9911796707
TMI Blog1985 (1) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the relevant accounting year the partners of the assessee firm had withdrawn huge amounts for payment of income-tax, wealth-tax and insurance premier. It was also noticed by the ITO that one of the partners namely, Shri V. K. Soni had withdrawn funds to the extent of Rs. 1,62,000 for acquiring a plot of land. It was also noticed by the ITO that the assessee-firm had diverted part of the interest bearing loans as interest free loans to the following parties and relations of the partners: 1. Monika India Rs. 2,00,000 2. Ashok Kumar Soni S/o Partner Shri R. K. Soni Rs. 26,564 3. Asha Rani Soni, w/o Rs. 73,153 4. Shri S. P. Suri, a relation of partner Rs. 10,000 5. Sushil Kumar Puri, a relative of partner Rs. 10,000 Having noticed the above facts and also having regard to disallowance of Rs. 1,26,000 which was made by the ITO and accepted by the assess in the asst. yr. 1978-79, the ITO called upon the assessee to explain vide a show-cause notice dt. 21st July 1981 as to why an appropriate amount of interest be not disallowed out of Rs. 9,93,935 debited in the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) given as above that the Revenue is in appeal. Mr. P. K. Sridharan, ld. Departmental Representative has taken us through the offer of the ITO and contended that there was more than adequate material in the assessment order to show that a very large portion of borrowings made by the assessee-firm had been diverted free of interest to the partners and the connected parties in the asst. yr., 1979-80. He has highlighted the facts mentioned in the assessment order and submitted that the opening debit balance in the accounts of the partners totalling at Rs. 15,72,115 had further increased by a sum of Rs. 6,18,013 on account of withdrawals made by the partneRs. Referring tot he credits of Rs. 5,88,660 made in the accounts of each one of the four partners, the ld. Departmental Representative has submitted that these credit did not in any way change the position of overall debits in the accounts of the partners because these were not on account of any cash having been repaid by the partners but because of the upward revision of the shares of R. K. Machine Tools Pvt. Ltd. held by the assessee-firm by a sum of Rs. 23,14,640. The ld. Departmental Representative has further submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the accounts of the partners or to certain connected parties, no disallowance could be made. In support of the his afore-mentioned contentions Mr. Mehra had relied upon the decisions reported as CIT vs. Gopi Krishna Murlidhar (1963) 47 ITR 469 (All), CIT vs. Coimbatore Salem Transport Pvt. Ltd. (1966) 61 ITR 480 (Mad) and CIT vs. Bombay Samachar Ltd. (1964) 74 ITR 723 (Bom). 6. We have considered the rival submissions. While we would agree with that portion of the order of the CIT (A) holding that the principle of res judicata does not apply to the income-tax proceedings and that the Ito would have no justification to disallow any part of the interest claimed in the asst. yr. 1979-80 on the premise that partial disallowance out of interest had been accepted by the assessee in the asst. yr. 1978-79, we find ourselves unable to agree with the rest of the finding given by him. The assessee would have been certainly entitled to the deductions of the entire interest of Rs. 9,93,935 and debited to its P L a/c as interest on funds or capital borrowed for the purpose of its business provided the facts were not those which had been highlighted in the assessment order made by the ITO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,72,970 2. Investment allowance reserve Rs. 96,900 3. Shri Krishnaji Maharaja Rs. 21 4. Sundry creditors for goods supplied Rs. 1,01,25,485 5. Expenses and other amounts payable Rs. 31,81,498 6. Customers on credit Rs. 3.03,731 According to us none of the above items can be equated with interest free funds available with the assessee. The development rebate reserve of Rs. 4,72,970 had already been taken into account in the asst. yr. 1978-79 before working out the funds unutilised by the partners free of interest. The investment allowance reserve could not have been utilised for the purpose of making any interest free advances to the partners as there is a statutory bar in that respect. The amount due to the sundry creditors for goods supplied by them or on account for services rendered by them also could not be said to be any liquid fund available to the assessee which could be utilised for the purposes of diverting it interest-free to the partneRs. Similarly the liability that had been incurred by the assessee in respect of expenses and other amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pi Krishna Murlidhar (1963) 47 ITR 469 (AP) the assessee had a capital of merely Rs. 20 laksh of its own and even then it had borrowed certain funds on interest. In the relevant accounting year the assessee had withdrawn a sum of Rs. 1,77,984 for household expenses. It was held by their Lordships of the Andhra Pradesh High Court that as the amounts had been borrowed for the purposes of business and as no particular sum borrowed could be said to have been spent for household expenses of the family and as the family itself had a capital of Rs. 20 lakhs available to it, the disallowance of interest was justified. Here the facts are wholly different. The ITO has been able to show in this case that the balances in the accounts of for the partners where in the red and that the large scale utilisation of funds by the partners for personal purpose could emanate only from the funds which had been borrowed on interest. Third decision reported in (1966) 61 IT 480 (Mad) also does not help the case of the assessee. In that case their Lordships of the Madras High Court that declined to interfere with the finding of fact given by the Tribunal that there was no positive material to show that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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