TMI Blog2005 (4) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 had two bank accounts, one with the Allahabad Bank and the other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purposes when the partners withdrew the money. This issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 business. In the absence of a contract to the contrary, a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay that the withdrawals made by the partners were such as to say that the borrowed funds were utilized for non-business purposes. I am, therefore, of the opinion that in regard to the point of difference of opinion no. 1 that the interest out of the borrowed funds is not disallowable in respect of the sum of ₹ 1,39,263/- withdrawn by Smt. Satyawavati Garg in view of the fact that the overall capital of the partners was in excess of the withdrawal made by the partner. Thereafter the Division Bench of the Tribunal passed the order dated 26th July,1994 in conformity with the order passed by Third Member as follows. After hearing learned representatives on both sides and carefully going through the order of the President as a Third Member we pass this order in conformity with the majority decision holding accordingly that in case of disallowance of interest pertaining to business of the assessee firm 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 relationshi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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