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Issues:
- Disallowance of interest by the ITO - Justification of disallowance by the Department - Deletion of addition by the AAC - Utilization of borrowings for business purposes - Comparison with previous year's decision Analysis: The judgment by the Appellate Tribunal ITAT Bombay involved appeals regarding the IT assessment for the years 1976-77 and 1977-78 of the assessee, a partnership firm engaged in manufacturing industrial detergents. The common objection of the Department was the deletion by the AAC of the addition of Rs. 5,000 for the assessment year 1976-77 and Rs. 5,500 for the assessment year 1977-78 on account of disallowance of interest. The ITO had observed heavy withdrawals by the partners, leading to an estimated disallowance of amounts for the two years, suspecting that borrowings were utilized for personal use. However, the AAC found that all loans taken were advanced to business customers, leading to the deletion of the disallowance. In further appeal, the Department argued that despite having substantial funds, the assessee chose to borrow money to make advances to business customers while partners utilized surplus funds for personal purposes. The Department sought restoration of the disallowance, contending that the overall business picture should be considered. The assessee's representative countered, stating that borrowings were used for business purposes, citing a similar decision in the earlier assessment year where a disallowance was canceled by the AAC. The representative emphasized that the borrowings were genuine and utilized for business, relying on legal precedents. After considering the submissions, the Tribunal upheld the AAC's decision, noting that borrowings were used for the assessee's business purposes, which was not disputed. The Tribunal emphasized that the test for disallowance of interest on borrowed money is whether it was used for the business, which was established in this case. As the genuineness of borrowing and its utilization for business were undisputed, the Tribunal dismissed the Department's appeals, concluding that there was no justification for sustaining the disallowance based on the facts presented.
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