COMMISSIONER OF INCOME TAX Vs. VENKATESWARAN M S

JUDGEMENT

(1.) IN compliance with the order of this court dated November 21, 1979, passed in T.C.P. Nos. 273 to 276 of 1976, the Tribunal referred the following common question, for the assessment years 1972-73 to 1975-76, for the opinion of this court, under section 256(2) of the INcome-tax Act, 1961 :

(2.) IN making the assessment of the assessee, who is an individual, carrying on business in executing sanitary contracts, the INcome-tax Officer disallowed interest payment of Rs. 10,069 for the assessment year 1972-73 on the ground that the said interest relating to the borrowed funds utilised by the assessee for his personal purposes should be disallowed as in the last year. For the assessment year 1973-74, he disallowed a similar sum of Rs. 10,069 on the ground that the assessee has claimed interest payment to the tune of Rs. 40,256, that the balance-sheet showed a sum of Rs. 2,16,070 on the assets side of the balance-sheet under the head "Old proprietor's account", that this was nothing but the drawing made by the father of the proprietor in the earlier years and that last year the same disallowance was made. For the assessment year 1974-75, following the earlier years' order, the INcome-tax Officer disallowed a similar sum of Rs. 10,069. So also, for the assessment year 1975-76 a similar disallowance was made.

(3.) WE have heard learned standing counsel for the Department and perused the records carefully. The fact remains that the assessee's father died on July 10, 1970. The first assessment year after the father's death was the assessment for the accounting year relevant to the year ending March 31, 1972. In the balance-sheet as on March 31, 1972, on the credit side, the assessee's capital account was shown at Rs. 1,58,675 and the advance against contracts was shown at Rs. 1,53,392.68. The total comes to Rs. 3 lakhs. On the debit side, the old proprietor's account in respect of which the case of diversion for non-business purposes is made, amounts to Rs. 22,20,590.96 (?). According to the Department, they have clearly established that a portion of the borrowed capital was utilised by the father of the assessee for non-business purposes and, therefore, the interest paid thereon cannot be allowed as a deduction under section 36(1)(iii). According to the Tribunal, when an assessee had invested his own capital in his business and also borrowed monies for the purpose of his business, any subsequent withdrawal for his personal use would be presumed to be out of his capital and would not entitle the Department to disallow a part of the interest paid. But the Department pointed out that this is subject to the proof given by the Department that a particular portion of the borrowed capital was utilised by the assessee for non-business purposes. According to the Department, it was clearly established that the father of the assessee had utilised a portion of the borrowed capital for non-business purposes, in such a case it was submitted that interest cannot be allowed on such borrowed capital, which was utilised for non-business purposes. In the order, the Tribunal filed to consider the submission made by the Department that they have established that a portion of the borrowed capital was utilised by the father of the assessee for non-business purposes. The facts on record would clearly go to show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, it cannot be said that there can be a presumption that a part of the capital would have been diverted for non-business purposes not from the borrowed capital but from the capital contributed by the assessee. In the absence of such an element in the facts arising in the present case, we are unable to subscribe to the view of the Tribunal that the assessee is entitled to deduction under section 36(1)(iii) with regard to the interest paid on borrowed capital, which was utilised by the assessee's father for non-business purposes. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. There will be no order as to costs.