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TMI Blog1998 (8) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... has borrowed heavily, for the purpose of its business and claimed deduction in respect of a sum of Rs. 1,58,354 as interest during the assessment year 1978-79. For the assessment year 1979-80, the amount sought to be deducted as interest payment was Rs. 2,26,180. The Assessing Officer found in the course of examination of accounts that the assessee had been advancing monies to close relatives of the partners without charging any interest. The advance made during the previous year relevant to the assessment year 1978-79 was to the extent of Rs. 6,08,408. The bulk of the advance had been made in October, 1979. The assessee claimed that the amounts so lent had not been lent out of the borrowed funds, but only at a time when the firm had sufficient funds at its disposal. According to the assessee, the advance was made when it received substantial contract receipts. The Assessing Officer on these facts held that there was diversion of borrowed funds and, therefore, the interest claimed to the extent relatable to the amount diverted was to be disallowed. On appeal, the Appellate Assistant Commissioner reduced the extent of disallowance, but upheld the finding that there had been a dive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors without interest as well as the figures of amounts due from the assessees to certain other concerns in which some of the directors had interest and on which no interest was paid, found that the diversion of the borrowed money for advancing to the directors should have taken place in the years earlier to September 30, 1955. There was no question of the Tribunal misplacing the onus of proof, that its finding was justified on the materials on record. For the Revenue it was submitted that the Tribunal, as also the Commissioner and Assessing Officer had found as a question of fact that there was diversion of funds and that finding has not been shown to be without any basis. The finding so arrived at was binding. Counsel submitted that even, according to the assessee, the advance was paid only from the contract realisation though the assessee had later sought to rely on the fact that as the amounts due to sundry debtors was well over Rs. 5 lakhs and that also could have been the source for making the advance. On the assessee's own showing the amount advanced to the relatives of the partners interest free came out of the funds of the business and the advance was not for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ostensibly for the business, but in reality is not for the business such expenditure is not allowable. Section 36(1)(iii) of the Act refers to "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession". The capital borrowed should be for the purposes of the business or profession. It is implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed continues to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of the income from the business. The interest payable on the capital borrowed is a liability which continues till such time as the amount borrowed is repaid. Such interest is allowable under the provision only for the reason that the amount on which interest is paid continues to be used in the business and the payment of such interest is, therefore, necessary for the purpose of running the business. The object of the provision is not to enable an assessee to make a large borrowing and create a liability for payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t that interest paid on such borrowed amounts are not allowable. The postponement of diversion, in cases where such diversion is found to be clearly established from the facts on record, does not entitle the assessee to claim the benefit of deduction on interest paid on the amounts borrowed but not presently used in its business diverted for other purposes. The time at which the diversion takes place is not the only relevant criterion. It is the fact of the diversion which is material and once it has been shown that there has been diversion of interest on the amount borrowed, but subsequently diverted would not qualify for deduction. Any view to the contrary would not in the least subserve the object of the provision, but it would only open the gates for the assessees to borrow merrily and after ostensibly using it in the business for a short period at a subsequent point of time divert the funds in whole or part, for non-business purposes and continue to claim the interest on the borrowing as a deductible item of expenditure. The objects of the section would not in any way be advanced by the adoption of such a view. If a business for which the interest paid is claimed as a deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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