TMI Blog2018 (4) TMI 1796X X X X Extracts X X X X X X X X Extracts X X X X ..... e personal purpose of the partners of the assessee-firm. The assessee with liquidity cannot claim that it could give such cash balance for the benefit of the partners of the assessee-firm. Such advance made by the partners has not been used for the business purpose but for the personal benefit of the respective partners. Had the assessee-firm used such cash balance for the business purpose or for payment of borrowals made by the partners of the assessee-firm, it could have saved interest expenditure. AR made an argument that only the withdrawals of the present assessment years is to be considered for computation of interest expenditure and the earlier old balance of advance in the name of the partners which was carried forward from the earlier years cannot be considered. In our opinion, this argument of the assessee s Counsel has no merit as the assessee is paying interest on such carried forward opening balance and incurred interest expenditure on it. Therefore, the total advance outstanding in the name of the partners is to be considered for computation of interest disallowance in the case of the assessee-firm. Accordingly, we do not find any infirmity in the orders of the low ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been used for any business purposes, therefore according to the CIT(A), the provisions of section 36(1)(iii) are squarely applicable. The CIT(A) observed that the assessee tried to contend that while making these advances to the partners the assessee had enough credit in its books so as to allow interest free credit to its partners but since it was noticed from the detailed working made out by the assessing officer about the debit balance and drawings in respect of three partners that various amounts as brought out in the tables in the assessment order have been given to the partners, the assessee was asked to show that such payments were made from the surplus funds available with the assessee as contended in the submissions made. 5.1 In this connection, the CIT(A) observed that the assessee furnished a copy of its bank statement to show that the various payments were made from the credit balance received from sales etc., which were received just before making these advances to the partners. However, the CIT(A) did not justify the explanation of the assessee as it was seen that the bank statement of assessee is a continuous over draft facility where balance on any particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from ₹ 10,00,000/- credit coming on the same day, but the fact remains that the credit of ₹ 10,00,000/- only had the effect of reducing overdraft facility of more than 2 crores, and hence for the payment of ₹ 7,00,000/- to Shri Fisel, interest bearing funds was utilized. The CIT(A) found that it was exactly the same pattern that was repeated for all the payments to these partners. Thus according to the CIT(A) it was established that the payments to the partners have been made for non-business purposes from interest bearing funds. Hence, according to the CIT(A), the assessing officer was right in working out the interest on debit balances and total drawings in respect of these partners and making the disallowance u/s. (1)(iii) of the IT Act and confirmed the same. 5.3 Further, the CIT(A) noticed that in the additional ground of appeal, the assessee contended that even if any disallowance u/s 36(1)(iii) was made, this could only be made for the increase in advances during the year and not on the debit balance, in this regard, the assessee relied on the case law of CIT Vs Sridev Enterprisies, 192 ITR l15(Kar). However, according to the CIT(A), it was seen that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise than for business purpose, the opening debit balance of the partners could not be considered during the current year and disallowance was to be limited to the increase in the partners debit balance of the current year only. The Ld. AR placed reliance on the judgment of the Karnataka High Court in the case of CIT vs. Sridev Enterprises (192 ITR 165). 7. On the other hand, the Ld. DR submitted that the assessee diverted interest bearing funds for non-business purpose by way of allowing withdrawals by the partners of the assessee-firm. Hence, interest expenditure is not wholly and exclusively laid out for the purpose of business. Accordingly, he supported the disallowance made by the Assessing Officer u/s. 36(1)(iii) of the Act and confirmation of the same by the CIT(A). He relied on the following judgments: i) Madhav Prasad Jatia vs. CIT (118 ITR 200 (SC) ii) CIT vs. V.I. Baby (254 ITR 248 (Ker.) iii) Somasundaram Brothers vs. CIT (239 ITR 795) (Mds.) 7.1 The Ld. DR distinguished the judgments relied upon by the assessee. The Ld. DR submitted that the facts in the case of CIT vs. Hotel Savera (supra) are that the advance was made with assessee-firm s own funds a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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