1985 (2) TMI 126 - AT - Income Tax

Summary

Issues:
1. Disallowance of expenses under postage, telegram, and electricity heads.
2. Disallowance of interest on loans paid by the assessee.

Analysis:
The appeal before the Appellate Tribunal ITAT Patna involved challenges to the order of the AAC for the assessment year 1977-78. The first issue pertained to the disallowance of Rs. 1,170 for postage and telegram expenses and Rs. 11,166 for electricity expenses incurred by a partnership firm engaged in the coal business. The expenses were claimed as deductions from current profits but were disallowed by the ITO and confirmed by the AAC on the grounds that they related to earlier years. The second issue concerned the disallowance of interest amounting to Rs. 7,435 paid by the firm on loans from R. R. Trading and A. K. Trading. The ITO disallowed the interest, stating that the loans were not used for the firm's business purposes due to partners' overdrawn accounts. The AAC upheld this disallowance as well.

During the appeal, the Departmental Representative argued that the expenses were incurred before the relevant period and the interest was rightly disallowed as it was not for business purposes. On the other hand, the assessee's representative contended that the expenses accrued on the day the Debit Note was received, making them allowable in the current year. Regarding interest disallowance, it was argued that the partners' drawings were covered by funds brought in by other partners, and the borrowed amounts were invested in the business, justifying the interest payment.

After considering the arguments and facts, the Tribunal found merit in the assessee's contentions. It noted that the firm maintained accounts on a mercantile basis, and the expenses accrued on the day of receiving the Debit Note. Additionally, the partners' funds covered the overdrawn amounts, and there was no evidence that borrowed sums were specifically given to the partners. Consequently, the Tribunal upheld the AAC's decision, ruling in favor of the assessee and dismissing the appeal.

In conclusion, the Tribunal's judgment favored the assessee by allowing the contested expenses and interest payments, emphasizing the mercantile basis of accounts and the absence of conclusive evidence to disallow the claimed amounts.