1985 (4) TMI 85 - AT - Income Tax

Summary

Issues:
1. Disallowance of excess interest paid for more than 12 months.
2. Disallowance of interest on withdrawals for personal expenses.
3. Disallowance of expenses related to refreshments.

Analysis:

Issue 1: Disallowance of Excess Interest
The Income Tax Officer (ITO) disallowed Rs. 13,885 of interest paid by the firm, claiming it was for more than 12 months and not allowable under the mercantile system. The firm contended before the Appellate Assistant Commissioner (AAC) that they followed a mixed accounting system and were entitled to deduction on a payment basis. The AAC agreed and deleted the disallowance of Rs. 13,885, based on the actual method of accounting followed by the firm. The Tribunal upheld the AAC's decision, emphasizing that the method consistently followed by the assessee should not be disturbed for the purpose of disallowance.

Issue 2: Disallowance of Interest on Withdrawals
The ITO disallowed Rs. 9,000 of interest on withdrawals for personal expenses, estimating them at Rs. 50,000. The firm cited a Madhya Pradesh High Court case to support their claim that interest on borrowings should be allowed regardless of partner withdrawals for personal use. However, the Tribunal distinguished this case, noting the absence of capital invested by partners and increased debit balances due to losses and personal withdrawals. Consequently, the disallowance of Rs. 9,000 was upheld as the diverted amount for personal purposes was not entitled to interest deduction.

Issue 3: Disallowance of Refreshment Expenses
The ITO disallowed Rs. 5,000 of claimed expenses for refreshments, attributing them to partners. The AAC found that the refreshments were for visitors, not partners, and allowed the deduction under section 37(2A) of the IT Act. The Tribunal upheld the AAC's decision, stating no interference was warranted as the expenses were found to be legitimate and within the permissible limit of the section.

In conclusion, both the appeal and cross-objections were dismissed, confirming the AAC's decisions regarding the disallowances of excess interest, interest on withdrawals for personal expenses, and refreshment expenses.