TMI Blog1983 (10) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 on 10-1-1977. These amounts, according to the ITO, were not utilised for the purpose of business and, therefore, he proposed disallowance of interest on the said amount out of the total claim for interest as made by the assessee. The assessee s explanation was that the said loans were obtained from the said party for business purposes as it had maintained a sarafi account with the said party. It was next pointed out that the withdrawals as made by the partner out of the borrowings made from the said party was part of the business transaction and as such the disallowance of interest on the said borrowings was not called for. This contention of the assessee stood rejected by the ITO on the ground that provisions of section 36(1)(iii) permit deduction of interest in respect of capital borrowed for the purpose of business. Since in the instant case the total sum of ₹ 3,77,000 as borrowed by the assessee-firm was not utilised for the purpose of business but had been immediately withdrawn by the partners, it could not be said that the said borrowings represented a borrowing on business account. In fact the amount so borrowed could not be said to have been utilised by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, contended that there was no case for disallowance of any portion of the interest. The Commissioner (Appeals), on consideration of the various submissions, found firstly, that the borrowings made from Mansukhlal Investment and the withdrawals by the partners had taken place on the same date. Therefore, there was a direct nexus between the amount borrowed and the withdrawals made by the partners. The provisions of section 36(1)(iii) do not permit deduction in respect of interest on amount borrowed but not utilised for the purpose of business. The decision in Kishinchand Chellaram s case (supra), the Commissioner (Appeals) observed, clearly helped the case for the revenue rather than that of the assessee. Relying on the two decisions referred to by the ITO as also another decision reported at CIT v. United Breweries [1973] 89 ITR 17 (Mys.) and distinguishing the decision of the Tribunal, the Commissioner (Appeals) held that the disallowance was justified. It may be stated that the Commissioner (Appeals) also took into consideration the additional ground as raised by the assessee relating to computation of disallowance of interest also, while disposing of the above ground. 3. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying on the decisions of Roopchand Chabildass Son s case (supra) and Milapchand R. Shah s case (supra) submitted that the disallowance was justified. The learned departmental representative submitted that usually the disallowance of interest stood deleted on a narrow ground that the nexus between the borrowings and the withdrawals has not been established by the revenue. Now this was a clear case in which the nexus was established and it was an admitted fact that the borrowings made from Mansukhlal Investment were withdrawn by the partners on the same day. It was, therefore, idle to contend that the borrowings made from Mansukhlal Investment were utilised for the purpose of business. In fact the firm was merely a conduit pipe for transferring the borrowings from the account of Mansukhlal Investment to the accounts of the partners which had absolutely no relation with the purpose or conduct of the business. 4. We have considered the rival submissions. The issue before us raises an interesting question as to whether or not the partners could withdraw a portion of the capital out of the borrowed funds and if so whether the interest paid on such borrowings could be disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts were that the assessee-firm of 4 partners was doing business in silk and was also accepting deposits from outsiders and utilised the sums so received for the purpose of business. The assessee had paid an aggregate sums of ₹ 23.67 lakhs against its income-tax and excess profits tax liability. The net capital of 4 partners after taking into consideration debit balance of one of the partners came to ₹ 14.26 lakhs. Thus, the total amount paid by the assessee-firm against income-tax and excess profits tax exceeded the aggregate net amount of capital of 4 partners by a sum of ₹ 9.41 lakhs. The interest paid on borrowings was sought to be disallowed to the extent of ₹ 9.41 lakhs inasmuch as it was the case of the revenue that to the extent of ₹ 9.41 lakhs which was disbursed by the firm out of borrowed money could not be said to be an outlay for the purposes of business of the firm. The said amounts were held to be not for the purpose of firm s business and the interest to the extent to which the capital was so used was held to be not a permissible deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922 [analogous to section 36(1)(iii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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