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TMI Blog2018 (8) TMI 1621X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Assessing Officer by disallow ance of interest paid to bank under section 36(1)(iii), on wholly erro neous and insufficient grounds." 3. At the outset it may be stated that ground No. 1 was not pressed by the assessee. The same is, therefore, treated as dismissed. 4. The sole issue, therefore, relates to the disallowance of interest made under section 36(1)(iii) of the Income-tax Act, 1961 (in short "the Act") raised in ground No. 2 above. 5. Brief facts relating to the case are that the assessee was a partnership concern comprising of three partners, Shri Gurdeep Singh Sethi, Shri Manpreet Singh Sethi and Shri Priyadarshan and was engaged in the business of liquor, having been allotted L-14 and L2 licences in the State of Himachal Pradesh. The assessee had filed its return of income declaring income at Rs. 7,44,330. During assessment proceedings the Assessing Officer noticed that there was debit balance of Rs. 5,68,42,578 in the capital account of one of the partner Shri G. S. Sethi. Perusal of the profit and loss account revealed that during the year assessee-firm paid interest of Rs. 39,69,660 as interest on bank overdraft and claimed expenditure of the same in the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraphs 5.4.2 and 5.4.3 are as under : "5.4.2 The facts of the case, the order of the Assessing Officer and the submissions of the appellant have been considered. It is not in dispute that huge funds to the tune of Rs. 5,68,42,578 has been advanced to Sh. G. S. Sethi, partner and no interest has been charged by the concern for the same. The appellant is simultaneously claiming the deduction of Rs. 39,69,660 in the profit and loss account on the interest paid to banks for availing of overdraft facilities. The appellant claimed deduction while computing the profits of business income under section 36(1)(iii) which allows deduction of the amount of interest paid in respect of capital borrowed for the purpose of busi ness or profession. Thus, the only issue to be seen is whether the interest expenditure claimed by the appellant is for the purpose of business or not. Considering the facts of the case, and also consid ering that substantial funds are being advanced to one of the partners without charging any interest, it will be important to peruse the facts of the case. A perusal of the balance-sheet shows that the appellant is availing of loan/overdraft facility/credit facility fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2013 shows that the imprest debit to Sh. G. S. Sethi is separately shown at Rs. 1,88,00,000 and the current account of Sh. G. S. Sethi, partner is showing a debit balance of Rs. 18,42,989. Hence, even if the imprest debit is considered to be advanced for the purpose of business, the debit of Rs. 5,68,42,578 referred to supra cannot be held to be advanced for the purpose of business. Diversion of interest bearing funds is established in this case and thus the disallowance of interest under section 36(1)(iii) is fully justified. Thus, the action of the Assessing Officer cannot be faulted with. The disallowance of the interest made by the Assessing Officer in this case is upheld and ground Nos. 8, 9 and 10 are deleted." 8. Aggrieved by the same, the assessee has come up in appeal before us. During the course of hearing before us, the learned counsel for the assessee reiterated the contentions made before the lower authorities stating that there was sufficient interest-free funds available with the partnership concern for making the impugned interest free advance to the partner of the firm. The learned counsel for the assessee in this regard pointed out that the assessee-firm had av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest by way of surplus withdrawals from capital account to the extent of Rs. 5,68,42,578. 12. As regards the contention of the learned counsel for the assessee that sufficient surplus interest-free funds were available with it to make the impugned advance to the partners, we find that the assessee has been unable to corroborate the same with the facts on record. The learned counsel for the assessee has merely submitted a calculation of availability of interest- free funds to the tune of Rs. 6.3 crores by reducing the loans taken by the assessee from the credit balance of the balance-sheet of the assessee. In our view, the balance figure does not necessarily reflect only the interest- free funds available with the assessee. The balance could comprise of creditors balances and other liabilities outstanding as also any provision created by the assessee, which, by no stretch of logic can be termed as interest-free funds available with the assessee for the purpose of making advances. Therefore, since the assessee has failed to demonstrate the actual amount of interest-free funds available with it, we cannot agree with the submissions of the learned counsel for the assessee that it h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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