INCOME TAX OFFICER v. PAYAL THEATRES
[Citation -1985-LL-0422-5]

Citation 1985-LL-0422-5
Appellant Name INCOME TAX OFFICER
Respondent Name PAYAL THEATRES
Court ITAT
Relevant Act Income-tax
Date of Order 22/04/1985
Assessment Year 1979-80
Judgment View Judgment
Keyword Tags interest paid on borrowed capital • mercantile system of accounting • disallowance of interest • method of accounting • payment of interest • excess interest • capital account • hybrid system
Bot Summary: PRAKASH NARAIN, A.M.: The assessee, which is a firm, is running Payal cinema in the city of Allahabad. The ITO noticed that the assessee had paid interest on its borrowings to the extent of Rs. 2,57,005. Since, according to him, the assessee had been following mercantile system of accounting, he held that the interest in excess of 12 months could not be allowed as deduction in the computation of the assessee s income. The assessee appealed to the AAC. It was submitted before the latter that with regard to the payment of interest, the assessee had been following cash system. The Departmental has challenged the deletion of Rs. 13,885, while the assessee in its Cross Objection has challenged the confirmation of Rs. 9,000. The assessee has furnished before me the details of the interest of a few earlier years to show that it was always claimed on payment basis and had also been allowed by the ITO on that basis. The ITO noticed that the expenses of Rs. 36,417 claimed by the assessee included amounts of refreshments. In the Cross Objections, the assessee has supported the deletions by the A A C with regard to Rs. 13,885 and Rs. 5,000.


PRAKASH NARAIN, A.M.: assessee, which is firm, is running Payal cinema in city of Allahabad. ITO noticed that assessee had paid interest on its borrowings to extent of Rs. 2,57,005. He found that interest paid in certain cases was for more than 12 months. Since, according to him, assessee had been following mercantile system of accounting, he held that interest in excess of 12 months could not be allowed as deduction in computation of assessee s income. He determined such excess interest at Rs. 13,885 and disallowed it. Besides, ITO also noticed that accounts of all partners showed opening debit balances. Subsequently, they also withdrew funds to extent of Rs. 1,10,772. Further, firm had suffered loss. After adjusting these amounts, partners accounts showed further debit balances. assessee did not furnish details of withdrawals for personal expenses of partners. ITO estimated them at Rs. 50,000. He then held that borrowings to extent of this amount had not been utilised for purposes of assessee s business. He calculated interest of Rs. 9,000 on this amount and disallowed it in computation of assessee s total income. assessee appealed to AAC. It was submitted before latter that with regard to payment of interest, assessee had been following cash system. It was pointed out to him that ITO had not filled column: Method of accounting in body of assessment order, while assessee in Part D of return had ticket item of 'Mixed system of accounting. On this basis, AAC held that assessee was entitled \to deduction of interest on payment basis as he had been following mixed or hybrid system of accounting. He accordingly deleted disallowance of Rs. 13,885. He, however, confirmed disallowance of Rs. 9,000. Departmental has challenged deletion of Rs. 13,885, while assessee in its Cross Objection has challenged confirmation of Rs. 9,000. I have heard parties. I am in agreement with findings of AAC on both above grounds. It was contended before me by ld. Departmental Representative that in Part D of return ticking of word 'Mixed relating to system of accounting had been carried on later on, while in earlier as well as subsequent years, assessee had shown system mercantile. In my opinion, nothing much turns on this. What I have to see is actual method of accounting followed by assessee in maintenance of its books of account. There can be mistake in describing that method in return or by ITO in assessment order. That will not militate against finding of fact regarding method of accounting followed by assessee. assessee has furnished before me details of interest of few earlier years to show that it was always claimed on payment basis and had also been allowed by ITO on that basis. This, therefore, proves assessee s case that it had been following Mixed system of accounting with reference to payment of interest. interest was claimed and also allowed on basis of actual payment. That method which has been regularly followed by assessee cannot now be disturbed by ITO only for purpose of making some disallowance. If this is permitted, then it will disturb assessee s accounts of earlier year as well as subsequent years which is uncalled for. I, therefore, agree with finding of AAC that no disallowance out of interest can be made on ground that payment in certain cases relates to more than 12 months. deletion of Rs. 13,885 is, therefore, confirmed. With regard to disallowance of Rs. 9,000, ld. counsel for assessee relied on decision of Madhya Pradesh High Court in case of CIT vs. Alok Paper Industries (1982) 138 ITR 729 (MP). reading of this judgment gives impression that if assessee resorts to borrowings and pays interest thereon, it has to be allowed irrespective of fact that capital account of partner shows debit balance because of certain excess withdrawals for personal purposes. It is, therefore, necessary to analyse this case in somewhat details. This case follows earlier decision of Andhra Pradesh High Court in CIT vs. Gopikrishna Muralidhar (1963) 47 ITR 469 (AP). In this case, assessee, HUF, which carried on business on extensive scale with capital of about Rs. 20 lacs, made large borrowals for purposes business on which interest was paid. In course of year monies amounting to about Rs. 2 lacs were withdrawn from time to time for household expenses. question was whether part of interest paid on borrowed capital could be disallowed. It was held that, as amounts were borrowed for purposes of business of family and as no particular sum purporting to borrowed on behalf of business was spent for household expenses and family was entitled to withdraw from capital supplied by it thereby depleting capital, fact that part of amounts borrowed was later on used for personal expenses did not deprive assessee of benefit of deduction of entire interest paid on borrowed capital. While dealing with matter at p. 471 of report, Court held that 'the family was surely entitled to withdraw from capital supplied by it with result of capital being deleted. In other words, finding in this case was based on fact that withdrawal could be related to capital supplied by assessee. In case before us, o n other hand, there is no capital invested by partners. I have already mentioned above that their opening balances were in debit. These debit balances had further increased because of losses suffered by them in firm and because of withdrawals for their personal purposes. ratio laid down by Andhra Pradesh High Court in above case and by Madhya Pradesh High Court in earlier case, therefore, does not apply as those cases clearly stand distinguished from case of assessee. I, therefore, hold that assessee is not entitled to deduction of interest on amount which had been diverted by partners for their personal purposes. In absence of details, estimate of ITO of such amounts at Rs. 50,000 cannot be questioned. As consequence, disallowance of interest of Rs. 90,000 whose correctness has not been doubted before me can also not be deleted. second contention in Departmental appeal relates to deletion of another disallowances of Rs. 5,000. ITO noticed that expenses of Rs. 36,417 claimed by assessee included amounts of refreshments. According to him, this expenditure related to partners of assessee. He, therefore, disallowed Rs. 5,000 on estimate. assessee appealed to AAC. AAC on facts of case held that no refreshment was attributable to partners. His finding was that refreshment related to visitors only. He further held that assessee was entitled to deduction of Rs. 5,000 under s. 37(2A) of IT Act, 1961. Since disallowance was also of Rs. 5,000, he held that it was within permissible limit of above section. He accordingly deleted addition of Rs. 5,000. limit of above section. He accordingly deleted addition of Rs. 5,000. Department is now in appeal before me. After hearing parties. I am of opinion that no interference is called for in order of AAC inasmuch as I agree with his finding in full. In Cross Objections, assessee has supported deletions by A C with regard to Rs. 13,885 and Rs. 5,000. Since, I have confirmed findings of AAC on this score, these objections are infructuous. In result, both appeal and Cross Objections are respectively dismissed and rejected. *** INCOME TAX OFFICER v. PAYAL THEATRES
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