2018 (4) TMI 1796 - AT - Income Tax

Disallowance of portion of the interest paid on secured loans from banks as proportionate interest pertaining to personal drawings made by the partners - Addition u/s. 36(1)(iii) - HELD THAT - In this case, the partners of the assessee-firm had withdrawn amount from the assessee-firm only for personal purpose. The assessee has been paying interest on borrowed funds. The withdrawals made by the partners was not utilized for the purpose of business and the assessee-firm has not derived any business advantage from such withdrawals by the partners. The assessee-firm has not charged any interest on the withdrawals made by the partners by way of paying interest on its borrowings. However, at the same time, the assessee has incurred interest expenditure on the borrowals made by the partners of the assessee-firm. The main contention of assessee is having sufficient cash balance to meet the withdrawals made by the partners. In our opinion, if the cash balance is available, it should be meant for the business purpose of the assessee-firm and not for the 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 lower authorities. - Decided against assessee.

Summary

Issues Involved:
Disallowance of portion of the interest paid on secured loans from banks as proportionate interest pertaining to personal drawings made by the partners.

Detailed Analysis:

1. Common Issue in Appeals:
The appeals pertain to disallowance of a portion of the interest paid on secured loans from banks, attributed to personal drawings made by the partners. The appeals for the assessment years 2009-10, 2010-11, and 2011-12 were heard together and disposed of by a consolidated order.

2. Facts and Assessment:
For the assessment year 2009-10, the Assessing Officer (AO) detailed the drawings by partners and the secured loan taken by the assessee. The AO calculated the interest chargeable on the partners' withdrawals, resulting in a total disallowance of ?26,29,945 under Section 36(1)(iii) of the Income Tax Act. Similar disallowances were made for the years 2010-11 and 2011-12.

3. CIT(A) Findings:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, stating that amounts used for non-business purposes are disallowed under Section 36(1)(iii). The CIT(A) observed that the payments to partners were made from a bank account with a continuous overdraft balance, indicating that interest-bearing funds were used for non-business purposes. The explanation provided by the assessee, suggesting payments were made from credit balances received from sales, was not accepted.

4. Assessee’s Argument:
The assessee argued that disallowance should only apply to the increase in advances during the year, not the debit balance. The assessee relied on the case of CIT vs. Sridev Enterprises (192 ITR 165) and other judgments, suggesting that withdrawals for non-business purposes were from non-interest-bearing funds.

5. Revenue’s Argument:
The Revenue contended that the assessee diverted interest-bearing funds for non-business purposes, supporting the disallowance under Section 36(1)(iii). The Revenue distinguished the judgments cited by the assessee, asserting that the facts in those cases were different.

6. Tribunal’s Decision:
The Tribunal found that the partners' withdrawals were for personal purposes, and the assessee was paying interest on borrowed funds. The Tribunal rejected the argument that only current year withdrawals should be considered, stating that the total advance outstanding in the partners' names should be considered for interest disallowance. The Tribunal upheld the disallowance made by the lower authorities, dismissing the assessee's appeals.

Conclusion:
The Tribunal dismissed the appeals of the assessee, confirming the disallowance of interest under Section 36(1)(iii) for the assessment years 2009-10, 2010-11, and 2011-12, as the funds were used for non-business purposes by the partners.