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TMI Blog2005 (4) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the disallowance of interest attributable to the borrowed funds diverted for non-business purposes by making interest free advances to the partners?" The brief facts of the case are as follows" The assessee is a registered firm consisting of five partners, by holding equal shares carrying on the business in the export of brassware. The AO noticed during the course of assessment that there was debit balance of ₹ 1,11,200/-in the name of a partner Smt. Satyawati Garg as on 1.4.1994. This debit balance increased to ₹ 2,51,381/- by 27th June,1984 on account of two withdrawals made subsequently, one of which was a sum of ₹ 1,13,263/- made on 27th June, 1984. As debit balance in this account continued through the year and as no interest was charged on the debit balance as well as the firm was paying interest of substantial amounts to the bank, the A.O. suspected that borrowed funds were diverted for non-business purposes like advances to the partners. The assessee was asked to explain as to why a portion of the interest should not be disallowed. The assessee gave an explanation which was not accepted by the A.O. It was explained that the assessee firm ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was referred to the learned President for the opinion of a Third Member u/s 255 (4) of the I.T. Act, 1961. The President of the Tribunal as Third Member agreed with the view of the Judicial Member. The Third Member decided the issue as follows: " I have to first determine what are exactly the points of difference of opinion from amongst the points mentioned by them individually and then express my opinion on the points of difference of opinion. I have gone through very carefully the points of difference of opinion made out by both the Members and in my view the points mentioned by the learned Judicial Member bring out the real controversy of the difference of opinion and I would, therefore, confine myself to express my opinion on those points of difference of opinion. In a way there is not much of difference of opinion between the points of difference of opinion mentioned by the learned Accountant Member and the learned Judicial Member. Both converge on the same issue except that they are couched in a different language. As I mentioned earlier, the real issue is whether any interest could be disallowed on the ground that the borrowed funds were diverted for non business p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money and since the purpose for which the moneys were withdrawn by the partners was not known, an assumption can be made in favour of the revenue that these funds were drawn for purposes other than business, but if the partners have got credit balances to their account and when they want to withdraw from their credit balances for their personal purposes, would it mean diversion of borrowed funds for non-business purposes. Implied in it is the further question whether the partners are entitled to draw from their credit balances whenever they need and whether such withdrawals amount to the outlay of the borrowed funds for non-business purposes. If the partners have got credit balances and when there is no prohibition in the partnership deed for withdrawal of the money as and when they desire, such withdrawal made by the partners cannot be termed as withdrawal made out of the borrowed funds for non-business purposes. When a partner wants to withdraw the money from his credit balance for a personal purpose, the other partners cannot normally object to it except on the peril of leading to difference of opinion which may even lead to dissolution of the firm and winding up of the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed for the withdrawal by Smt. Satyawati Garg to the extent of ₹ 1,58,356/- it must be construed that she was allowed to withdraw the money from out of the capital of the partners and not necessarily out of the borrowed funds even though, the partners have arranged the withdrawal by the partners out of the money withdrawn from the Bank.. The following figures would show the position of the partners accounts both at the beginning, during and at the ends of the year: Name of the partners % Op.Balance Additions Drawings Sri Praveen Kr.Garg 20% 1,62,319.67 1,48,108.29 Sri Prashant Kr.Garg 20% 1,62,408.13 1,46,936.30 Sri Atul Kr.Garg 20% 1,73,805.14 1,47,826.30 Smt. Chitra Garg 20% 1,10,992.22 23,978.50 Smt. Satyawati 20% 1,11,200.32 Dr. 1,46,294.29 4,98,324.84 6,13,143.68 Name of the partners total Profit balance as 31.3,1985 Sri Praveen Kr.Garg 14,211.38 99,137.72 1,13,349.10 Sri Prashant Kr.Garg 15,471.83 99,137.72 1,14,609.55 Sri Atul Kr.Garg 25,978.84 99,137.72 1,25,116.56 Smt. Chitra Garg 87,013,72 99,137.72 1,86,151.44 Smt. Satyawati (-) 2,57,494.61 99,137.73 (-) 1,58,356.88 (-) 1,14,818.84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m where money was withdrawn from the bank and given to one of the partners but charging interest thereon and credit balance in the account of other partners was enough to enable them to pay money to the other partners and withdrawal could be to preserve harmonious relationship among the partners and hence for business purposes and that, therefore, interest payable to bank could not be disallowance under the relevant provisions of the Act." We have heard Sri R.K.Upadhyaya, learned Standing Counsel for the revenue and Sri Vikram Gulati, learned counsel for the respondent-assessee. We have perused the order of the Tribunal. Admittedly, though the money has been withdrawn by Sri Atul Kumar Garg , but since there was a credit balance in its own account, therefore, no interest was disallowed on the amount withdrawn by him. The amount of interest has only been disallowed on the amount withdrawn by Smt. Satyawati. Tribunal found that there was a credit balance of ₹ 5,39,226/- in the account of partners and the debit balance in the account of Smt. Satyawati Garg of ₹ 1,58,356/-and after setting off this amount still there was a credit balance of ₹ 3,80,870/- in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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