9911796707
TMI Blog1981 (3) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... he firm's account was Rs. 1,53,256 whereas the closing balance was Rs. 2,08,485. In respect of such bebit balances the assessee firm had not charged any interest from the above firm. It was explained before the ITO the partners of the assessee firm were also partners in the above firm and they had 42 per cent share in that firm. It was also submitted that the partners had sufficient money in the capital account to advance to the new firm. The ITO, however, did not accept this plea of the assessee as he found that the money belonging to the assessee firm was transferred to one of its sister concern without interest when the firm itself was paying interest @ 18 per cent to various creditors. He further observed that the debtor firm was not carrying on the business of the assessee and he relied on the decision in the case of United Breweries (1973) 89 ITR 17 (Mys) to hold that a parent company should not claim interest on moneys borrowed and re-lent to its subsidiary without interest. The ITO, therefore, proceeded to ascertain the average of the opening and closing balance in the above account and disallowed interest @ 18 per cent on that average. (2) The account of the partner Sri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that if overall position of all the partners was considered, there was a credit balance in the partners, accounts and therefore, the amounts withdrawn by the partner Sri Bhojraj was only out of the capital of the other partners. It was contended that the interest paid to the partners on their capital account was Rs. 50,633 and this had been added to the income of the firm while computing its income. It was further contended that the interest paid to persons other than the partners was about Rs. 82,000 and out of this merely s. 54,000 had been paid to family members whose money was deposited at the time of the family partition. It was, therefore, contended that about Rs. 28,000 had been paid as interest to outsides. It was further contended before the CIT (A) that the debit balances were not the results of the transactions in this year also and each of the accounts in question opened with a debit balance and in earlier years there had been no disallowance of interest on this basis. It was also pointed out that on the deposit made by one of the partners of M/s. Kanha Refined Oil Vanaspati Sri Jagtar Singh no interest had been paid. In the same way no interest was charged fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were diverted for non-business purposes. The CIT (A) was further of the view that though there had been no such disallowance in the past the conditions laid down in s. 36(1)(iii) had to be applied for each year separately. He further observed that a borrowing or deposit continues to be so till it was repaid. According to him it was necessary that allowance of interest the use of borrowed fund must be for the purposes of business. The addition of interest was therefore upheld by the CIT (A). 5. Before us the ld. counsel for the assessee submitted that the lower authorities have not correctly applied the law to the facts of the case. He pointed out that it has not been suggested that any specific debit in this year or in earlier years had been diverted to any specific non-business purposes by the assessee. He referred to the decision of the ld. CIT (A) and pointed out that no connection was established between particular loans taken and interest free advance made by the assessee. He further submitted that the view of the ld. CIT (A) that it was not necessary to establish any nexus between the amounts borrowed and the amounts advanced free in interest was not correct. He contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish a direct nexus between the amounts borrowed and the non-interest bearing investments of the firm. He submitted that if on the consideration of the totality of the circumstances it was found that the funds borrowed by the firm had ultimately found their way for non-business advances a proportionate interest can be disallowed. He further contended that the provisions of s. 36(1)(iii) should be interpreted in such a manner so as to make it workable and the interpretation claimed by the assessee would make the provision completely ineffective. 7. We have considered the facts of the case and we are of the view that the disallowance had been made without any justification. Sec. 36(1)(iii) contemplates deduction of any interest on amounts borrowed for the purpose of business. The purposes of borrowal is the important factor in this regard. It must also be shown that interest has been paid on such borrowals by the assessee in the case of Bombay Samachar Ltd., it was held by the Bombay High Court that for allowing the above deduction it was not necessary for the assessee to show that the borrowing of the capital was necessary for the purpose of business and the fact that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r years the amounts advanced to these parties were out of borrowed capital or were over and above the assessee's own funds available to him. The funds of a business are not held in water tight compartments and when a particular amount is borrowed the funds available to the assessee at that time are his own funds as well as the borrowed funds. In addition, the assessee has at his disposal such funds which it might have acquired without payment of interest. It is now for the assessee to utilise his own funds and such funds on which it has not to pay interest for such investments which are not strictly for the purpose of business and even if this facts of investment for non-business purpose is established no interest can be disallowed as no interest has been claimed or allowed in respect of the funds used for such investments. In the present case the funds of the partners as a whole was much more than the advances made to the sister concern or the partner of the firm. In addition there were substantial amount of creditors available to the assessee on which no interest had been paid. The available funds on which no interest had been paid were much larger than the amounts advanced for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have been allowed as revenue expenditure. In the case of Bharat Cinema (1980) 15 CIT (P H) 283: (1980) 121 ITR 165 (P H) it was held by the Punjab Haryana High Court that replacement of a false ceiling in the cinema has was a revenue expenditure. In the case of Nathmal Banketlal Parikh Co, (1980) 15 CTR (AP) 216 : (1980) 122 ITR 168 (AP) the Anbdhra Pradesh High Court held that replacement of the old diesel engine by a new one was allowable as a revenue expenditure as it was done with a view to preserve and maintain the asset in existence. In the case of CIT vs. Bharat Induststries Corporation Ltd. (1980) 18 CTR (P H) 247: (1980) 126 ITR 645 (P H) it was held by the Punjab High Court that even the repairs of durable nature to the business premises could not be considered as capital expenditure. We therefore hold that the claim of the assessee should have been allowed in full. 12. The next ground is against the disallowance of Rs. 2,278 as bad debt. The disallowance of Rs. 2,278 as bad debt. The disallowance has been made on; the ground that the claims had become bad prior to this year and could not be claimed as deduction by the assessee in this year. It is submitted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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