9911796707
TMI Blog1981 (3) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITO noticed that four of 'the assessee's partners, Gyanchand Dharamchand, Bhagchand and Harishchand had debit balances in the capital accounts totalling Rs. 1,97,314. He, therefore called upon the assessee as to why a part of the interest paid on the borrowings be not disallowed. After cause was shown, the ITO disallowed Rs. 23,678 being interest of 12 per cent on Rs. 1,97,314 by observing as under: "The assessee filed reply dt. 25th Sept., 1978 in which he explained that interest on the deposit balance of the partners was not being charged in accordance with the prevalent practice and also no interest was being paid to two other partners on their credit balance. It is to be noted that the assessee is paying Rs. 97,046 as interest expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property and that in view thereof, the firm will not pay any rent of the shop to the partners; and that even otherwise there was no nexus between the drawings made by the partners and the borrowings made by the firm. The addition made by the ITO should be deleted. 4. These arguments of the assessee have been negatived by the CIT, who has upheld the above addition made by the ITO observing as under "There was admittedly no written documents to support the assessee's version that there was an agreement between the firm and the partners to the effect that the firm would not charge any interest on the advances made for construction of the aforesaid property. In the Remand Report, the ITO has furnished certain figures. According to these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of drawings made by them for other purposes. These drawings were certainly not for purposes of the assessee's business. It is also a fact that the assessee has been making huge borrowings every year and there is no doubt that these drawings were made in, fact, they could only be made out of the borrowings made by the assessee firm". 5. In the appeal before us, the ld. Counsel for the assessee, Mr. Ranka has urged that on the facts and in the circumstances of the case, more so in view of the past history, the tax authorities have grossly erred in disallowing Rs. 23,678 out of the interest amount debited to the profit and loss account. According to Mr. Ranka, total investment on the construction of the building on the aforesaid plot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not arise. Further the ITO/CIT(A) failed to prove by any material or evidence on record, the nexus between the amounts borrowed by the assessee and the amounts debited and credited to the accounts of the partners. Mr. Ranka took us through the accounts of the partners of the assessee for the year under consideration and established that the entire withdrawals by all the partners in the year under consideration was less than the profits credited to their accounts in the year under consideration. As such, no part of the withdrawals in the year by the partners was related in any manner whatsoever to the amounts borrowed in the year by the assessee firm. These arguments of the assessee are controverted by the departmental representative, who h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been made in the construction of the shop on the plot purchased by the partners and that those investments were debited in equal proportion every year to the accounts of each partner is also a significant fact to be noted when no part of interest on the borrowings made then has been disallowed by the ITO. It is also a fact that the accounts of the partners have not been credited with their shares of rent of the said shop. No interest has been also charged on the debits pertaining to the investments in the property in all these years. These facts establish the case set up by the assessee that there was a verbal agreement amongst the partners to the effect that no interest will be charged on the debits pertaining to the investments made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure on the ground that the said expenditure was in the nature of entertainment expenses. 10. We have heard both the learned counsel for the assessee and the Deptl. Rep. The expenses in so far as they pertained to providing tea, coffee, coca cola, etc. to the staff are concerned, the same are to be allowed, as staff welfare expenditure. In so far as the said expenditure pertaining to the customers is concerned, the said expenditure is in the nature of customary courtesy provided by the assessee to its constituent. The said expenditure, as repeatedly held by the Tribunal, is not in the nature of entertainment expenditure. This view of ours finds support from a recent decision of the Supreme Court in SLP No. 3781 of 1978, decided on 13th Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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