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Issues:
1. Disallowance of interest payments by the assessee. 2. Burden of proof on the assessee regarding the utilization of borrowed funds for business purposes. Analysis: 1. The appeals by the Revenue related to assessment years 1981-82 and 1982-83, challenging the disallowance of interest payments made by the assessee firm. The Assessing Officer disallowed a portion of the interest payments, alleging diversion of funds to non-business purposes. The CIT(Appeals) reversed this disallowance, citing lack of direct nexus between diverted funds and borrowed funds. The Revenue appealed to the Tribunal, arguing that the burden was on the assessee to prove the utilization of borrowed funds for business. The Tribunal analyzed relevant case laws, including decisions by the Bombay High Court and the Supreme Court, to determine the applicability of interest disallowance. 2. The Tribunal examined the facts of the case, emphasizing the absence of capital in the firm's business as per the balance sheets for the relevant years. It noted that partners had withdrawn more than their capital, relying heavily on borrowed funds. The Tribunal observed that loans and advances made by the firm were not proven to be for business purposes. Consequently, the interest attributable to such non-business loans and advances was deemed non-deductible under section 36(1)(iii) of the Income-tax Act. The Tribunal concluded that the interest disallowance by the Assessing Officer was justified, reversing the CIT(Appeals) orders and upholding the assessment orders for both years. As a result, the appeals by the Revenue were allowed. This detailed analysis of the judgment provides insights into the legal reasoning behind the decision to disallow interest payments by the assessee and the burden of proof regarding the utilization of borrowed funds for business purposes.
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