1979 (5) TMI 42 - AT - Income Tax

Summary

Issues:
- Disallowance of interest paid by firms to the bank for obtaining loans for business purposes.

Detailed Analysis:
The judgment involves three appeals filed by the Department challenging the orders of the AAC regarding the disallowance of interest paid by three firms to the bank for obtaining business loans. The partners of the firms withdrew amounts from their capital accounts and converted them into fixed deposits, against which the firms obtained loans and paid interest. The ITO disallowed the interest paid by the firms on borrowed funds, resulting in additions to their total income.

During the appeal, the assessees argued that the interest paid to the banks was allowable as a deduction under section 36(iii) of the IT Act, as the borrowed funds were used for business purposes and not for personal use. They contended that the mere pledging of fixed deposits as security did not disqualify them from claiming the interest paid on borrowed funds. The AAC accepted these arguments and deleted the disallowance made by the ITO.

In the subsequent appeal before the ITAT, the Department's representative argued that the fixed deposits pledged as security were assets of the firms, and therefore, the interest on these deposits should have been credited in the firms' accounts, not the partners' individual accounts. The counsel for the assessees reiterated that the interest paid on loans utilized for business purposes should be allowed as a deduction.

The ITAT upheld the AAC's decision, emphasizing that partners have the right to withdraw money from their capital accounts for personal use unless otherwise agreed. The partners converted withdrawn amounts into fixed deposits, against which loans were obtained for business purposes. As the loans were specifically utilized for business, the interest paid to the banks was considered an allowable deduction under section 36(iii) of the IT Act. The court rejected the Department's argument that pledging fixed deposits transferred ownership to the firms, stating that the interest paid on loans for business purposes was rightly allowed. Consequently, all three Departmental appeals were dismissed.