R.K. Industries Unit II LLP Vs ACIT (ITAT Ahmedabad)
AO Looked Only at Debits, Ignored Credits—Tribunal Restores Commercial Reality; Partners’ Drawings ≠ Borrowed Fund Diversion When Own Funds Exceed Needs; Non-Cash Loss Cannot Shrink Capital: ITAT Deletes Rs.2.88 Cr 36(1)(iii) Disallowance
Assessee, engaged in ship recycling, declared income of Rs.7.69 crore. AO completed assessment u/s 143(3) making a major disallowance of Rs.2,88,13,592 u/s 36(1)(iii) alleging diversion of overdraft funds for partners’ personal withdrawals. AO held that debit balances of two partners indicated use of borrowed funds, ignored Assessee’s claim of substantial interest free funds & relied only on overdraft utilisation pattern. CIT(A) upheld disallowance, treating withdrawals as non-business & holding that Assessee failed to use own funds for overdraft reduction.
Before Tribunal, Assessee demonstrated through audited figures that interest free funds—partners’ capital, current liabilities & trade payables—were over Rs.2,06 crore at opening & over Rs.2,09 crore at closing, far exceeding partners’ drawings. Tribunal noted that negative capital balances arose only due to a prior-year non-cash diminution entry of Rs.31.63 crore, already disallowed in tax computation, meaning real capital remained substantially positive. Day-wise fund analysis also showed availability of interest free funds on each withdrawal date. Tribunal held that when mixed funds exist & interest free funds exceed withdrawals, presumption applies that such drawings come from own funds as per Reliance Utilities, Torrent Financiers & Xebec Exports. AO failed to establish nexus between borrowed funds & drawings; CIT(A) ignored crucial judicial principles & misapplied precedents. Tribunal deleted entire disallowance of Rs.2.88 crore & treated remaining grounds as consequential. Appeal allowed.
