COMMISSIONER OF INCOME TAX Vs. HOTEL SAVERA

JUDGEMENT

(1.) AN interesting question of law on the power of the Income-tax Officer to disallow any portion of the interest the asses-see has paid on the borrowing for the purpose of business under Clause (iii) of Section 36(1) of the Act arises on the facts of the case.

(2.) THE assessee is a registered firm and its original assessment for the assessment year 1972-73 was completed allowing certain amount of interest paid by the assessee on its borrowing for the purpose of business. Later, the Revenue audit pointed out that some of the moneys which the assessee has borrowed have been utilised for the advance of loans to a private limited company known as Savera Hotels (P.) Ltd., hereinafter referred to as the hotel, and on such lending no interest was charged by the assessee. THE Income-tax Officer, therefore, pointed out that the money borrowed to the extent of the money advanced to the hotel was not put to business purpose and, therefore, the corresponding interest attributable to such lending should be taken as if the money was not borrowed for business purpose and the interest should be disallowed. THE Income-tax Officer, on receipt of the audit objection, issued a notice under Section 148 of the Income-tax Act and called upon the assessee to file the return. In the reassessment proceedings initiated by the Income-tax Officer, the Income-tax Officer indicated that he would disallow a sum of Rs. 72,769 towards interest. THE assessee objected to the disallowance on the ground that in the accounts of the partners there was enough credit balance and the amount advanced to the hotel should be regarded as having come out of the money standing to the credit of the partners. THE assessee also pleaded that the partners instead of directly advancing the money to the hotel, advanced the money through the medium of the firm, which in effect meant that it was the partners' advance. THE Income-tax Officer, in the reassessment proceedings, held that the three partners of the assessee-firm were also the directors of the hotel and there wa's no interest due from the hotel to the credit of the profit and loss of the assessee-firm and, therefore, he held that a sum of Rs. 72,769 being the interest arrived at at the rate of 10 per cent, on the average balance should be disallowed.

(3.) FURTHER there is no finding by the Income-tax Officer or the Appellate Assistant Commissioner that the money borrowed has been spent for non-business purposes. The addition made by the Income-tax Officer was on the basis that the money advanced to Savera Hotels (P.) Ltd., should carry notional interest of 10 per cent, and in that view he disallowed the amount of Rs. 72,769. The Appellate Assistant Commissioner held that the advance to Savera Hotels (P.) Ltd., would have come proportionately out of the own funds as well as borrowed funds is not based on any principle of law. There is no finding even by the Appellate Assistant Commissioner that the money borrowed by the assessee was actually diverted for non-business purposes. In the absence of any clear finding both by the assessing authority and the appellate authority and in the absence of any such finding by the Appellate Tribunal we have to hold that the Income-tax Officer was not justified in disallowing the sum of Rs. 72,769 or by the Appellate Assistant Commissioner a sum of Rs. 30,063.