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TMI Blog1987 (9) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly when it was not clear as to how the CIT (A) worked out the extra cost, vis-a-vis, the expenses for production of rice per quintal. After considering the findings of the authorities below as well as the submissions before us, we find that the addition was rightly deleted by the CIT(A). No interference in called for. 3. The second point of appeal is regarding the disallowance of Rs. 49,436 which was deleted by the CIT(A). In the assessment order, the ITO noted that from the capital account of the partner Shri Ram Bharosey Goel Rs. 1,99,818 have been transferred to M\s. Prakash Oil Industries, Sitapur, by a single transfer entry. The ITO also noticed that similarly form the capital account of Shri Kailash chand Goel, a sum of Rs. 1,99,620 has been transferred to the accounts of M/s. Nepal Timber Co. and Rs. 1,99,818 from the first firm i.e., M/s. Prakash Oil Industries, Sitapur. The ITO asked the assessee to explain as to why interest debited to the accounts at Rs. 1,53,279 relating to the amounts withdrawn by the disallowed, as the money to the said extent have been withdrawn by the partners from the assessee firm which had not been utilised for earning of profit by the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 36(1)(iii) it has to be shown that the capital borrowed on which interest was being paid had been diverted for non business purposes. According to him, the facts of the case did not lead to that conclusion. According to him the funds advanced to the above two firms did not represent the funds of the assessee-firm, but represented the transfers from the capital account of the two partners mentioned above. He also mentioned that both the partners had adequate credit balance with the firm from which the amounts could be withdrawn. He observed that it was true that the assessee firm had borrowed similar amounts from those two firms and on such utilised in the business so the assessee firm. he also observed that the net effect of the transaction, of course, was that the assessee firm substituted one set of creditors by another set and by doing that the assessee was permitted to arrange its affairs to reduce the tax liability. In the circumstances of the case, he deleted the disallowance. Hence, this appeal by the revenue. 8. It is vehemently urged by the learned Department Representative that the CIT(A) erred in giving the above direction that on the facts of the case before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entitled fully to the user of such cash or asset being its capital account and in such a situation the right of a partner before or after the dissolution of a firm, would always be only to the extent of the share of profit which ultimately means the assets of the firm. The right of a partner is not to any particular asset of the firm but only to the share in the net funds to which the assets of the firm are converted. As no time, a partner can assert his right to a particular share in any specific property. For this proposition we may refer to the decision of the Hon'ble Madras High Court in the case of PL. RM. Arunachalam Chettiar v. CED [1970] 75 ITR 28. It was similarly held by the same Hon'ble High Court in CGT v. M. K. K. R. Muthukaruppan Chettiar [1969] 72 ITR 1 that whatever be the character of the property brought in by the partners or acquired in the course of the business, it became the property of trading assets of the firm and a partner was entitled only to a share in the moneys realised which represented the value of the property, The Hon'ble Andhra Pradesh High Court in the case of Adbul Kareemia and Bros. v. CIT [1984] 145 ITR 442, on the facts of the case, held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was properly disallowed. The CIT (A) was of the view that the assessee has substituted one set of creditors by another set. In other words, the assessee will have to pay interest on the funds needed by it either to the partners on which section 40(b) would be applicable or to the said tow firms on which interest claimed to be for business purpose, would be allowable. Thus, form the findings of the CIT (A), this transaction is a part of a colourable scheme. Thus, having regard to the totality of the facts and circumstances of the case and the decision cited and the submissions made by both the sides, we are of the opinion that the assessee-firm advanced the money to those firms, though the assessee-firm claimed that if the partners who made the withdrawals for deposit with the said two firms and as found by the ITO, the assessee-firm subsequently took the loans from the said two firms of an identical amount on which interest was paid. In such a situation, section 40(b) would not be attracted which was wrongly considered by the authorities below as the payment of interest was not made to the partners as such. On the facts of the case as discussed by us in the preceding paragraphs, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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