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of <h1>Interest on borrowed funds vs interest-free advances to partners: disallowance only if advances exceed interest-free funds; recomputation ordered</h1> Disallowance of interest on borrowed funds allegedly diverted for non-business purposes was held to depend on a comparison between total interest-free ... Disallowance of interest paid on borrowed funds - diverted partly for non-business purposes - interest on debit balances in partner's capital account, - CIT(A) held that interest has to be disallowed only in respect of amount representing the difference between the interest-free advances made by assessee and interest-free funds available to the assessee and accordingly, amount was calculated and the disallowance was restricted - HELD THAT:- We uphold the view of CIT(A) with an exception about the interest-free loans available with the assessee, instead of it we are of the view that entire interest-free funds available with the assessee is to be considered, with this modification, the finding of CIT(A) is confirmed. The entire interest-free funds include owner's own capital, accumulated profits and other interest-free creditors and loans, if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilisation of fund for non-business purposes and if it exceeds, the proportionate disallowance can be made. In support of this view, we refer a judgment of Calcutta High Court CIT vs. Tingri Tea Co. Ltd [1970 (2) TMI 25 - CALCUTTA HIGH COURT]. We are of the view that the AO is required to recalculate the figures of disallowance of interest paid on borrowed funds, therefore, the order of CIT(A) on this issue is set aside and the issue is restored back to the file of AO for the limited purpose to recalculate disallowance of interest paid on borrowed funds, if any in accordance with the above observations and as per provisions of IT Act. Both the grounds of appeal stand disposed of by above observations. However, as regards the disallowance of interest related to Shri Kumar B. Parikh, we respectfully follow the order of the Ahmedabad Tribunal for asst. yr. 1989-90 and action of Revenue authorities is confirmed because of different facts involved and disallowance admitted by the assessee in this particular case of Shri Kumar B. Parikh. As regards the second ground regarding interest on debit balances in partner's capital account, this ground will be covered by the above observations. Issues Involved:1. Confirmation of Rs. 1,38,492 out of total addition of Rs. 1,74,123 on account of non-charging of interest from certain parties.2. Non-charging of interest on debit balances of partners resulting in an addition of Rs. 9,083.3. Relief granted by the CIT(A) contested by the Revenue.Summary:Issue 1: Confirmation of Rs. 1,38,492 out of total addition of Rs. 1,74,123 on account of non-charging of interest from certain partiesThe assessee, a partnership firm engaged in financing, did not charge interest on loans/advances to Torrent Investment (P) Ltd. and Shri Kumar V. Parikh. The AO disallowed interest at the rate of 12% amounting to Rs. 1,74,123, citing that the business of the assessee is financing and non-charging of interest affects the correct computation of income. The CIT(A) partially upheld the AO's decision, confirming an addition of Rs. 1,38,492 after adjusting for interest-free loans received by the assessee. The Tribunal directed the AO to verify and correct the figures, emphasizing that interest-free funds available should be considered in totality, including owner's capital, accumulated profits, and other interest-free creditors and loans.Issue 2: Non-charging of interest on debit balances of partners resulting in an addition of Rs. 9,083The AO added Rs. 9,083 for non-charging of interest on debit balances of partners, which was confirmed by the CIT(A). The Tribunal upheld this decision, noting that the assessee's contention regarding the nexus between borrowed funds and advances was not substantiated. The Tribunal referred to various judgments, including those of the Madras High Court and Bombay High Court, which support the disallowance of interest when borrowed funds are diverted for non-business purposes.Issue 3: Relief granted by the CIT(A) contested by the RevenueThe Revenue's appeal against the relief granted by the CIT(A) was dismissed. The Tribunal upheld the CIT(A)'s view that borrowed funds were partly diverted for non-business purposes, but also considered the availability of interest-free funds. The Tribunal directed the AO to recalculate the disallowance of interest paid on borrowed funds, if any, in accordance with the observations and provisions of the IT Act.Conclusion:The Tribunal upheld the CIT(A)'s decision with modifications, directing the AO to recalculate the disallowance of interest on borrowed funds. The appeal of the Revenue was dismissed, and the appeal of the assessee was allowed for statistical purposes.
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