1982 (1) TMI 127 - AT - Income Tax

Summary

Issues:
1. Disallowance of interest on debit balance in partners' accounts for non-business purposes.

Analysis:
The appeal before the Appellate Tribunal ITAT MADRAS-D concerned the disallowance of interest amounting to Rs. 13,992 by the Income Tax Officer (ITO) in the assessment of M/s P.Sundararajan & Co., a partnership firm engaged in the cloth manufacturing and sale business. The ITO disallowed the interest on the debit balance in the accounts of partners P.S. Jawahar and P.S. Ravichandran, as the firm did not charge them interest for substantial withdrawals used for personal purposes, specifically for house construction. The ITO concluded that the firm's borrowings were utilized for non-business purposes, leading to the disallowance of interest. The CIT(A) later deleted the disallowance, noting that all loans taken by the firm were used for trade disbursements, not advanced to partners, and that the net effect of partners' accounts showed a credit balance due from partners. The department, aggrieved by this decision, contended that the borrowings were diverted to personal purposes of partners. However, the Tribunal found no merit in the department's objection, as there was no evidence connecting past borrowings to advances made to partners for private purposes during the relevant year. The Tribunal upheld the CIT(A)'s decision, rejecting the department's claim and dismissing the appeal.