Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1998-99 - Partners of assessee-firm had taken advances from firm - It claimed deduction of interest on said advances which was disallowed by Assessing Officer - Assessee contended that advances drawn by partners were not for personal purpose but for business purpose, i.e., for acquisition of property for purpose of business of firm - However, it failed to produce any details about utilisation of advances retained by partners for purchase of property for business purpose of firm - Whether since assessee had specific case that advances drawn by partners were for business purpose, one more opportunity should be given to assessee to prove its case with facts and details pertaining to advances given to partners and utilisation thereof for purpose of business of firm during previous year - Held, yes [Matter remanded back] P.K.R. Menon and George K. George for the Appellant. T.M. Sreedharan for the Respondent. JUDGMENT C.N. Ramachandran Nair, J. - The question raised in the appeal filed by the revenue is whether the Tribunal was justified in sustaining the order of CIT (Appeals) upholding disallowance of interest claimed by the firm amounting to Rs. 3,94,385. We have heard standing counsel appearing for the appellant and counsel appearing for the assessee. The total interest claimed for the assessment year concerned, namely, 1998-99, is around Rs. 60 lakhs. However, on verifying the accounts the Assessing Officer noticed that one of the partners has made interest free withdrawal of around Rs. 21 lakhs during the previous year and on account of personal withdrawal by one of the partners, the firm was short of liquidity leading to higher incidence of debt and consequently interest liability. On going through the orders and after hearing parties, we feel the assessee also does not controvert the legal position that personal withdrawal of cash by the partner will lead to liquidity problem…

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