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TMI Blog2006 (10) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal Pune, in the case of Chindhy's Interiors in ITA No. 619/Pune/2002 for asst. yr. 1998-99, dt. 3rd March, 2006. In para 3.3 of his order the Tribunal held as under: "3.3 We have considered the facts of the case and rival submissions. There are a number of Tribunal decisions including the decisions discussed by the learned CIT(A) that membership fees of the clubs for executives and directors constitute admissible expenditure as such membership gives a chance to employees to interact with existing and future customers. The Western Royal Turf Club did not permit membership of a firm and, therefore, the assessee decided to take up life membership in the name of the partner. The benefit accruing to the firm will be the same as accruing to companies when the membership is taken for the employees or directors. Therefore, we find that there is no distinction in the facts of this case and the facts of the cases relied upon by the assessee. Accordingly, it is held that the assessee was entitled to deduct the aforesaid amount of Rs. 1 lakh in computing its income. Thus, this ground of appeal is also allowed." 4. We find that the facts of the case in the present appeal are identi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were put forward on behalf of the assessee before the AO and the CIT(A). He submitted that there was no direct nexus between the interest-bearing funds and the interest-free loans/advances given by the assessee, that there was no increase in the cash credit limit sanctioned by the bank during the last two years, that these loans/advances were given out of the profits of the assessee firm, that the assessee had substantial bank balance and Rs. 36,74,565 were converted into fixed deposit, that the assessee had received interest-free loans amounting to Rs., 6,00,000, that the assessee had its own capital aggregating to Rs. 65,58,709. Shri Joshi placed reliance on the decisions in the following cases: (i) CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom); (ii) CIT vs. Radico Khaitan Ltd. (2005) 194 CTR (All) 451 : (2005) 274 ITR 354 (All); (iii) East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC). 10. Shri V.S. Kumar, the learned Departmental Representative, placed reliance on the orders of the authorities below. He vehemently argued saying that the order of the CIT(A) needed to be upheld. 11. We have considered the rival su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time when the cheque was issued or at the time when the amount represented by that cheque was posted in the account. There is no doubt that a current/overdraft account is always for availing of a credit facility for the requirements of the assessee's business and that the assessee pays interest in respect thereof. Therefore, the nexus between the interest-bearing funds and an interest-free advance can be said to exist whenever a cheque is issued in respect of an interest-free advance for a non business purpose from a current/overdraft account and in such a situation the claim in respect of interest cannot be said to fulfil the conditions of s. 36(1)(iii) of the Act. This view of ours is fortified by the decisions in the following cases: (i) Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC); (ii) CIT vs. Abhishek Industries Ltd. (2096) 205 CTR (P H) 304 : (2006) 286 ITR 1 (P H); (iii) K. Somasundaram Bros. vs. CIT (1999) 153 CTR (Mad) 153 : (1999) 238 ITR 939 (Mad). 13. In the case of Madhav Prasad Jatia vs. CIT, the assessee derived income from various sources such as shares, properties and businesses. On 21st Oct., 1955, the assessee promi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t interest on the outstandings due to it from others, it could not be permitted to claim interest paid by it to outsiders. The High Court held that such a view was clearly unsustainable and that in deciding whether a claim of interest on borrowing can be allowed, the fact that the assessee had ample resources at its disposal and need not have borrowed was not a relevant matter for consideration. 15. The Supreme Court in a later judgment in the case of East India Pharmaceutical Works Ltd. vs. CIT, referred to its decision in the case of Madhav Prasad and observed that a payment made by the assessee by drawing a cheque on the overdraft account was a borrowing within the meaning of s. 10(2)(iii) of the IT Act, 1922. 16. In the case of CIT vs. Abhishek Industries Ltd., the secured loans standing against the assessee company as on 31st March, 1993 were to the tune of Rs. 25,40,04,090 and the interest liability which arose during the year thereon was Rs. 2,26,64,994 out of which Rs. 1,48,51,396 were debited to the P L a/c and the balance of Rs. 81,81,508 was capitalized. The assessee company filed its return for asst. yr. 1993-94 showing income as nil. Subsequently. a revised return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was being incurred and at the same time certain interest-free advances had been made to sister-concerns for non-business purposes, the interest paid on the borrowing to the extent of interest-free advances is to be disallowed under s. 36(1)(iii) of the Act. This decision of the Punjab Haryana High Court supports the view taken by us in this case in para 12.2 above. The Court also referred to the decision of the Madras High Court in the case of K. Somasundaram Brothers vs. CIT. 17. In the case of K. Somasundaram, it was claimed by the assessee that the amounts lent as interest-free advances came out of the contract earnings and that the amount borrowed was invested in the execution of the contracts. It was observed by their Lordships of the Madras High Court that the assessee had recouped with profits the borrowed funds invested in the execution of the contracts and the amount realized on the execution of the contracts included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial part of those funds interest-free to the relatives of the partners, the assessee was clearly diverting the funds which had been borrowed after it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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