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assessee havesuch a division which accepted deposits from the publicThe amounts so deposited by the public were withdrawn by the partners and invested in other sister concerns which were doing business in financeThe partners, on their advances from the assessee-firms, paid 12% interest to the assessee-firms. The assessee-firms, on deposits from the public, paid 5 to 12 percent interest to such depositors. The assessee claimed set off, of the expenditure, being the interest paid to the depositors, under Section 37(1) of the Income Tax Act, 1961 [for brevity "IT Act"] and there was only a negligible profit which was returned as income from the business of finance so carried on by the assessee. it is found that the advance received by the partners and investment made in other sister concerns is a mere camouflage. On that basis, the assessees were found to have earned interest income far in excess of that received by it from the partners., on enquiry, found the interest received by comparable financial institutions and computed the income accrued in the hands of the assessee-firms at the average of 20%.This addition was made to the income and there was a dis-allowance of the expenditure claimed by way of interest payment to the public who had deposited amounts with the assessee-firms. The first appellate authority sustained the addition to the income; but, however, deleted the expenditure claimed.necessarily the expenditure by way of interest paid to the public who had deposits with the assessee-firms was to be allowed under Section 37 of the IT Act was the finding; with which we agree on principle. Court ruled that advances obtained by the partners were not in the nature of business carried on by the assessee and, hence, there could be no claim of business expenditure insofar as the interest paid to the depositors, the public.The order of the AO disallowing the expenditure on interest paid to the depositors is sustained on the grounds herein above mentioned as distinguished from the view taken by the AO.

Shanti Prime Publication Pvt. Ltd.

Section 37, 40 of Income Tax Act, 1961—Allowance of interest paid—In the instant case, appeal is preferred by revenue and question is that Whether, The ITAT is right in allowing the interest paid on deposits which were not taken for the purpose of business of the assessee, as a deduction u/s.37(1)?

Held that—The assessee also debited its capital account and corresponding credit was given to the account of the college. It then availed of an overdraft facility of ₹ 5.5 lakhs from an account maintained for business purposes and disbursed it to the college. The balance was treated as a loan availed by the assessee from the College. The assessee paid interest to the bank on the overdraft and to the college for the loan, which was claimed as business expenditure. The overdraft facility was held to be not availed for business purposes and the so called loan from the college was held to be the assessees' own funds. Here too there was no business in finance carried on by the Firms and the partners had merely taken advances from the firm, the application of which was not the concern of the firm.

We, hence, find that the advances obtained by the partners were not in the nature of business carried on by the assessee and, hence, there could be no claim of business expenditure insofar as the interest paid to the depositors, the public. We, hence, answer the other questions of law framed against the assessee and in favor of the Revenue. We delete the order of the Tribunal insofar as the allowance of interest expenditure under Section 37. The order of the AO disallowing the expenditure on interest paid to the depositors is sustained on the grounds herein above mentioned as distinguished from the view taken by the AO. The appeals would stand partly allowed.[COMMISSIONER OF INCOME TAX, KOTTAYAM VERSUS M/S. MUTHOOT PROPERTIES AND INVESTMENTS] [2018] 5 ITCD Online 107 (KER)