1982 (3) TMI 161 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest claim by lower authorities.
2. Interpretation of section 36(1)(iii) of the Income-tax Act, 1961.
3. Justification for disallowance of interest.
4. Consideration of additional ground regarding property income.

Detailed Analysis:
1. The judgment concerns the disallowance of the assessee's interest claim by the lower authorities. The assessee, a firm of chartered accountants, claimed interest payment on loans for the construction of a property used for professional purposes. The Income Tax Officer (ITO) disallowed a portion of the interest claim, amounting to Rs. 4,025. The Appellate Assistant Commissioner (AAC) upheld a partial disallowance of Rs. 2,600 under section 36(1)(iii) of the Income-tax Act, 1961, based on the balance sheet analysis.

2. The interpretation of section 36(1)(iii) was a key issue in the judgment. The AAC held that if surplus cash from a loan was not used for loan repayment but for non-professional expenditure, the loan would lose its character of being borrowed wholly for business purposes. However, the Tribunal disagreed with this proposition. It cited the case law of CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469 (AP) to establish that in the absence of evidence showing a direct link between borrowing and personal use, interest paid on loans taken for business purposes should not be disallowed.

3. The Tribunal held that the assessee was entitled to succeed as there was no evidence of diversion of borrowing for personal purposes. It emphasized that if an assessee borrows money for business purposes and subsequently withdraws for personal use, it should be presumed to be out of capital, not the borrowed funds. Therefore, the Tribunal found no justification for the disallowance of interest and allowed the assessee's appeal.

4. Lastly, the judgment addressed the additional ground raised by the assessee regarding property income, which the AAC had not considered. The Tribunal noted that this point did not arise from the AAC's order and advised the assessee to approach the AAC for redress. Ultimately, the Tribunal allowed the assessee's appeal against the disallowance of interest claim by the lower authorities.