ORDER
A. Kalyanasundharam, Accountant Member
1. These are three appeals by the assessee involving a common issue in regard to disallowance of the interest paid to the bank on the basis that the amounts taken on loan from the bank are diverted or withdrawn by the parties.
2. Shri K.P. Bhatnagar, appearing for the assessee submitted that, for the assessment year 1985-86, interest was disallowed on the basis that a loan of Rs. 3,10,000 credited to the current account with the bank was utilised for withdrawal by one of the partners. Shri Bhatnagar referring to the details submitted that the amount was withdrawn from the bank only for 22 days after which the account got adjusted with various credits. He, accordingly, pleaded that the disallowance at best could be for 22 days. He further submitted that the partners have credit balances in the capital account and it was only in the case of one of the partners that the balance was a debt. He pleaded that the overall account of all the partners had to be taken into account and, on that basis, no disallowance was at all called for. Alternatively, he submitted that the interest could be disallowed for only these 22 days. He further pleaded that the partners are not entitled to any interest on the capital account and, therefore, on the same basis on the debit balances, no interest was paid or was payable by the firm. He submitted that, for the assessment years 1986-87 and 1987-88, there was no nexus at all and, therefore, no part of the interest could be disallowed.
3. The Departmental Representative placed heavy reliance on the orders.
4. We have given our very careful consideration to the rival submissions. The export loan account as was taken by the assessee, Rs. 3,10,000 remained outstanding as at the end of the year. The said amount which
was credited to the current account with the Allahabad bank was utilised to the extent of Rs. 2,78,526 representing the amounts withdrawn by two of the partners, Mrs. Satyawati Garg and Ch. Atul Kumar Garg. Though the current account had several deposits and withdrawals, the export loan account remained at Rs. 3,10,000 till the next year. Therefore, the claim as advanced by the assessee that only for 22 days the amount was utilised is clearly misplaced and is of no merit. Since identification and nexus have been established in regard to the amount of loan taken but diverted for the use of the partner to that extent, the loan could not be said to be used for the purposes of business and, therefore, the disallowance was rightly made. As far as the subsequent years are concerned based on the period for which the loan remained unpaid during the year, interest paid thereon would have to be disallowed by the Assessing Officer. From the date the loan is repaid, there would not be any nexus and the disallowance of interest would be improper. The Assessing Officer is directed to carry out the modification of the interest, restricting the disallowance only in regard to the loan taken from the Allahabad Bank on the export loan account. The appeals of the assessee are allowed in part.
M.A. Bakhshi, Judicial Member
5. Since I have not been able to persuade myself to agree to the proposed view of the learned Accountant Member, I am passing a separate order as provided under Section 255(4) of the Income-tax Act, 1961.
6. The common issue involved in the three appeals of the assessee is relating to disallowance of interest on the ground of alleged diversion of borrowed funds. The Assessing Officer made a disallowance of Rs. 39,506 for the assessment year 1985-86, Rs. 30,327 for the assessment year 1986-87 and Rs. 26,190 for the assessment year 1987-88. There was a debit balance in the name of Smt. Satyawati Garg, one of the partners of the firm, at the beginning of the year as well as at the close of the year. A sum of Rs. 3,10,000 had been transferred from the Allahabad Bank export loan account to the current account in the same bank on June 27, 1984, and on the same date, a sum of Rs. 1,39,264 had been paid to Smt. Satyawati Garg. Interest was disallowed to the extent indicated above as the Assessing Officer was of the view that there was a nexus between the withdrawal by Satyawati Garg and the loan obtained from the bank.
7. The assessee appealed to the Commissioner of Income-tax (Appeals) and claimed that there was an overall credit balance on account of capital of all the partners and, therefore, the mere fact that there was a debit balance in the case of one of the partners would not be sufficient to make
disallowance of interest paid on funds borrowed for the purposes of business. It had been brought to the notice of the Commissioner of Income-tax (Appeals) that as per the partnership deed no interest was payable to any of the partners nor any interest was receivable from them. Reliance had been placed on the decision of the Chandigarh Bench of the Tribunal in the case of, in support of the contention that, when, in the case of the partners, overall credit is more than the debit in respect of some of the partners, disallowance of interest is not warranted. The assessee had further pleaded before the Commissioner of Income-tax (Appeals) as well as before us that a sum of Rs. 1,50,263.29 withdrawn by the partner, Smt. Satyawati Garg, on June 27, 1984, had been repaid to the export loan account on July 19, 1984, and, therefore, at best interest for 22 days alone could be disallowed.
8. The Commissioner of Income-tax, (Appeals), in paragraph 6 of his order, has observed that the assessee had in fact withdrawn identical amounts of Rs. 1,39,263.30 on June 27, 1984, from the current account with the Allahabad Bank. Whereas one amount was paid to Smt. Satyawati Garg, a similar amount had been paid to another partner. The Assessing Officer had not made any disallowance in respect of the other partner as there was a credit balance in the name of the said partner even after the withdrawal of this amount. However, the Commissioner of Income-tax (Appeals) was of the view that, even in respect of the amount paid to the other partner, interest was disallowable. The matter has been accordingly remitted to the Assessing Officer who has been directed to ascertain the nexus between the withdrawals made by the partners from the firm for non-business purposes and disallow interest in respect of these amounts. The disallowance, however, has been directed to be limited up to the period the amount of overdraft or loan were liquidated. The rate of interest has also been directed to be verified for purposes of disallowance.
9. Though the Commissioner of Income-tax (Appeals) has allowed partial relief to the assessee yet the assessee is dissatisfied with the said order and is in appeal before us. I propose to consider first the alternate contention of the assessee that at best interest in respect of the amounts withdrawn by the partners be disallowed only for 22 days, i.e., from the date of withdrawal to the date of return of the amount. Though the learned Commissioner of Income-tax (Appeals) had specifically directed the Assessing Officer to restrict the disallowance up to the date of liquidation of the overdraft, my learned brother has recorded a categorical finding at page 2 of the order that the claim of the assessee that the loan was utilized
for 22 days only is misplaced and is of no merit. The relevant bank statements are available on the paper book before us. A sum of Rs. 3,10,000 has been transferred to the general account from the export account on June 27, 1984. Thereafter, a sum of Rs. 1,39,263.29 each has been withdrawn by the two partners from the said account. Since the amount of Rs. 3,10,000 has been transferred from the export account, the withdrawal by the partners is stated to be directly linked with the overdraft of Rs. 3,10,000 obtained from the Allahabad Bank. At page 21 of the paper book, it is observed that the assessee had withdrawn sums of Rs. 12,100, Rs. 68,600 and Rs. 20,300 from the export account prior to the withdrawal of Rs. 3,10,000 in the month of June, 1984. The sums of Rs. 12,100 and Rs. 68,600 have been returned in the same month. At page 24, it is observed that a sum of Rs. 3,10,000 has been credited to the export account on July 19, 1984, from general account. The copy of the general account is also placed at page 22 of the paper book and it is observed that, on July 19, 1984, the assessee had received remittance of Rs. 4,79,100 out of which a sum of Rs. 4,15,000 has been transferred to the export account. Since there is a difference of Rs. 1,05,000 between the sums of Rs. 4,15,000 and Rs. 3,10,000, it is to be reconciled. When we turn back to page 24, it is observed that the assessee has one more account to which a sum of Rs: 1,05,000 has been credited on July 19. The sum total of Rs. 1,05,000 and Rs. 5,10,000 is Rs. 4,15,000, which is the debit to the general account on July 19, 198.4. It is evident from these statements that whereas a sum of Rs. 3,10,000 had been transferred from the export loan account in the Allahabad Bank to the general account in the same bank on June 27, 1984, the amount has been returned on July 19, 1984. Even if it were to be held that the interest in respect of the withdrawals of Rs. 2,78,526 (Rs. 1,39,263.29 + Rs. 1,39,263.29), would be warranted the disallowance of interest for 22 days alone would be called for for the assessment year 1985-86. For the assessment years 1986-87 and 1987-88, on these facts, the disallowance of interest would in any case not be justified, the loan having been liquidated earlier. Therefore, the alternate contention raised on behalf of the assessee, that interest up to 22 days alone could be disallowed, in my view, deserves to be accepted.
10. Now, I consider the assessee’s claim that, on the facts and in the circumstances of this case, no disallowance at all is warranted. I am inclined to agree with the contention raised on behalf of the assessee. The fact that the assessee is routing his sales through the general account with the Allahabad Bank is not in dispute. The fact that the assessee has been obtaining temporary assistance from the Allahabad Bank on export commitments from time to time is also not in dispute. As is seen from the copy of the bank account, such facility has been utilised by the assessee from time to time. The temporary loans given by the bank on the basis of export commitments have been liquidated as and when sale proceeds have been realised by the assessee. Nobody has disputed the contention raised on behalf of the assessee that there is no provision in the partnership deed for payment of interest to the partners on account of capital nor is there any specific clause thereunder for charging interest from the partners. The partners have contributed capital and have earned profits in various years. During the year under appeal, a profit of Rs. 1 lakh approximately has been earned by each partner. In the case of Shri Atul Garg, one of the partners, there was a credit balance of Rs. 1,73,805 as on the first day of April, 1984. A profit of Rs. 99,136.72 has been credited towards the end of the year. A sum of Rs. 1,39,263.30 has been withdrawn on June 27, by the said partner. The amount has been debited to his capital account which is placed at page 25 of the paper book. There is no justification in my view for disallowance of interest in respect of the withdrawal made by this partner. The amount withdrawn by the partner is his own money and the firm has not allowed any facility to the partner for utilising its funds for non-business purposes. The mere fact that, on the relevant date, i.e., June 27, 1984, when the amount was paid to the partner, a sum of Rs. 3,10,000 had been obtained by the assessee as a temporary loan from the Allahabad Bank on account of export commitments will not alter the character of the withdrawal made by the partner. As far as the firm is concerned, it has its assets and liabilities. The capital of the partner is the liability of the firm. When a partner is paid his capital, the firm is discharging its liability. Therefore, the payment of capital or profit to a partner does not, in my view, amount to utilisation of funds for non-business purposes. The disallowance of interest in respect of withdrawal of Rs. 1,39,263.30 made by Shri Atul Garg is, therefore, uncalled for.
11. In respect of Smt. Satyawati Garg, there was a debit balance of Rs. 1,11,200 at the beginning of the year. After some withdrawals, including the withdrawal on June 27, 1984, of Rs. 1,39,263.29, the debit balance as on the close of the year has increased to Rs. 1,58,356, In other words, the debit has increased by a sum of Rs. 47,156 from that of the preceding year. Since no nexus has been established between the borrowed funds and the opening debit balance of the partner, interest to the extent of the opening balance would not be warranted. The capital of the partners when taken together is more than the withdrawal made by Smt. Satyawati Garg. Since the other partners have allowed the withdrawal with mutual consent,
it is implied that the partners have allowed her to utilise their own capital. Moreover, the partners are allowed to withdraw the profits earned during the year. As against the withdrawal of Rs. 1,39,263, a profit of Rs. 99,137 has been earned by the partner. Considering the fact that the capital of the partners as on the beginning of the previous year as also on the close of the previous year was much more than the debit balance of the partner in the name of Smt. Satyawati Garg, in my view, no disallowance of interest is warranted even for 22 days referred to elsewhere in this order. I would, therefore, allow the appeal of the assessee on this ground.
12. Another common ground raised in these three appeals relates to cash compensatory support claimed to be not liable to tax. In view of retrospective amendment, the cash compensatory support is liable to tax. Therefore, this ground of appeal raised by the assessee is dismissed in respect of all the three years.
13. In the result, the appeals are partly allowed.
ORDERS OF REFERENCE TO THIRD MEMBER
M.A. Bakhshi, Judicial Member
14. The Members could not agree on one of the issues and accordingly the point of difference raised in the shape of questions is being referred for the opinion of the Third Member:
“1. Whether, on the facts and in the circumstances of the case, interest out of borrowed funds is disallowable in respect of a sum of Rs. 1,39,263 withdrawn by Smt. Satyawati Garg, one of the partners of the firm, when the overall capital of the partners was in excess of the withdrawal made by the partners ?
2. Whether, on the facts and in the circumstances of the case, interest out of borrowed funds in respect of a sum of Rs. 1,39,263 withdrawn by Atul Kumar Garg, another partner of the firm, is disallowable when there was a credit balance standing to his credit throughout the relevant previous year ?
3. If the answer to any of the above two questions is in the affirmative, whether interest for the period of 22 days alone, i.e., between June 27, 1984, to July 19, 1984, is disallowable out of the interest paid on borrowed funds ?”
A. Kalyanasundharam, Accountant Member
15. The Members could not agree on one of the issues and accordingly the point of difference is raised in the shape of the following questions and the same are being referred to the Third Member for his valued opinion :
“1. Whether, on the facts and in the circumstances of the case, the amount, i.e., withdrawn by the partners, Smt. Satyawati Garg, of Rs. 1,39,263 and Shri Atul Kumar Garg for Rs. 1,39,263 from out of borrowed funds of the firm on which the firm had paid interest could be disallowed on the basis that it was diversion of the borrowed funds for the personal purposes of the partners ?
2. Whether, on the facts and in the circumstances of the case, the nexus between the borrowed funds and its utilisation by the partners for her, personal purposes being established and there are no other liquid funds which could be said to be amount retained from the capital of the partners for utilisation by the partner for their personal purposes, could the claim of the appellant that the partner’s capital account was available to the partners could be accepted or not ?
3. Whether the alternative claim of the appellant that the amount so withdrawn by the partner was made good in the shape of collections from parties, which collections were credited to the overdraft account, thus bringing it to the credit balance within a period of 22 days and, therefore, the interest could be disallowed only for 22 days could be accepted or not though the amount of borrowal of Rs. 3,10,000 remained in a separate account of the bank throughout the year was not liquidated within a period of 22 days ?”
ORDER OF THIRD MEMBER
Ch. G. Krishnamurthy, President
16. The assessee in this appeal is a registered firm consisting of five partners, all holding equal shares, carrying on business in the export of brassware.
17. During the course of assessment, the Income-tax Officer noticed that there was a debit balance of Rs. 1,11,200 in the name of a partner, Smt. Satyawati Garg, as on April 1, 1984. This debit balance increased to Rs. 2,51,387 by June 27, 1984, on account of two withdrawals made subsequently, one of which was of a sum of Rs. 1,39,263 made on June 27, 1984, with which I am concerned in this matter. As the debit balance in this account continued throughout the year and as no interest was charged on the debit balance and as the firm was paying interest to the bank of substantial amounts, the Income-tax Officer suspected that the borrowed funds were diverted for non-business purposes like advances to the partners. The assessee was asked to explain as to why a portion of the interest
should not be disallowed. The assessee gave an explanation which was not accepted by the Income-tax Officer. It was explained that the assessee-firm had two bank accounts-one with the Allahabad Bank and the other with Indian Overseas Bank and with the Allahabad Bank, there were credit balances and with the Indian Overseas Bank, there were debit balances. The Income-tax Officer noticed that on June 27, 1984, a sum of Rs. 3,10,000 was drawn from the Allahabad Bank and out of that, a sum of Rs. 1,39,264 was paid to the partner, Smt. Satyawati Garg. This fact, according to the Income-tax Officer, proved that the funds withdrawn from the bank were directly credited to the partner and, therefore, a direct nexus was established between the borrowed funds and the amount withdrawn by the partner. On this view, the Income-tax Officer, calculated that the assessee-firm should have received Rs. 39,506 by way of interest from the partner, Smt. Satyawati Garg. However, this amount was added by way of disallowance out of the interest payable to the bank.
18. It may be noted here that there is another partner named Atul Kumar Garg, who also withdrew a like sum of Rs. 1,39,264 out of the withdrawal of Rs. 3,10,000 made on June 27, 1984, referred to above. No disallowance of interest was made out of this sum withdrawn by this partner because the account of the partner showed a credit balance.
19. Against this order of disallowance of interest, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). After examining the position, the Commissioner of Income-tax took the view that the matter should go back to the Assessing Officer for further examination to clearly establish once again the nexus between the borrowed funds and the withdrawals made by the partners and then to determine the disallowance of interest restricting it to the period from the date of withdrawal to the date of repayment. Dissatisfied with these observations and partial confirmation of the appeal, the assessee has come up by way of further appeals before the Tribunal.
20. After hearing the appeal, the learned Members could not agree on the conclusion to be reached. They, therefore, differed and the points of difference of opinion were referred to me for my opinion as a Third Member. While, according to the Accountant Member, the following are the points of difference of opinion :
“1. Whether, on the facts and in the circumstances of the case, the amount, i.e., withdrawn by the partners, Smt. Satyawati Garg of
Rs. 1,39,263 and Shri Atul Kumar Garg for Rs. 1,39,263 from out of borrowed funds of the firm on which the firm had paid interest could be disallowed on the basis that it was diversion of the borrowed funds for the personal purposes of the partners ?
2. Whether, on the facts and in the circumstances of the case, the nexus between the borrowed funds and its utilisation by the partners for her personal purposes being established and there are no other liquid funds which could be said to be amount retained from the capital of the partners for utilisation by the partner for their personal purposes, could the claim of the appellant that the partner’s capital account was available to the partners could be accepted or not ?
3. Whether the alternative claim of the appellant that the amount so withdrawn by the partner was made good in the shape of collections from parties, which collections were credited to the overdraft account, thus bringing it to the credit balance within a period of 22 days and, therefore, the interest could be disallowed only for 22 days could be accepted or not, though the amount of borrowal of Rs. 3,10,000 remained in a separate account of the bank throughout the year was not liquidated within a period of 22 days?”
according to the Judicial Member, the following are the points of difference of opinion :
“1. Whether, on the facts and in the circumstances of this case, interest out of borrowed funds is disallowable in respect of a sum of Rs. 1,39,263 withdrawn by Smt. Satyawati Garg, one of the partners of the firm, when the overall capital of the partners was in excess of the withdrawal made by the partners ?
2. Whether, on the facts and in the circumstances of the case, interest out of borrowed funds in respect of sum of Rs. 1,39,263 withdrawn by Atul Kumar Garg, another partner of the firm, is disallowable when there was a credit balance standing to his credit throughout the relevant previous year ?
3. If the answer to any of the above two questions is in the affirmative, whether interest for the period of 22 days alone, i.e., between June 27, 1984, to July 19, 1984, is disallowable out of the interest paid on borrowed funds ?”
21. I have to first determine what are exactly the points of difference of opinion from amongst the points mentioned by them individually and then express my opinion on the points of difference of opinion. I have gone through, very carefully, the points of difference of opinion made out by both the Members and, in my view, the points mentioned by the learned Judicial Member bring out the real controversy of the difference of opinion and I would, therefore, confine myself to express my opinion on those points of difference of opinion. In a way, there is not much of difference of opinion between the points of difference of opinion mentioned by the learned Accountant Member and the learned Judicial Member. Both converge on the same issue except that they are couched in different language. As I mentioned earlier, the real issue is whether any interest could be disallowed on the ground that the borrowed funds were diverted for non-business purposes when the partners withdrew the money.
22. This issue has to be looked at from the point of view of whether the nexus between the borrowed funds and the withdrawals made by the partners was established. A reading of the order of the learned Judicial Member would show that, in the Allahabad Bank, the assessee-firm had an account called the “Allahabad Bank Export Loan Account” where there are huge credit balances. A sum of Rs. 3,10,000 was transferred from that account to the current account in the same bank on June 27, 1984, out of which a sum of Rs. 1,39,264 was withdrawn by one partner, Smt. Satyawati Garg, and another sum of similar amount was withdrawn by the other partner, Atul Kumar Garg. The Assessing Officer disallowed the interest only on the withdrawal made by Smt. Satyawati Garg and not on the withdrawal made by the other partner because there was a credit balance in the account of the other partner throughout the year while there was a debit balance in the account of Smt. Satyawati Garg, again throughout the year. If we take the withdrawal made from the bank and the payments made to the partners, it can be argued perhaps successfully that the funds borrowed from the bank were utilised for making payments to the partners and thus a direct nexus between the borrowed funds and the payments made to the partners was established. Assuming it is so, the answer to the question is not immediately available because it has to be further established that the funds withdrawn from the bank were borrowed funds on which interest was paid and the amounts paid to the partners were (a) for non-business purposes, and (b) they had no credit balance to withdraw.
23. In so far as the first issue is concerned, it was from the Allahabad Bank Export Loan Account where there was a credit balance, that the sum
of Rs. 3,10,000 was transferred to the current account out of which the partners got the payments. It is not clear whether, on the Allahabad Bank Export Loan Account, any interest was paid by the assessee. Both the Members as well as the Revenue proceeded on the assumption that interest was paid on this sum. I will not go behind this and I will also proceed on the same assumption that this sum of Rs. 3,10,000 bore interest.
24. The second aspect is whether the sums in question were given for non-business purposes. It is not known why the partners were given this money and since the purpose for which the moneys were withdrawn by the. partners was not known, an assumption can be made in favour of the Revenue that these funds were drawn for purposes other than business, but if the partners have got credit balances to their account and they want to withdraw from their credit balances for their personal purposes, would it mean diversion of borrowed funds for non-business purposes ? Implied in it is the’ further question whether the partners are entitled to draw from their credit balances whenever they need and whether such withdrawals amount to the outlay of the borrowed funds for non-business purposes. If the partners have got credit balances and there is no prohibition in the partnership deed against withdrawal of the money as and when they desire, such withdrawal made by the partners cannot be termed as withdrawal made out of the borrowed funds for non-business purposes. When a partner wants to withdraw money from his credit balance for a personal purpose, the other partners cannot normally object to it except on the peril of leading to difference of opinion which may even lead to dissolution of the firm and winding up of the business. In the absence of a contract to the contrary, a partner is entitled to withdraw out of the credit balance, subject to the consent of the other partners. Such a consent was given in this case, when one partner, Atul Kumar Garg, was allowed to withdraw money out of his credit balance. On the day when the partner wanted to withdraw the money, the firm may not have liquid resources. For that purpose, it may even generate funds by borrowing from the banks or even from the creditors. When the funds so generated, are withdrawn by the partner against his credit balance, it cannot be, in my opinion, said that the borrowed funds were utilised for non-business purposes. In order to preserve the integrity of the business, the partner must be allowed to withdraw the money provided the need is genuine and the other partner agrees for such a withdrawal. This, in my opinion, does not amount to withdrawal made for non-business purposes. This is so far as the partner who has got a credit balance is concerned.
25. As regards the other partner who does not have a credit balance but who also wants to withdraw money, it is open to all the other partners who have got credit balances to agree to give him or her the money needed either by charging interest or even free of interest. The test to be applied in such a case is whether the other partners have got enough credit balances to enable them to pay the money to the other partner. When I used the word “pay”, I mean to say that the amount withdrawn by the partners was out of the balance standing to the credit of the partners of the firm and not necessarily out of the borrowed funds’. Here I may say that, when own funds, i.e., equity of the partners and the borrowed funds either from the creditors or from the banks were so mixed up as to lose their identity, then, if withdrawals are made from such funds, the presumption, the courts have held, is that the funds withdrawn must, in the first instance, be construed to be out of the own capital and anything in excess of the own capital is only from the borrowed funds. Here in this case, it is an admitted fact that all the other partners have got credit balances of about Rs. 5,39,226. The debit balance in the account of Smt. Satyawati Garg was Rs. 1,58,356. After setting off this sum, still there is a credit balance of Rs. 3,80,870 in the accounts of the other partners. When the other partners have agreed for the withdrawal by Smt. Satyawati Garg to the extent of Rs. 1,58,356, it must be construed that she was allowed to withdraw the money from out of the capital of the partners and not necessarily out of the borrowed funds even though the partners have arranged the withdrawal by the partner out of the money withdrawn from the bank. The following figures would show the position of the partners’ accounts both at the beginning, during and at the end of the year :
Name of the partners
%
Opening balance
Additions
Drawings
Total
Profit
Balance as on 31-3-1985
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Rs. P.
Rs. P.
Rs. P.
Rs. P.
Rs. P.
Sri Praveen Kr. Garg
20
1,62.319.67
–
1,48,108.29
14,211.38
99,137.72
1,13,349.10
Sri Prashant Kr. Garg
20
1,62,408.13
–
1,46,936.30
15,471.83
99,137.72
1,14,609.55
Sri Atul Kr. Garg
20
1,73,805.14
–
1,47,826.30
25,978.84
99,137.72
1.25,116.56
Smt. Chitra Garg
20
1.10.992.22
–
23,978.50
87,013.72
99,137.72
1,86,151.44
Smt. Satyawati
20
1,11,200.32
Dr-
1,46,294.29
(-) 2,57,494.61
99,137.72
(-) 1,58,356.88
4,98,324.84
–
6,13,143.68
(-) 1,14,818.84
4,95,688.61
3,80,869.77
26. This would show that, except in the account of Smt. Satyawati, which Started with opening debit balance and ended with a debit balance, in all the other accounts of the partners, there was a credit balance even after withdrawals. In these circumstances, it is very difficult to say that only the borrowed funds were utilised or diverted for non-business purposes. As I mentioned earlier, allowing a partner to withdraw the money with the consent of the other partners who have got credit balances, is also a business purpose because refusal to allow to withdraw the money may eventually end in the dissolution of the firm or create differences of opinion which are not healthy for the continuation of the partnership business. A partnership business is founded upon the bedrock of mutual trust, agency, good faith and good relations between the partners. Unless harmonious relations exist with mutual trust, without any bickerings, no partnership business can run. Therefore, merely because a partner has withdrawn moneys from the firm, ending in a debit balance, it does not necessarily mean that the debit balance in the account of the partner is an amount laid out for a non-business purpose, provided, I repeat, there are credit balances in the accounts of the other partners and the other partners have agreed to let the partner withdraw the money from the firm.
27. Having come to this conclusion in the setting of the facts in this case, I am unable to say that the withdrawals made by the partners were such as to say that the borrowed funds were utilised for non-business purposes. I am, therefore, of the opinion that, in regard to the point of difference of opinion No. 1 that the interest out of the borrowed funds is not disallowable in respect of the sum of Rs. 1,39,263 withdrawn by Smt. Satyawati Garg in view of the fact that the overall capital of the partners was in excess of the withdrawal made by the partner.
28. In regard to the second point of difference of opinion, the question of disallowance does not arise at all inasmuch as even after the withdrawal, the account of the partner showed a credit balance not only at the end of the year but throughout the year.
29. In view of my opinion on points Nos. 1 and 2 above, point No. 3 does not necessarily arise for consideration.
30. Before I conclude, I must refer to the decisions relied upon by the learned Departmental Representative in support of the view that interest has to be disallowed. One such decision relied upon by him was that of the Supreme Court rendered in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200. In this case, the principle laid down by the Supreme Court was that, if it is proved that the borrowing made by an assessee was to meet his personal obligation and not an obligation of the business, the expenditure incurred by way of interest on such borrowing could not be said to be for the purpose of carrying on the business or in his capacity as a person carrying on the business and any amount of entries in the books of account would not alter the character of the borrowing. In this case, the assessee who carried on money-lending business promised a donation of Rs. 10 lakhs for the setting up of an engineering college and a further sum for a hospital. On November 21, 1955, a sum of Rs. 10 lakhs was debited towards the capital account which had an ample credit balance and corresponding credit was given to the account of the college. On January 7, 1956, the assessee drew a sum of Rs. 5.5 lakhs from an overdraft account maintained with a bank for her business and paid that sum to the college. The balance of Rs. 4.5 lakhs was treated by the assessee as a debt due to the college. The question was whether the interest paid by the assessee to the bank on the sum of Rs. 5.5 lakhs and the interest paid on the balance amount of Rs. 4.5 lakhs credited to the college account were allowable expenditure in computing her business income. The claim of the assessee was that she had preferred to draw on the overdraft account for the purpose of paying the college in order to save her income-earning assets, namely, the shares, etc. The Income-tax Appellate Tribunal held that the sum of Rs. 5.5 lakhs overdrawn from the bank was not borrowed for business purposes and that as regards the balance of Rs. 4.5 lakhs, there was only a promise and a mere credit entry in her books of account did not convert that promise into a gift or charity for a trust and, therefore, neither interest was allowable as deduction. Both the High Court and the Supreme Court affirmed the decision of the Tribunal. This decision
neither on facts nor on principle laid down would apply to the facts of the case before me because, unlike in the case before me, in the case before the Supreme Court, the amount was borrowed from the bank and paid over to the college by way of a donation to meet a personal obligation and not a business obligation. Here, in this case, according to me, the obligation is not personal at all.
31. In another case of the Allahabad High Court, in the case of CIT v. Saraya Sugar Mills (P.) Ltd. [1992] 193 ITR 575, the facts were that the assessee, out of the moneys borrowed, advanced a substantial portion thereof to the directors free of interest. Loans were also advanced to the firms in which the directors of the assessee were interested, again free of interest. The amounts advanced to the directors in their firms free of interest were very substantial and it was a continuous course of conduct and not an isolated transaction. The High Court held that, in these circumstances, the interest paid on the borrowed money cannot be said to have been utilised for business purposes and upheld the disallowance of interest. But the principle laid down there was that the moneys borrowed from the bank were directly advanced to the directors free of interest. Therefore, the money borrowed for the purpose of advance to the directors free of interest could not be said to be for a business purpose. Another feature found there was that it was a continuing practice and not an isolated transaction. Here, in this case, the position is totally different. First of all the relationship here in the case before me is not that of a company and a director. Both of them are two distinct legal entities. The company as a juristic person having a perpetual succession and common seal can sue and be sued in its own name and is distinct from its shareholders, having a juristic personality, unlike the case of a firm where the firm is not a legal entity, different from its partners, though the name of the firm is only a compendious name given to a group of persons who agreed to carry on the business in partnership as partners. Secondly, this is only an isolated transaction unlike in the case before the Allahabad High Court where it was a continuous course of conduct. Thirdly, there was enough credit balance” in the accounts of the partners who were entitled to withdraw, which does not seem to be the case in the case of the directors of the case before the Allahabad High Court. This decision was only an application of an earlier decision of the Allahabad High Court in the case of CIT v. H. R. Sugar Factory Pvt. Ltd. [1991] 187 ITR 363.
32. I am, therefore, of the opinion that the principles laid down in those cases which turned on the facts of those cases do not apply to the facts before me, I am, therefore, in agreement with the view expressed by the learned Judicial Member.
33. The matter will now go before the regular Bench for disposal of the case in accordance with the opinion of the majority.