INDIANA TEXTILES MILL,KOLKATA vs. I.T.O.,WARD-44(1), KOLKATA

The issue involved in Ground No. 1 of the assessee’s appeal relates to the disallowance of Rs.12,08,832/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of interest expenditure.

The assessee in the present case is a partnership firm, which is engaged in the business of manufacturing of and dealing in hosiery goods. The return of income for the year under consideration was filed by it on 28.09.2013 declaring total income of Rs.14,86,150/-. During the course of assessment proceedings, it was noticed by the Assessing Officer that the 1 Assessment Year: 2013-2014 Indiana Textile Mill assessee-firm on the one hand had paid substantial interest on the secured and unsecured loans borrowed by it, while Shri O.P. Ahuja, one the partners of the assessee-firm, on the other hand, had withdrawn an amount of Rs.1,10,95,830/- as on 01.04.2012. By treating the same as diversion of borrowed funds by the assessee, the Assessing Officer required the assessee to explain as to why interest attributable to the debit balance in one of the partners capital account should not be disallowed. In reply, it was submitted on behalf of the assessee that the partners capital as a whole was having a positive balance of about Rs.6,00,00,000/- and the withdrawal of excess capital by one of the partners was an internal arrangement between the partners. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, had the concerned partner not withdrawn excess amount from his capital account, the firm would not have required to borrow loan to that extent and the burden of interest would have been lesser. He accordingly treated the interest attributable to the debit balance in one of the partners capital account at Rs.12,08,832/- by applying the rate of 12% per annum and made a disallowance out of interest to that extent. On appeal, the ld. CIT(Appeals) confirmed the said disallowance made by the Assessing Officer observing that there was a diversion of borrowed funds by the assessee-firm for allowing withdrawal of excess capital by one of the partners.

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly contended by the ld. Counsel for the assessee, sufficient own funds in the form of capital of other partners were available with the assessee-firm at the relevant time and since the excess withdrawal from his capital account was made by one of the partners from the said own funds available with the assessee-firm, the disallowance of interest as made by the Assessing Officer and confirmed by the ld. CIT(Appeals) was not warranted. The overall balance in the capital account of all the partners was to the tune Assessment Year: 2013-2014 Indiana Textile Mill of about Rs.6,00,00,000/- and the same being much more than the excess withdrawal of capital of about of Rs.1,00,00,000/- made by one of the partners, I find that it is not a case of diversion of borrowed funds by the assessee-firm for allowing excess withdrawal of capital account by one of its partners as alleged by the authorities below. As rightly contended on behalf of the assessee before the ld. CIT(Appeals) as well as before the Tribunal, it was an internal adjustment between the partners of the assessee-firm, which allowed excess withdrawal of capital to one of the partners from the funds sufficiently available in the capital account of other partners. I, therefore, delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) out of interest expenditure and allow Ground No. 1 of the assessee’s appeal.

Grounds No. 2 & 3 of the assessee’s appeal relate to the disallowance of Rs.5,17,539/- and Rs.46,918/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of depreciation of motor car and motor car running expenses respectively.

During the year under consideration, the assessee had purchased a Mercedes Benz make car and claimed depreciation and running expenses in respect of the said car on the ground that the same was utilized for the purpose of its business. According to the Assessing Officer, the said car purchased by the assessee was a sports car and the same was meant for personal use of the partners of the assessee-firm and not for the purpose of business. He, therefore, disallowed the expenses claimed by the assessee on running of the said car amounting to Rs.46,918/- as well as depreciation thereon amounting to Rs.5,17,539/-. On appeal, the ld. CIT(Appeals) confirmed the said disallowances made by the Assessing Officer.

I have heard the arguments of both the sides on these issues and also perused the relevant material available on record. The ld. Counsel for the assessee has placed on record a copy of bill for the car in question purchased by the assessee to show that the said car was not a sports car as alleged by the authorities below. This documentary evidence placed on record by the ld. Counsel for the assessee clearly shows that the adverse inference drawn by the Assessing Officer in the matter of use of car not being for business purpose but for personal purpose of the partners of the assessee-firm on the basis of the car purchased by the assessee being a sports car was not correct. Besides the said basis which is turned out to be wrong, there is no other basis given by the authorities below to dispute the claim of the assessee that the car in question was purchased and used for the purpose of its business. At the same time, I also find merit in the alternative contention raised by the ld. D.R. that in the absence of any record maintained by the assessee in the form of Log Book etc., the personal use of the said car by the partners of the assessee-firm cannot be ruled out and some disallowance out of the expenses and depreciation claimed in respect of the said car is liable to be made for personal use. In my opinion, it would be fair and reasonable to make such disallowance on account of personal use to the extent of 25%. The impugned order of the ld. CIT(Appeals) on this issue is accordingly modified and the disallowance made by the Assessing Officer on account of depreciation on car and running expenses of car is restricted to 20%. Grounds No. 2 & 3 of the assessee’s appeal are thus partly allowed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on January 10, 2020.