1979 (7) TMI 125 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest on debit balance in partner's account.
2. Disallowance of interest on overdrafts obtained against fixed deposits.

Issue 1: Disallowance of interest on debit balance in partner's account:
The appeal was filed by the Department challenging the deletion of disallowance of interest on a debit balance in the account of a partner, Smt. Mohankumari. The firm, during the relevant accounting period, had a partner who withdrew Rs. 40,000, leading to a debit balance in her account. The Income Tax Officer (ITO) disallowed Rs. 1,333 as interest on this debit balance. However, the Commissioner of Income Tax (Appeals) found that the partner actually had a credit balance at the end of the accounting period and that the debit balance was only for a brief period before the end of the period. The CIT(A) deleted the disallowance as the ITO failed to establish a connection between the borrowed funds and the partner's withdrawals. The Tribunal upheld the CIT(A)'s decision, noting that the withdrawal by the partner was directly linked to a deposit made by another partner, and there was no borrowing by the firm on the date in question.

Issue 2: Disallowance of interest on overdrafts obtained against fixed deposits:
The Department also contested the deletion of disallowance of interest amounting to Rs. 4,708 made by the ITO. The partners of the firm withdrew Rs. 2 lakhs from their capital account and invested it in fixed deposits in their personal names. Subsequently, the firm obtained overdrafts from banks against these fixed deposits. The ITO disallowed the interest on the overdrafts, but the CIT(A) overturned this decision, stating that partners were entitled to withdraw from their individual accounts and make investments as they pleased. The Tribunal, after considering a similar issue in a previous year, upheld the CIT(A)'s decision, emphasizing that the financial arrangements between the firm and its partners did not contravene any provisions of the Income Tax Act.

In conclusion, the Tribunal dismissed the appeal, confirming the decisions of the CIT(A) in both issues regarding the disallowance of interest.