ORDER
M.M. Cherian, A.M.
1. This is an appeal directed against the order of the CIT(A), Cochin, in the income-tax assessment on Rockey C. Neroth for the asst. yr. 1987-88.
2. The assessee is a partnership firm carrying on business in rubber and hill products. The only ground raised in this appeal by the assessee is that the CIT(A) erred in confirming the disallowance of Rs. 75,351 out of the claim of interest on borrowed funds. In the course of the assessment proceedings the AO noticed that the assessee was having transactions with a sister-concern by name Chandysons Latex and that the balance due from that concern as on 31st March, 1987 was Rs. 12,32,920. The AO noticed that the assessee was doing business mainly on borrowed funds that on the borrowals there was claim of payment of interest to the extent of Rs. 5,17,178. From the details of the transactions with the sister-concern, the AO came to the conclusion that the funds borrowed on interest had been diverted for the purpose of the sister-concerns and so proportionate interest of Rs. 75,351 was not allowable as deduction in computing the assessee’s income. Though it was claimed that the transactions with Chandysons Latex were in the nature of business transactions and so there was no reason for disallowing the interest, the claim was not found acceptable by the AO. In the first appeal the CIT(A) concurred with the AO that there was diversion of borrowed funds for the use of the sister-concern and so there was a case for disallowing the interest on proportionate basis. Aggrieved with the finding of the CIT(A) the assessee has filed this appeal before the Tribunal.
3. On behalf of the assessee, S. Mahadevan C.A. submitted before us that the AO as also the CIT(A) was not correct in holding that borrowed funds had been diverted by the assessee for advancing to the sister-concern, Chandysons Latex. Mahadevan stated that the assessee was having a running account with Chandysons Latex in respect of various business transactions including the purchase and sale of rubber. It was submitted that Chandysons Latex was a new business started for the sale of latex and that the assessee-firm had been selling and also purchasing latex from that concern. The learned representative also filed before us a paper-book in which copies of the assessee’s account with Chandysons Latex are included. Referring to the entries in the account Mahadevan stated that the payments were only in connection with the business transactions between the assessee and Chandysons Latex and so the AO was not correct in considering such instance as diversion of borrowed funds by the assessee. Arguing on the above lines, Mahadevan urged us to delete the disallowance of the interest amount.
4. The Departmental Representative, Kuruvilla M. George, on the other hand, supported the order of the CIT(A) and submitted that it was clearly brought on record by the AO that there was diversion of borrowed funds by the assessee to the sister-concern and that the funds had not been utilised by the assessee in connection with its business. Drawing our attention to the assessment order Kuruvilla M. George submitted that there was only one instance of purchase of latex by the assessee from Chandysons Latex during the previous year and that the amount receivable as per purchase bill No. 2721 was only Rs. 10,854. It was pointed out that as against the sum of Rs. 10,854 the balance amount due to the assessee from Chandysons Latex as on 31st March, 1987, was Rs. 12,32,921. The learned Departmental Representative submitted that though in the running account with Chandysons Latex there were number of entries but they were mostly showing cash payments by the assessee on their behalf. Kuruvilla contended that in view of the evidence regarding the cash payments by the assessee there was no merit in the claim that the diversion of the funds by the assessee was for the purpose of its business.
5. We have considered the rival submissions and also gone through the transactions between the assessee-firm and the sister-concern, Chandysons Latex. No doubt, the assessee was having running account with the other concern but the payments appear to have been made mostly by way of cash and remittances to other parties on their behalf. As pointed out the learned Departmental Representative, there is only one instance of purchase of latex in the whole year as per bill No. 2721 showing the value of Rs. 10,854 but at the same time, we notice that there was a sum of Rs. 6,88,426 due to the assessee from the other concern as per sale bill No. 3214 dt. 1st January, 1987. We are of the view that the amount due to the assessee from Chandysons Latex on account of the above sale bill cannot be viewed as diversion of funds for purposes not connected with the assessee’s business. As regards the other payments, we are inclined to agree with the CIT(A) that the transactions amount to only diversion of funds by the assessee for non-business purposes. There is thus justification for disallowance of the interest on the basis of the total sum of Rs. 12,32,921 which was found to be due from Chandysons Latex as on 31st March, 1982. In view of the fact that out of the outstanding amount, Rs. 6,88,426 represented business transactions, interest is to be disallowed only on the basis of the amount of Rs. 5,45,000 only. The AO is directed to restrict the disallowance of the interest on a proportionate basis, considering the diversion of funds to the extent Rs. 5,45,000 only.
6. In the result, this appeal by the assessee is partly allowed. The AO will revise the assessment accordingly.
