Law: Income Tax Act, 1961

Section: 256(1)

Income-tax---Interest on borrowed capital-Deduction-Firm-Interest credited on credit balance of partners-No interest charged on debit balance of one partner-No explanation for not charging interest on debit balance-No inference can be drawn that borrowings to the extent of debit balance not utilised for business purposes--Proportionate interest on borrowed capital whether cannot be disallowed. C I. T. v. Gopikrlshna Muralidhar (1963) 47I T R 469 (A P) applied. Bai Bhuriben Lallubhai v. C. I. T. (1956) 29 I T R 543 (Bom.) ref. JUDGMENT S. S. SHARMA, J.-This is reference under section 256(1) of the Income- tax Act, 1961 (hereinafter referred to as "the Act"), referring the following question of law " Whether on the particular facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 13,020 was not disallowable from and out of the assessee's claim for interest payment in respect of its borrowings?" The assessment year in question is 1976-77. The assessee-firm has been carrying on the business of manufacture and sale of paper. It had been maintaining accounts under the mercantile system of accounting and the amounts are closed on 31st December, every year. The assessee-firm had credited interest on the credit balance of all the partners excepting for Shri Chandmal Agarwal who had a debit balance in his capital account. No interest had been charged on the said debit balance by the assessee. The assessee had paid interest on borrowings to outsiders. The I. T. O. therefore, inferred that borrowings to the extent of the debit balance in the partner' account had not been utilised for business purposes and thus disallowed the proportionate interest. The assessee had claimed deduction on account o interest to extent of Rs. 13,020, which was disallowed on the aforesaid reasoning of the Income-tax Officer. The A. A. C. upheld this finding of the Income-tax Officer and, according to him, there was no explanation for not charging interest on the debit balance of the…

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