TMI Blog2001 (10) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 1,31,566: Ground Nos. 1 to IV 3. The assessee-firm in its P L a/c showed expenses of Rs. 1,31,566 as interest payment. This interest related to borrowings from the bank and from other parties. On scrutiny of balance sheet and other books of account, the AO noticed that in the current account with the firm, one of the partners, Shri Uma Shankar Halwasia, had opening balance as on 1st April, 1994, at Rs. 2,69,089.12. This amount was increased to Rs. 3,98,489.12 by 31st March, 1995. No interest was charged on this debit balance. Likewise, there were other advances also on which no interest was charged. A sum of Rs. 27,44,672.81 was given to different persons including sister concerns, relatives of the partners and others from these parties, neither any recovery was made nor interest charged. The AO disallowed the deduction claimed at Rs. 1,31,566 relating to interest payment on the ground that on the one hand the assessee was making interest-free advances to its relatives and sister concerns, whereas money borrowed was yet to be repaid. He also concluded that the money borrowed was not utilised for business purposes as no new project was undertaken for work by the firm. He als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ior to 31st March, 1991, and therefore, barring loan of Rs. 80,000 relating to four transactions dt. 17th April, 1989, other borrowings are subsequent to the advances. This argument was supported by him with reference to the details contained in the chart available at p. 2 of the paper book. (iii) From sister concern, advances to the tune of Rs. 17,41,631.71 were outstanding as on 31st March, 1991. (iv) Out of Rs. 8,09,350, the interest was paid on Rs. 6.80 lakhs and not on the balance of Rs. 1,19,350. (v) The Department was not able to prove that the borrowed funds were not utilized for business purposes. (vi) No nexus could be established by the Department between the borrowed funds and the advances made by the assessee free of interest. 6. The learned counsel also placed reliance on the following cases in support of his arguments: (1) Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC); (2) CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom); and (3) Regal Theatre vs. CIT (1997) 143 CTR (Del) 81 : (1997) 225 ITR 205 (Del). 7. The learned counsel further submitted that the decision relied upon by the CIT(A) for rejecting the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. The Hon ble Supreme Court, on the other hand, reversed the approach of the Hon ble High Court by observing as under: "Proceeding to consider the claim for deduction made by the assessee under s. 10(2)(iii) or s. 10(2)(xv), we may point out that under s. 10(2)(iii) three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. As regards the claim for deduction in respect of expenditure under s. 10(2)(xv) the assessee must also satisfy three conditions, namely, (a) it (the expenditure) must not be an allowance of the nature described in cls. (i) to (xiv), (b) it must not be in the nature of capital expenditure or personal expenses of the assessee, and (c) it must have been laid out or expended wholly and exclusively for the purpose of his business. It cannot be disputed that the expression "for the purpose of business" occurring in s. 10(2)(iii) and also is s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt made the following observations: "The view that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings, that the assessee would not be justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it and that to the extent to which it would have been in a position to collect interest on the outstanding due to it from others, it could not be permitted to claim as an allowance interest paid by it, is not correct." The issue also came for consideration before the Hon ble Delhi High Court in the case of Regal Theatre. In that case also, following the decision of Bombay High Court in the case of Bombay Samachar Ltd. and that of Hon ble Supreme Court of India in the case of Madhav Prasad Jatia and also after considering the same in the case of Ram Krishna Oil Mills vs. CIT the Hon ble Delhi High Court has held that the conditions for getting the deduction under s. 36(1)(iii) of the IT Act in respect of interest are: (i) Money must have been bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged from the partner on the amount debited to its account. 13. So far as the efforts of recovering the amount of advances is concerned, there may be several conditions or difficulties. However, merely on that basis, it cannot be said that the claim for deduction on account of payment of interest on borrowed funds should be disallowed if other necessary conditions to justify the claim as laid down above, are fulfilled. 14. In view of this position and in view of the totality of the circumstances relating to this issue, we are unable to concur with the findings recorded by the CIT(A) in sustaining the disallowance of deduction claimed by the assessee. We, therefore, reverse his findings and delete the addition made on account of disallowance of deduction of Rs. 1,31,566 relating to payment of interest. 15. Ground Nos. I to IV are, therefore, allowed. Disallowance of Rs. 31,450 out of telephone expenses Ground Nos. V, VI VII: 16. The AO disallowed 50 per cent of the telephone expenses being Rs. 31,450. The contention of the assessee against this disallowance before the CIT(A) was that the two partners were allowed the facilities of telephone in the capacity of directors/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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