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TMI Blog2018 (10) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... rm. The assessee could not establish the business interest or availability of interest free funds to give advances to the partners in the guise of investment. Therefore, we consider it is fair and just to disallow the proportionate interest on the amounts advanced to the partners. Disallowance of interest for diversion of funds - Held that:- Though the assessee stated that the assessee is following the cash system of accounting and would admit the income as and when it is received, the assessee has not proved with any evidence that the assessee has made any efforts to collect the advances along with interest till date. No attempt has been made by the assessee to collect the interest on advances given to debtor till date. This attitud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature which does not require specific adjudication. 4. Ground No. 2 is related to the addition of ₹ 40.46 lakhs made by the AO towards interest on advances to partners. The Ld.CIT in his order u/s 263 in para No.5 found that the assessee has made the investments with ShriCh.NVS Reddy of ₹ 2,67,94,681/- and Ch.Chandra Reddy of ₹ 3,84,35,845/- and both are partners of the firm. The assessee did not admit any interest / profit from these investments but paid the interest on partners capital accounts promptly. The AO found that the assessee had paid the interest of ₹ 1,23,51,423/- to the unsecured loan creditors. Further, it was also observed that the assessee had also advanced the loans and advances of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners receive interest on their capital contribution, and do not pay the interest on advances taken by them, it leads to lopsided and unnatural results. Therefore, the Ld.CIT(A) confirmed the addition made by the AO and directed the AO to disallow the interest from the interest paid to the partners. 6. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribunal. 7. We have heard both the parties and perused the material placed on record. The assessee is a partnership firm in which Ch.Chandra Reddy and Mr.Ch.N.V.S. Reddy are partners. They have contributed capital to the partnership firm and also taken advances from the partnership firm. The advances taken by the partners from the partnership firm were more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm and thereby evading the tax. The assessee firm has paid the interest of ₹ 1,23,51423/- during the year under consideration on borrowed funds. Similarly, the assessee has paid interest of ₹ 60,28,175/- on the partners capital accounts and as per the balance sheet no interest free funds are available to the assessee. The assessee could not establish the business interest or availability of interest free funds to give advances to the partners in the guise of investment. Therefore, we consider it is fair and just to disallow the proportionate interest on the amounts advanced to the partners. Accordingly, we sustain the order of the Ld.CIT(A) and dismiss the appeal of the assessee on this ground. 8. Ground No.3 is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interest for diversion of funds non business purposes but accepted that the payment of interest was @18% on borrowings. The Ld.AR further argued that the assessee is following cash system of accounting and if the interest isrequired to be offered, the same would be offered as and when it is received. Therefore argued that the addition made by the AO to be deleted and the order of the Ld.CIT(A) be set aside. 11. On the other hand, the Ld.DR relied on the orders of the lower authorities. 12. We have heard both the parties and perused the material placed on record. As per the balance sheet, capital balances have shown the balance of ₹ 4,47,48,884/- and the loans and advances given to the partners in the form of investments were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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