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| The Tax Publishers2020 TaxPub(DT) 5041 (Coch-Trib) INCOME TAX ACT, 1961
Section 36(1)(iii)
Where assessee was aggrieved by the action of AO disallowing proportionate bank interest and drawings made by managing partner of the firm, as partner had withdrawn his own funds from his current account with the firm, and it cannot be said that the assessee's funds should be used for business purposes only and the partners cannot withdraw their money which leads to the firm borrowing interest bearing funds as per reconstituted partnership deed, partners were at liberty to withdraw any amount from the partnership against the amount outstanding in his credit in the firm, therefore, withdrawal of money by the partner from his current account did not carry any interest and he was at liberty to draw the same from his current account, without facing any disallowances in that regard.
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Business deduction under section 36(1)(iii) - Interest on borrowed capital - Disallowance of proportionate bank interest and drawings made by managing partner of firm -
Assessee was aggrieved by disallowance of proportionate bank interest and drawings made by managing partner of the firm. AO found that part amount of drawings was gifted by the assessee to managing partners of assessee-firm. AO alleged that interest bearing funds were diverted for non-business purposes. AO also alleged that purpose of making the gift was not explained and gift was not made out of commercial expediency. AO, therefore, disallowed the amount out of the interest payment attributable to interest paid on funds diverted for non-business purposes, viz. gifts made. Held: It was found that partner had withdrawn his own funds from his current account with the firm. It cannot be said that the assessee's funds should be used for business purposes only and the partners cannot withdraw their money which leads to the firm borrowing interest bearing funds. Further, as per reconstituted partnership deed, partners were at liberty to withdraw any amount from the partnership against the amount outstanding in his credit in the firm. Being so, withdrawal of money by the partner from his current account did not carry any interest and he was at liberty to draw the same from his current account. Accordingly, there was force in the argument of assessee that no proportionate disallowance of interest could be made.
Followed:S. Jameela v. ACIT [ITA No. 704/Coch/2010, dated 20-7-2012]. Distinguished:CIT v. VI. Baby And Co. (2002) 254 ITR 248 (Ker-HC) : (2002) 123 Taxman 894 (Ker-HC) : 2002 TaxPub(DT) 847 (Ker-HC) and New India Colour Co. v. CIT (1971) 80 ITR 206 (Del-HC) : 1971 TaxPub(DT) 210 (Del-HC).
REFERRED : Hero Cycles (P) Ltd. v. CIT (Central) (2015) 379 ITR 347 (SC) : 2015 TaxPub(DT) 4897 (SC) and Munjal Sales Corporation v. CIT (2008) 298 ITR 298 (SC) : 2008 TaxPub(DT) 1671 (SC).
FAVOUR : In assessee's favour.
A.Y. : 2004-05 & 2007-08
IN THE ITAT, COCHIN BENCH
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