AI Structured Summary
Not yet generated for this judgment
Judgment
Ramanujam, J.—At the instance of the Revenue, the following question has been referred to this court for its opinion
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal''s finding that 6% interest alone should be charged on the
overdrawings of the partners is based on relevant and valid considerations and is sustainable in law especially when the assessee was paying
interest at the rate of 9.5 per cent. on its borrowals ?
The assessee in this case is a registered firm consisting of four partners. For the previous year ended March 31, 1968, corresponding to the
assessment year 1968-69, the ITO, in the course of the assessment, found the following debit balances :
As against this, the partner''s capital accounts showed a total roughly of Rs. 1,50,000. The ITO took the view that the drawings of the partners
as on March 31, 1968, amounted to Rs. 3,50,000. He also found that there was an increase in the overdraft account to the extent of Rs.
1,60,000. He estimated the interest on the drawings of the partners at Rs. 24,000 while computing the assessment. Aggrieved against the
assessment, the assessee appealed to the AAC, who found that interest has been credited to the partners on their contribution towards the capital
and so the capital accounts should be left alone. He worked out the opening debit balances in the loan and annuity deposit accounts as under :
The AAC also found that the bulk of the borrowings were from bank at the rate of 9 1/2 per cent. He concluded that the interest, if reckoned at
this rate would be above Rs. 24,000. He, therefore, sustained the addition. The assessee appealed to the Tribunal. The Tribunal found that the
partners had been allowed interest on credit balances in their capital accounts, that the capital accounts of the four partners had been credited with
interest totalling Rs. 15,151 and that the loan taken by them in the aggregate worked out to Rs. 2,62,352. The firm also debited interest on such
withdrawals and this amounted to Rs. 15,741. The Tribunal, therefore, felt that no adjustments between the loan account and the capital account is
called for. Thereafter, the Tribunal went into the question as to whether the amount borrowed by the firm has gone for the purpose of business, and
having regard to the substantial borrowing made by the partners from the firm, it held that the entire borrowing has been utilised for non-business
purposes, i.e., for making advances to the partners, and, therefore, the interest paid on the borrowing cannot be allowed as a business expenditure.
The Tribunal held that instead of the disallowance of the sum of Rs. 24,000, the disallowance should be restricted to Rs. 12,393, being the interest
calculated at 6 per cent. on the amount borrowed, but spent for non-business purposes. The Revenue questions the view taken by the Tribunal, so
far as it is against the Revenue.
We find that the Tribunal has categorically found that the amount borrowed by the firm has not been fully and exclusively utilised for the purpose
of the business. Part of the borrowing has gone for granting loans to the partners, which admittedly is a non-business purpose. To the extent that
the borrowed funds have been utilised for non-business purposes, any interest paid on that portion of the borrowing cannot be deducted as a
business expenditure. This finding of the Tribunal is in favour of the Revenue. But the Revenue is questioning the order of the Tribunal in so far as it
computed the amount of disallowance by taking interest at 6 per cent. as against 9 1/2 per cent. paid by the firm on the borrowings. It is seen that
the firm charged 6 per cent. interest on the loan it had given to the partners, and their accounts have been debited with interest at 6 per cent. on
their borrowing from the firm. But, admittedly, the firm has been paying interest at 9 1/2 per cent. to the banks on its borrowing. Therefore, while
determining the quantum of disallowance under the head ""Interest paid on the borrowings"", on the ground that it had been spent for non-business
purposes, the interest at the rate of 9 1/2 per cent. On its borrowing alone should be taken into account, and the interest at 6% paid by the
partners on their loan to the firm cannot at all be taken into account. Therefore, we are of the view that the Tribunal is not correct in holding that the
interest at 6 per cent. alone should be calculated for the purpose of disallowance of the interest paid on the borrowed amounts as against 9 1/2 per
cent. actually paid by the firm on its borrowing. In this view of the matter, we have to answer the question referred to us in the negative and against
the assessee. There will be no order as to costs.