TaxTMI 
TaxTMI 
2017 (10) TMI 536
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....rust was running a proprietor-ship business in the name and style of "Modern Tubes". According to the assessee, Trust was set up with a capital of Rs. 1,000/- which has capital balance of the beneficiaries. That capital balance was treated as loan and as per resolution passed in the year 1992, beneficiary was given interest on that loan. The assessee has claimed deduction of interest on the alleged land from the beneficiaries. The ld.AO has rejected the contentions of the assessee on the ground that in the balance sheet, the assessee nowhere shown loan from the beneficiaries. Only loan shown in the balance is from Vora Finance. Therefore, he disallowed claim of the assessee in both the years. 6. Dissatisfied with the order of the AO, the assessee carried the matter in appeal. It has filed written submissions which has been reproduced by the ld.CIT(A) in both years. Since submissions are verbatim same, therefore, we take note of these submissions from the Asstt.Year 2009-10, which reads as under: "Shri J. S. Pandit, CA & AR attended on behalf of the appellant and furnished the written submissions on this issue as under:- Disallowance of interest paid to Beneficiaries of Rs.....
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....has been utilized for the purpose of business and interest has been paid on the funds so utilized for the purpose of business. Thus the payment of interest to beneficiaries is on account of money utilized by trust for the purpose of its trading activity and hence payment of interest to beneficiaries is rightly claimed as allowable expenses. That clause (Hi) of sub. section (1) of section 36 of the Income Tax Act deals with the payment of interest on Capital borrowed for the purpose of business. The clause envisaged the fulfillment of three conditions before interest can be allowed as a deduction ; there should be borrowings, capital must have been borrowed for . business purpose and interest should have been paid / payable in respect thereof. Since all three ingredients are fulfilled, legitimate claims of interest payment to beneficiaries need to be allowed. Looking to the nature of business substantial fund is required for working capital. The amount which otherwise is payable to beneficiaries in form of cash/cheque have been utilized towards the purpose of business and since separate accounts of beneficiaries are maintained in the books of accounts of trust, interest have been du....
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....ed -" Annexure- A " Thus it is the borrowed amount from beneficiaries which has been utilized for the purposes of business. As per the provisions of the trust deed, assuming for the sake of argument, that amount of profit generated is distributed to beneficiaries and beneficiaries in turn take their prof its away than for working capital requirement trustees will have to borrow fund from other outsider agencies such as banks, financial institutions, money lenders etc. etc. Interest in any case has to be paid on the funds borrowed and utilized for the purpose of business. To sum up, amount lying to the credit of beneficiaries accounts is nothing but loan from beneficiaries for which proper resolution empowering to borrow and consent were obtained as long back as 1992. Rohit Nandlal Trust is proprietor of" Modern Tubes " There are separate sets of books of accounts of" Modern Tubes " which is a business unit and Rohit Nandlal Trust which is proprietor/ concern. In proprietary concern ROHIT NANDLAL TRUST Capital account shown an amount of Rs. 1,000/- only as Trust Fund whereas amount due to beneficiaries is the substantial amount as follow. Beneficiaries A/c Opening ....
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.... the account, and therefore, the ld.AO instead of strictly going through the entries shown in the books, ought to have verified the contentions of the assessee with other details. In the grounds, the assessee has specifically pointed out as to how the benefit meant for the beneficiaries have been accumulated and not paid to them over a period of time. These undistributed benefits have been treated as capital of the beneficiaries in the trust, which has been used for the purpose of business. There are various other aspects also namely, the ld.DR pointed out that the assessee has been using PAN of a firm, whereas it should have a separate account number. All these aspects have confused the ld.AO. There may be certain short coming in maintaining the accounts or availing PAN but these are not so major which can persuade the AO to disallow the claim. Therefore, taking into consideration other details, we are of the view that the assessee has undistributed benefit of the beneficiaries which has been construed as capital balance, and as per the decision taken by the trust, interest has been provided on such capital balance of the beneficiaries. Therefore, the deduction ought to be allowed....