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of <h1>High Court upholds interest disallowance on advances to Hindu undivided family for non-business purposes</h1> <h3>Commissioner Of Income-Tax Versus P. Ganu Rao And Sons</h3> The High Court ruled in favor of the Revenue, holding that the Tribunal erred in deleting the interest disallowance on advances made by a firm to a Hindu ... Interest On Borrowed Capital Issues involved: The issue involves the disallowance of interest by the Appellate Tribunal on advances made by a firm to a Hindu undivided family for non-business purposes, specifically for the construction of a building, under section 256(2) of the Income-tax Act, 1961.Summary:The assessee, a firm engaged in supplying various goods, advanced funds to a Hindu undivided family for constructing a house. The Income-tax Officer disallowed the interest on these advances, stating that the firm had no other interest-free capital available. The Appellate Assistant Commissioner upheld the disallowance, emphasizing that all funds available to the firm bore interest. However, the Tribunal overturned these decisions, noting that there was no direct link between the borrowings by the firm and the investment in the family house. The Tribunal deleted the disallowance of interest, leading to the reference to the High Court.The Revenue argued that the firm and the family were separate entities, and the borrowed amounts were indeed used for the house construction, justifying the interest disallowance. Case references were made to support this position. On the other hand, the assessee contended that there was no clear evidence of fund diversion for the house construction, and the mere expenditure from borrowed funds did not warrant interest disallowance. Case law was cited to support this argument.The Tribunal found no justification for the interest disallowance, highlighting the credit balance in the partners' accounts and the lack of a direct connection between specific borrowings and house construction expenses. However, the High Court disagreed, stating that the borrowed funds were diverted to the family for non-business purposes, justifying the interest disallowance. The Court emphasized the separate treatment of the firm and the family in the accounts, concluding in favor of the Revenue.In conclusion, the High Court held that the Tribunal erred in deleting the interest disallowance, as the borrowed funds were diverted to the family for non-business purposes. The Court ruled in favor of the Revenue, emphasizing the distinct treatment of the firm and the family in the accounts.
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