TMI Blog1997 (11) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... money advanced to the hotel was not put to business purpose and, therefore, the corresponding interest attributable to such lending should be taken as if the money was not borrowed for business purpose and the interest should be disallowed. The Income-tax Officer, on receipt of the audit objection, issued a notice under section 148 of the Income-tax Act and called upon the assessee to file the return. In the reassessment proceedings initiated by the Income-tax Officer, the Income-tax Officer indicated that he would disallow a sum of Rs. 72,769 towards interest. The assessee objected to the disallowance on the ground that in the accounts of the partners there was enough credit balance and the amount advanced to the hotel should be regarded as having come out of the money standing to the credit of the partners. The assessee also pleaded that the partners instead of directly advancing the money to the hotel, advanced the money through the medium of the firm, which in effect meant that it was the partners' advance. The Income-tax Officer, in the reassessment proceedings, held that the three partners of the assessee-firm were also the directors of the hotel and there was no interest du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient capital in their account to cover the entire amount of advance to the hotel. The Tribunal also applied the principles laid down by the Andhra Pradesh High Court in CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469, and held that where the money borrowed had been mixed up with their own funds and held that it was impossible to come to the conclusion that from which fund the amounts were advanced to the hotel free of interest and the presumption as enunciated by the Andhra Pradesh High Court would apply to the facts of the case on hand. The Tribunal also found that the working done by the Appellate Assistant Commissioner in disallowing a portion of the interest was not based on any principle and the estimate based by the Appellate Assistant Commissioner was found to be incorrect. In this view of the matter, the Tribunal allowed the appeal preferred by the assessee. The Revenue had challenged the finding of the Appellate Tribunal and in compliance with the directions of this court in T. C. P. No. 206 of 1992 by order dated February 15, 1993, the Appellate Tribunal has stated a case and referred the following three questions of law for our consideration under section 256(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the other hand, contended that the presumption laid down by the Andhra Pradesh High Court in CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469, would apply to the facts of the case as the money available with the assessee-firm was Rs. 10,95,010 as against the advance made to Savera Hotels (P.) Ltd., viz., a sum of Rs. 10,34,656, and when the firm had sufficient funds as well as the borrowed money the presumption is that the money was advanced out of its own capital instead of the borrowed money. He also submitted that there is no finding either by the Income-tax Officer or by the Appellate Assistant Commissioner that the money was utilised for non-business purpose and in the absence of any finding it is impermissible for the Revenue to invoke the provisions of section 36(1)(iii). He strongly placed reliance on the decision of the Madhya Pradesh High Court in the case of D H Secheron Electrodes P. Ltd. v. CIT [1984] 149 ITR 400, in support of his submission that no part of the capital borrowed was utilised for the purpose of advance made to the hotel. He also placed reliance on a certain passage in the book titled Sampath Iyengar's Law of Income-tax at page 2349. We have carefu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or household expenses and this was a case where the loans were taken for carrying on the business of the assessee-firm, but the family used to withdraw some amounts from the business and which were within the limit of capital supplied by the family. In that situation the court held that presumption can arise that where the assessee had both his own money as well as borrowed capital, the money lent came out of his own funds. The above decision of the Andhra Pradesh High Court was followed by the Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45, and the Gujarat High Court held that where the material on record showed that the assessee had a common fund it cannot be predicated that the money lent came only out of borrowed funds. The learned author, Sampath Iyengar in his book Sampath Iyengar's Law of Income-tax, 9th edition, at page 2349, observed as under: "For the same reason a presumption appears to be permissible that where the assessee has his own capital as also the borrowed funds, the former rather than latter to have been utilised for the non-business or personal expenses." In the facts of the case the Tribunal has found that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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