upheld this decision, prompting the appeal to the Tribunal by the assessee. Representing the assessee, it was argued that the funds were not diverted but used for legitimate business transactions with Chandysons Latex, supported by a paper-book containing relevant account details. The Departmental Representative contended that the funds were indeed diverted, citing specific instances from the assessment order. After considering the submissions and examining the transactions, the Tribunal found that while some payments were related to business transactions, others were diversion of funds for non-business purposes. Consequently, the Tribunal directed the AO to restrict the disallowance of interest to Rs. 5,45,000, which was deemed as diverted for non-business purposes. In conclusion, the Tribunal partially allowed the appeal by the assessee, instructing the AO to revise the assessment accordingly. The judgment highlights the importance of establishing the purpose of fund utilization in determining the allowability of interest on borrowed funds, emphasizing the need for clear documentation and evidence to support claims in tax assessments.
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