2001 (10) TMI 283 - AT - Income Tax

Tribunal Partially Allows Appeal, Reduces Disallowance, Adjusts Relief

The Tribunal allowed the appeal partly by deleting the disallowance of interest amounting to Rs. 1,31,566. The disallowance of telephone expenses was ... Interest on borrowed capital Issues Involved:1. Disallowance of interest of Rs. 1,31,566.2. Disallowance of Rs. 31,450 out of telephone expenses.Summary:Disallowance of Interest of Rs. 1,31,566: Ground Nos. I to IV1. Facts and AO's Findings: - The assessee-firm claimed Rs. 1,31,566 as interest payment in its P&L account, related to borrowings from banks and other parties. - The AO noted that one partner, Shri Uma Shankar Halwasia, had a significant debit balance in the current account, and no interest was charged on this balance or other advances. - The AO disallowed the deduction, reasoning that the borrowed money was not utilized for business purposes and could have been used to repay loans instead of making interest-free advances to relatives and sister concerns.2. CIT(A)'s Decision: - The CIT(A) upheld the AO's disallowance, stating that the appellant's business did not require giving loans to sister concerns or relatives, and such advances were not for business purposes.3. Assessee's Arguments: - The assessee contended that the partnership deed specified no interest on debit balances. - The borrowed funds were utilized for business purposes, and the interest disallowance was unjustified. - Cited case laws: Madhav Prasad Jatia vs. CIT, CIT vs. Bombay Samachar Ltd., and Regal Theatre vs. CIT.4. Tribunal's Analysis and Decision: - The Tribunal found force in the assessee's contentions, noting that the Department failed to prove that borrowed funds were not used for business purposes. - The Tribunal cited relevant case laws, emphasizing that the conditions for allowing interest deduction u/s 10(2)(iii) and s. 10(2)(xv) were satisfied. - It was observed that most advances were prior to the borrowings, and the borrowed funds were not diverted to interest-free advances. - The Tribunal reversed the CIT(A)'s findings and deleted the disallowance of Rs. 1,31,566.Disallowance of Rs. 31,450 out of Telephone Expenses: Ground Nos. V to VII1. Facts and AO's Findings: - The AO disallowed 50% of the telephone expenses, amounting to Rs. 31,450, suspecting personal use by partners.2. CIT(A)'s Decision: - The CIT(A) upheld the disallowance, noting that the resolution allowing telephone facilities to directors did not contradict the AO's findings.3. Assessee's Arguments: - The assessee argued that the telephone was used exclusively for business purposes, given the volume of business and the status of the users.4. Tribunal's Analysis and Decision: - The Tribunal considered the totality of circumstances and the volume of business. - It found it reasonable to restrict the disallowance to 25% instead of 50%. - The AO was directed to work out the relief accordingly.Conclusion:- The appeal was partly allowed, with the disallowance of interest being deleted and the disallowance of telephone expenses being reduced to 25%.