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TMI Blog1993 (10) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... d, on that basis, no disallowance was at all called for. Alternatively, he submitted that the interest could be disallowed for only these 22 days. He further pleaded that the partners are not entitled to any interest on the capital account and, therefore, on the same basis on the debit balances, no interest was paid or was payable by the firm. He submitted that, for the assessment years 1986-87 and 198788, there was no nexus at all and, therefore, no part of the interest could be disallowed. The Departmental Representative placed heavy reliance on the orders. We have given our very careful consideration to the rival submissions. The export loan account as was taken by the assessee, Rs. 3,10,000 remained outstanding as at the end of the year. The said amount which was credited to the current account with the Allahabad bank was utilised to the extent of Rs. 2,78,526 representing the amounts withdrawn by two of the partners, Mrs. Satyawati Garg and Ch. Atul Kumar Garg. Though the current account had several deposits and withdrawals, the export loan account remained at Rs. 3,10,000 till the next year. Therefore, the claim as advanced by the assessee that only for 22 days the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It had been brought to the notice of the Commissioner of Incometax (Appeals) that as per the partnership deed no interest was payable to any of the partners nor any interest was receivable from them. Reliance had been placed on the decision of the Chandigarh Bench of the Tribunal in the case of United Trading Co. v. Assessing Officer [1982] 2 ITD 440, in support of the contention that, when, in the case of the partners, overall credit is more than the debit in respect of some of the partners, disallowance of interest is not warranted. The assessee had further pleaded before the Commissioner of Income-tax (Appeals) as well as before us that a sum of Rs. 1,30,263.29 withdrawn by the partner, Smt. Satyawati Garg, on June 27, 1984, had been repaid to the export loan account on July 19, 1984, and, therefore, at best interest for 22 days alone could be disallowed. The Commissioner of Income-tax (Appeals), in paragraph 6 of his order, has observed that the assessee had in fact withdrawn identical amounts of Rs. 1,39,263.30 on June 27, 1984, from the current account with the Allahabad Bank. Whereas one amount was paid to Smt. Satyawati Garg, a similar amount had been paid to another part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that a sum of Rs. 3,10,000 has been credited to the export account on July 19, 1984, from general account. The copy of the general account is also placed at page 22 of the paper book and it is observed that, on July 19, 1984, the assessee had received remittance of Rs. 4,79,100 out of which a sum of Rs. 4,15,000 has been transferred to the export account. Since there is a difference of Rs. 1,05,000 between the sums of Rs. 4,15,000 and Rs. 3,10,000, it is to be reconciled. When we turn back to page 24, it is observed that the assessee has one more account to which a sum of Rs. 1,05,000 has been credited on July 19. The sum total of Rs. 1,05,000 and Rs. 3,10,000 is Rs. 4,15,000, which is the debit to the general account on July 19, 1984. It is evident from these statements that whereas a sum of Rs. 3,10,000 had been transferred from the export loan account in the Allahabad Bank to the general account in the same bank on June 27, 1984, the amount has been returned on July 19, 1984. Even if it were to be h eld that the interest in respect of the withdrawals of Rs. 2,78,526 (Rs. 1,39,263.29 + Rs. 1,39,263.29), would be warranted the disallowance of interest for 22 days alone wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a temporary loan from the Allahabad Bank on account of export commitments will not alter the character of the withdrawal made by the partner. As far as the firm is concerned, it has its assets and liabilities. The capital of the partner is the liability of the firm. When a partner is paid his capital, the firm is discharging its liability. Therefore, the payment of capital or profit to a partner does not, in my view, amount to utilisation of funds for non-business purposes. The disallowance of interest in respect of withdrawal of Rs. 1,39,263.30 made by Shri Atul Garg is, therefore, uncalled for. In respect of Smt. Satyawati Garg, there was a debit balance of Rs. 1,11,200 at the beginning of the year. After some withdrawals, including the withdrawal on June 27, 1984, of Rs. 1,39,263.29, the debit balance as on the close of the year has increased to Rs. 1,58,356. In other words, the debit has increased by a sum of Rs. 47,156 from that of the preceding year. Since no nexus has been established between the borrowed funds and the opening debit balance of the partner, interest to the extent of the opening balance would not be warranted. The capital of the partners when taken together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shape of the following questions and the same are being referred to the Third Member for his valued opinion : " 1. Whether, on the facts and in the circumstances of the case, the amount, i.e., withdrawn by the partners, Smt. Satyawati Garg, of Rs. 1,39,263 and Shri Atul Kumar Garg for Rs. 1,39,263 from out of borrowed funds of the firm on which the firm had paid interest could be disallowed on the basis that it was diversion of the borrowed funds for the personal purposes of the partners ? 2. Whether, on the facts and in the circumstances of the case, the nexus between the borrowed funds and its utilisation by the partners for her personal purposes being established and there are no other liquid funds which could be said to be amount retained from the capital of the partners for utilisation by the partner for their personal purposes, could the claim of the appellant that the partner's capital account was available to the partners could be accepted or not ? 3. Whether the alternative claim of the appellant that the amount so withdrawn by the partner was made good in the shape of collections from parties, which collections were credited to the overdraft account, thus brin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is another partner named Atul Kumar Garg, who also withdrew a like sum of Rs. 1,39,264 out of the withdrawal of Rs. 3,10,000 made on June 27, 1984, referred to above. No disallowance of interest was made out of this sum withdrawn by this partner because the account of the partner showed a credit balance. Against this order of disallowance of interest, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). After examining the position, the Commissioner of Income-tax took the view that the matter should go back to the Assessing Officer for further examination to clearly establish once again the nexus between the borrowed funds and the withdrawals made by the partners and then to determine the disallowance of interest restricting it to the period from the date of withdrawal to the date of repayment. Dissatisfied with these observations and partial confirmation of the appeal, the assessee has come up by way of further appeals before the Tribunal. After hearing the appeal, the learned Members could not agree on the conclusion to be reached. They, therefore, differed and the points of difference of opinion were referred to me for my opinion as a Third Member. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st paid on borrowed funds ? '' I have to first determine what are exactly the points of difference of opinion from amongst the points mentioned by them individually and then express my opinion on the points of difference of opinion. I have gone through, very carefully, the points of difference of opinion made out by both the Members and, in my view, the points mentioned by the learned Judicial Member bring out the real controversy of the difference of opinion and I would, therefore, confine myself to express my opinion on those points of difference of opinion. In a way, there is not much of difference of opinion between the points of difference of opinion mentioned by the learned Accountant Member and the learned Judicial Member. Both converge on the same issue except that they are couched in different language. As I mentioned earlier, the real issue is whether any interest could be disallowed on the ground that the borrowed funds were diverted for non-business purposes when the partners withdrew the money. This issue has to be looked at from the point of view of whether the nexus between the borrowed funds and the withdrawals made by the partners was established. A reading of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have got credit balances to their account and they want to withdraw from their credit balances for their personal purposes, would it mean diversion of borrowed funds for non-business purposes ? Implied in it is the further question whether the partners are entitled to draw from their credit balances whenever they need and whether such withdrawals amount to the outlay of the borrowed funds for non-business purposes. If the partners have got credit balances and there is no prohibition in the partnership deed against withdrawal of the money as and when they desire, such withdrawal made by the partners cannot be termed as withdrawal made out of the borrowed funds for non-business purposes. When a partner wants to withdraw money from his credit balance for a personal purpose, the other partners cannot normally object to it except on the peril of leading to difference of opinion which may even lead to dissolution of the firm and winding up of the business. In the absence of a contract to the contrary, a partner is entitled to withdraw out of the credit balance, subject to the consent of the other partners. Such a consent was given in this case, when one partner, Atul Kumar Garg, was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds even though the partners have arranged the withdrawal by the partner out of the money withdrawn from the bank. The following figures would show the position of the partners' accounts both at the beginning, during and at the end of the year : Name of the partners % Opening balance (Rs.) Additions (Rs.) Drawings (Rs.) (1) (2) (3) (4) (5) Sri Praveen Kr. Garg 20 1,62,319.67 - 1,48,108.29 Sri Prashant Kr. Garg 20 1,62,408.13 - 1,46,936.30 Sri Atul Kr. Garg 20 1,73,805.14 - 1,47,826.30 Smt. Chitra Garg 20 1,10,992.22 - 23,978.50 Smt. Satyawati 20 1,11,200.32 Dr. - 1,46,294.29 4,98,324.84 6,13,143.68 Name of the partners Total Profit (Rs.) Profit (Rs.) Balance as on 31-3-1985 (6) (7) (8) Sri Praveen Kr. Garg 14,211.38 99,137.72 1,13,349.10 Sri Prashant Kr. Garg 15,471.83 99,137.72 1,14, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the account of the partner showed a credit balance not only at the end of the year but throughout the year. In view of my opinion on points Nos. 1 and 2 above, point No. 3 does not necessarily arise for consideration. Before I conclude, I must refer to the decisions relied upon by the learned Departmental Representative in support of the view that interest has to be disallowed. One such decision relied upon by him was that of the Supreme Court rendered in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200. In this case, the principle laid down by the Supreme Court was that, if it is proved that the borrowing made by an assessee was to meet his personal obligation and not an obligation of the business, the expenditure incurred by way of interest on such borrowing could not be said to be for the purpose of carrying on the business or in his capacity as a person carrying on the business and any amount of entries in the books of account would not alter the character of the borrowing. In this case, the assessee who carried on money-lending business promised a donation of Rs. 10 lakhs for the setting up of an engineering college and a further sum for a hospital. On November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for business purposes and upheld the disallowance of interest. But the principle laid down there was that the moneys borrowed from the bank were directly advanced to the directors free of interest. Therefore, the money borrowed for the purpose of advance to the directors free of interest could not be said to be for a business purpose. Another feature found there was that it was a continuing practice and not an isolated transaction. Here, in this case, the position is totally different. First of all the relationship here in the case before me is not that of a company and a director. Both of them are two distinct legal entities. The company as a juristic person having a perpetual succession and common seal can sue and be sued in its own name and is distinct from its shareholders, having a juristic personality, unlike the case of a firm where the firm is not a legal entity, different from its partners, though the name of the firm is only a compendious name given to a group of persons who agreed to carry on the business in partnership as partners. Secondly, this is only an isolated transaction unlike in the case before the Allahabad High Court where it was a continuous course of conduc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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