1986 (7) TMI 175 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest by the Commissioner (Appeals) in the assessment year 1980-81.
2. Disagreement between the Judicial Member and the Accountant Member on the disallowance of interest.

Analysis:

Issue 1: Disallowance of Interest by the Commissioner (Appeals)
The assessee, a registered firm, contested the addition of Rs. 14,580 for interest made by the learned IAC based on a 15% disallowance on the average debit balance of a partner. The firm argued that the withdrawals were utilized for income tax, CDS, and personal use. However, the Commissioner (Appeals) upheld the disallowance, stating that interest claims for tax payments are allowed for partners, not firms. The Tribunal concurred, emphasizing that interest-free loans to partners put the firm at a financial disadvantage, diverting borrowed funds for non-business use. The Tribunal dismissed the appeal, affirming the lower authorities' actions to ascertain the correct income and prevent tax avoidance.

Issue 2: Disagreement between Members on Disallowance of Interest
In a separate judgment, the Accountant Member disagreed with the disallowance, highlighting that non-interest bearing funds exceeded interest-bearing loans, indicating no diversion of borrowed funds for personal use. The Accountant Member emphasized the lack of evidence showing the utilization of interest-bearing funds for non-business purposes. The Third Member, concurring with the Accountant Member, concluded that the revenue failed to substantiate the diversion allegation, leading to the deletion of the disallowance. The case was referred back to the original Bench for disposal based on the majority view.

In essence, the judgment addresses the disallowance of interest by the Commissioner (Appeals) for the assessment year 1980-81, emphasizing the proper utilization of funds and the prevention of tax avoidance. The disagreement between the Judicial Member and the Accountant Member centered on the diversion of borrowed funds for non-business purposes, ultimately resulting in the deletion of the disallowance based on the lack of evidence supporting such diversion.