ITAT Jaipur Orders Daily Computation of Interest on Partners’ Debit Balances

TW Ventures LLP Vs DCIT (ITAT Jaipur)

Borrowed Funds for Group Shares and Partners’ Withdrawals: Commercial Expediency Must Be Proved, Interest Must Be Computed Daily

Background of the Dispute

The assessee, formerly known as Truworth Stone Care LLP, carried on the business of floor maintenance of hotels. It filed its return declaring income of ₹66,02,230.

The AO noticed substantial interest expenditure alongside investments of ₹1,69,50,000 in unlisted group-company shares and debit balances in partners’ capital accounts. The assessee claimed that the investments served business expansion through acquisition of controlling interests and were financed from partners’ capital and profits.

Rejecting this explanation, the AO disallowed interest of ₹6,37,700 on investments and ₹16,23,125 on partners’ debit balances, totalling ₹22,60,825, at 12%. The CIT(A) confirmed the disallowance.

Commercial Expediency Requires Factual Examination

The Tribunal explained that section 36(1)(iii) permits interest on capital borrowed for business purposes. Applying S.A. Builders Ltd. v. CIT(A), the relevant question was whether the funds were deployed as a measure of commercial expediency.

However, deduction does not follow automatically merely because the recipient is a sister concern. The purpose of the transaction and utilisation of money require examination.

Accordingly, the Tribunal considered two questions: whether borrowed funds financed the investments and withdrawals, and, if so, whether a business justification had been established.

Own-Funds Presumption Failed Against the Ledgers

The partners’ aggregate capital opened with a debit balance of ₹22,33,998. At year-end, after crediting remuneration and the entire annual profit, net capital stood at ₹1,30,23,221, still below the share investments alone.

The presumption that investments from mixed funds are financed first from interest-free funds requires sufficient interest-free funds. That foundation was absent.

More decisively, the investment ledger showed payments from the Federal Bank cash credit account. Partners’ withdrawals were also largely routed through that account. The nexus with borrowed funds was therefore evidenced by the assessee’s own books.

The argument that unsecured loans increased only marginally was insufficient. The issue was utilisation of existing borrowings, not merely whether fresh loans had been obtained.

The Tribunal distinguished Hero Cycles, Munjal Sales Corporation and Jugal Kishore Dangayach, where sufficient own funds or other supporting circumstances existed.

Group Connection Did Not Establish Business Purpose

The assessee claimed that the shares were acquired to obtain controlling interests and expand its business. However, it produced no evidence establishing the shareholding acquired, actual control obtained or a business connection supporting the expenditure.

The ledgers disclosed purchases of existing shares between group entities. No fresh capital reached the companies whose businesses were said to have benefited. This undermined the contention that those companies had utilised the investment money for their business.

The Tribunal also referred to Indian Shavings Products Ltd. v. CIT, a Rajasthan High Court decision sustaining interest disallowance in the circumstances considered there.

The investment-related disallowance was consequently upheld in principle, subject to recomputation.

Earlier Acceptance and Closing Credits Offered No Protection

The assessment for the preceding year had accepted the returned income without discussing this issue. The Tribunal held that Radhasoami Satsang’s consistency principle required an earlier factual determination of the relevant fundamental aspect.

No such finding existed. Moreover, ₹1,39,50,000 of the investments had been made during the year under appeal.

For partners’ withdrawals, the ledgers revealed payments towards personal credit card dues, land purchase and an air ticket, without any demonstrated connection to the LLP’s business.

Some accounts became credit balances only towards year-end, following fresh contributions or credit of remuneration and profit. These closing adjustments did not explain away debit balances during the year. The challenge to disallowance on principle therefore failed.

Daily Computation Directed with Credit-Period Set-Off

The Tribunal nevertheless found that the CIT(A) had not addressed the assessee’s alternative calculation.

For partners, interest must be computed on daily capital-account balances, allowing set-off for periods when an account remained in credit. During those periods, the LLP was using the partner’s interest-free money, which required recognition in the computation.

For investments, the assessee’s calculation began only on 21 December 2015 and omitted interest attributable to the opening investment of ₹30 lakh for the earlier period.

The AO was directed to recompute both components at the undisputed 12% rate, include opening investments from 1 April 2015 and provide reasonable opportunity of hearing. The appeal was partly allowed for statistical purposes. Only quantum was remanded; liability in principle remained upheld.

Author’s Comments

The decision shows why commercial expediency needs supporting evidence. A group relationship or assertion of acquiring control cannot substitute for documents demonstrating the commercial objective and benefit.

Equally, purchasing existing shares does not inherently exclude a business purpose. Here, the absence of evidence establishing control or business connection was decisive, alongside the unsupported claim about utilisation by the investee companies.

The useful computational ruling is that credit periods cannot be ignored while charging interest on debit periods. However, the remand does not grant the assessee’s proposed reduction automatically: omitted opening investments must also enter the calculation.

Cases Discussed

• Hero Cycles (P.) Ltd. v. CIT (Supreme Court) — [2015] 379 ITR 347. Distinguished because the assessee in that case had sufficient own funds and reserves to cover the advances.
• CIT v. Jugal Kishore Dangayach (Rajasthan High Court) — [2014] 265 CTR 215. Distinguished because sufficient opening and closing capital, interest-free credits and business dealings existed in that case.
• Radhasoami Satsang v. CIT (Supreme Court) — [1992] 193 ITR 321. Distinguished regarding the principle of consistency, since the previous assessment had recorded no factual determination of the disputed issue.
• Munjal Sales Corporation v. CIT (Supreme Court) — [2008] 298 ITR 298. Distinguished concerning the availability of sufficient own funds to cover advances.
• S.A. Builders Ltd. v. CIT(A) (Supreme Court) — [2007] 288 ITR 1. Applied for the requirement to examine commercial expediency and the actual purpose and utilisation of borrowed funds.
• Indian Shavings Products Ltd. v. CIT (Rajasthan High Court) — [2004] 265 ITR 250. Relied upon regarding disallowance of interest on borrowings used for investments where business purpose was not established.

FULL TEXT OF THE ORIGINAL ORDER OF ITAT JAIPUR

1. This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax (Appeals) [Addl/JCIT(A)-1, Bengaluru] [hereinafter referred to as “the learned CIT(A)”] dated 30.12.2025 arising out of the assessment order dated 01.11.2018 passed by the Assessing Officer [ACIT, Circle-2, Jaipur] (hereinafter referred to as “the AO”) under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). The assessee was formerly known as Truworth Stone Care LLP and the assessment order was passed in that name.

2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 read as under:

“1. That on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in upholding rejection by the ld. AO plea of the appellant that investment of Rs. 169.50 lacs in unlisted shares of sister concerns have been made for business purpose and / or to acquire controlling interest therein and in further confirming disallowance of Rs. 6,37,700/- out of interest expenses claimed on this count.

2. That on the facts and in the circumstances of the case the ld CIT(A) is wrong, unjust and has erred in law in not accepting plea of the appellant that interest free advances to partners were given for business purpose on account of commercial expediency and in further confirming disallowance of Rs. 16,23,125/- out of interest paid on this count.

3. That without prejudice to the ground No. (2) above the ld. CIT(A) is also wrong and has erred in law in not accepting plea of the appellant that amount of Rs. 16,23,125/- calculated and disallowed by the ld. AO is also not correctly calculated.

4. That the appellant craves permission to add to or amend to any of the above grounds of appeal or to withdraw any of them.”

3. Briefly stated, the facts of the case are that the assessee, a limited liability partnership engaged in the business of floor maintenance of hotels, filed its return for the year under consideration on 16.10.2016 declaring an income of Rs 66,02,230. The case was selected for limited scrutiny. The AO noticed that the assessee had paid interest of Rs 47,22,517 on unsecured loans and Rs 2,53,596 to banks, while it held investments of Rs 1,69,50,000 in unlisted shares of group companies yielding no income, and its partners carried debit balances in their capital accounts for most of the year. The assessee explained that the investments were made in sister concerns in a similar line of business to acquire controlling interest, that they came out of the partners’ capital, and relied on S.A. Builders Ltd. v. CIT(A) [2007] 288 ITR 1 (SC). The AO did not accept the explanation. In paragraph 3.4 of the assessment order the AO observed:

“No prudent businessman will take loans on interest and give loans as interest free or made investments for no benefit. Therefore, it can be construed that the assessee has failed to prove business necessity as well as expediency of interest free advances to the partners on loans / advances given and investments in unlisted companies.”

4. Since the assessee paid interest at rates ranging from 12% to 18%, the AO computed the disallowance at 12% as under, and added Rs 22,60,825 to the returned income. The alternative working furnished by the assessee before the learned CIT(A), and again before us, is shown alongside:

5. The learned CIT(A) confirmed the disallowance. The operative finding in paragraph 4.4 of the impugned order reads:

“In the present case, the pattern of continuous debit balances of partners, lack of any business transactions with sister concerns, and absence of demonstrable benefit clearly indicate diversion of interest-bearing funds for non-business purposes. The Assessing Officer has also adopted a reasonable rate of 12% for computing proportionate disallowance, which is conservative and justified considering the actual interest rates ranged between 12% and 18%.”

6. Before us, the learned Authorised Representative (hereinafter referred to as “the learned AR”) relied on the written submissions dated 15.09.2026 and a paper book containing the ledger of investments, the partners’ capital accounts with interest workings, the audited accounts for F.Y. 2014-15 and 2015-16 and the assessment order for A.Y. 2015-16, all certified to have been filed before the authorities below. It was submitted that (i) unsecured loans rose only by about Rs 10 lakh during the year (from Rs 2,63,67,781.97 to Rs 2,73,31,891.09) and no fresh loan was raised, so neither the investments nor the partners’ withdrawals came out of borrowed funds; (ii) the investments of Rs 1,39,50,000 made between 11.01.2016 and 03.03.2016 were funded out of net fresh capital of about Rs 60 lakh brought in by the partners and the current year’s profit of Rs 1,13,08,734; (iii) the investments were in group companies, Truworth Impex Pvt. Ltd. being in a similar business and Truworth Corporation Pvt. Ltd. being the parent company, to acquire controlling interest, which is commercial expediency within S.A. Builders Ltd. (supra), Munjal Sales Corporation v. CIT [2008] 298 ITR 298 (SC) and CIT v. Jugal Kishore Dangayach [2014] 265 CTR 215 (Raj.); (iv) the AO wrongly left out the opening credit balance of Rs 28,07,422 of Smt. Anju Mundhra, so that the net opening debit of the partners was only about Rs 22.34 lakh, and in the assessment for A.Y. 2015-16 under section 143(3) of the Act no such disallowance was made, so the Revenue cannot take a different stand on the same facts; and (v) without prejudice, the AO’s computation is wrong, and the correct figures are Rs 11,02,040 for the partners and Rs 3,84,712 for the investments.

7. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the orders of the authorities below. It was submitted that the assessee was paying interest on substantial borrowings while its partners carried interest free debit balances and funds were locked in shares that earned nothing, and that no evidence of commercial expediency was produced at any stage.

8. We have heard both sides and perused the material on record, including the paper book. Section 36(1)(iii) of the Act allows interest paid in respect of capital borrowed for the purposes of the business. The settled test, laid down in S.A. Builders Ltd. (supra), is whether the borrowed money was applied as a measure of commercial expediency. The Hon’ble Supreme Court, however, cautioned that the deduction is not automatic and that the authorities must look at what the recipient did with the money. In paragraphs 30 and 35 of the judgment, it was held:

“30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done.”

“35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. …”

Two questions therefore arise: first, whether interest bearing funds went into the investments and the partners’ withdrawals, and second, if so, whether the assessee has shown commercial expediency.

Source of funds

9. The audited accounts in the paper book answer the first question. The relevant figures are:

The partners as a body began the year owing the assessee money. Even at the close of the year, after crediting remuneration of Rs 48,75,000 and the entire profit of the year, the partners’ capital of Rs 1,30,23,221 fell short of the investments alone. There were thus no interest free own funds at the beginning of the year, and not enough at its end, to cover the investments and the partners’ debit balances. The presumption that a mixed fund is first drawn from interest free funds, on which the assessee relies, presupposes that such funds exist in sufficient measure. That foundation is missing here.

10. The ledger of investments at pages 1 to 3 of the paper book shows that the payments for the shares bought during the year, beginning with Rs 18,00,000 on 21.12.2015 and followed by instalments of Rs 14,25,000 each between 11.01.2016 and 10.02.2016, were made from the assessee’s cash credit account with the Federal Bank. The partners’ capital ledgers at pages 4 to 13 similarly show that the amounts paid to the partners “on account” were largely drawn from the same cash credit account. The nexus between borrowed funds and the outgoings is therefore not a matter of inference; it is borne out by the assessee’s own books. The argument that unsecured loans rose only marginally during the year does not help the assessee. The question is not whether fresh loans were raised, but whether the existing interest bearing funds were used for purposes other than the business. The accounts for F.Y. 2014-15 show that in that year the partners withdrew Rs 4,45,60,914 against additions of Rs 3,02,59,032, turning their capital into a debit, while unsecured loans from others rose from Rs 1,38,31,197 to Rs 2,63,67,782. The debit balance carried into this year was thus itself financed by borrowings. The plea that the investments came out of the year’s profit fares no better. The profit is credited to the partners’ capital and has already been taken into account in the closing capital, which, as noted, remained below the investments. In Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347 (SC), the loans to directors were upheld because, in the words of paragraph 16 of the judgment:

“… it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors.”

The facts before us are the reverse. Similarly, in Jugal Kishore Dangayach (supra) the Hon’ble Rajasthan High Court noted in paragraph 12 that the assessee had “an opening capital of Rs. 1.42 crores at the beginning of the year and Rs. 1.88 crores at the end of the year”, besides interest free trade credits and customer advances, and had trade dealings with the recipient. In Munjal Sales Corporation (supra), as quoted in paragraph 20 of Jugal Kishore Dangayach (supra), the opening balance of Rs 1.91 crore and the profits of the year were held sufficient to cover a loan of only Rs 5 lakh. Those decisions turned on the availability of own funds. They do not assist an assessee whose own funds were negative.

Ground No. 1: investment in unlisted shares

11. Once the investments are traced to borrowed funds, the burden is on the assessee to show commercial expediency. The only explanation is that the investments were made in group companies to acquire controlling interest for the expansion of the assessee’s business. No material was placed before the AO, the learned CIT(A) or us to show the shareholding acquired, that any control was in fact obtained, or any business connection between the assessee and these companies. The same ledger shows that the shares of Truworth Impex Pvt. Ltd. were purchased from Truworth Corporation Pvt. Ltd., and the shares of Truworth Corporation Pvt. Ltd. were bought by a payment to Truworth Impex Pvt. Ltd. These were purchases of existing shares between group entities. No fresh capital reached the companies whose business is said to have been furthered. The submission that the sister companies used the money in their business therefore finds no support in the record. This is precisely the enquiry that paragraph 30 of S.A. Builders Ltd. (supra) requires, and on this record it goes against the assessee. The present case is also far removed from the situation contemplated in paragraph 35 of that judgment, where a holding company advances money to a subsidiary which uses it for business. Nothing on record shows that the assessee holds a controlling stake in either entity, or that the money went into the business of either of them. The Hon’ble Rajasthan High Court in Indian Shavings Products Ltd. v. CIT [2004] 265 ITR 250 (Raj.) declined to interfere with the disallowance of interest on borrowings used to acquire shares for controlling interest, observing in paragraph 7 that there was no justification “to pay huge amount of interest on the borrowings and advance the loan to its subsidiaries at free of interest”.

12. We have also considered the submission based on the assessment for A.Y. 2015-16. That order dated 14.09.2017, placed at pages 34 and 35 of the paper book, accepts the returned income without any discussion of the issue. The rule of consistency explained in Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) applies where a fundamental aspect has been “found as a fact one way or the other” in an earlier year. Paragraph 13 of that judgment reads:

“13. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”

No finding was recorded in A.Y. 2015-16. Moreover, Rs 1,39,50,000 of the investment of Rs 1,69,50,000 was made during the year under appeal. The principle of consistency is therefore not attracted. Accordingly, we uphold the disallowance under Ground No. 1 in principle. Its quantum is dealt with in paragraphs 14 and 15 below.

Ground No. 2: partners’ debit balances

13. The position is no different for the partners. The capital accounts show that Shri Rajesh Mundhra and Shri Rohit Mundhra began the year in debit, and that Smt. Anju Mundhra, though in credit at the start, was in debit for most of the year until amounts were credited towards its close. The second page of her capital ledger in the paper book shows that her account returned to credit only after Rs 40,00,000 was brought in on 22.03.2016 and 23.03.2016, and that her remuneration and share of profit were credited on 31.03.2016. The payments recorded on that page, including the settlement of her personal credit card dues, were made from the assessee’s cash credit account with the Federal Bank. The complete capital ledger of Shri Rajesh Mundhra, also in the paper book, shows that his account remained in debit throughout the year and turned to credit only on 31.03.2016, when his remuneration and share of profit were credited. The amounts debited to his account were paid from the assessee’s cash credit account or current account with the Federal Bank. They include payments of Rs 14,00,000, Rs 10,00,000 and Rs 6,00,000 made to a third party on his behalf, the last of which is described in the ledger as being “towards land purchase”, and a payment of Rs 1,08,125 to a travel agency for an air ticket. Nothing has been shown to connect these outgoings with the assessee’s business. Withdrawals by a partner from the firm are, by their very nature, for the partner’s personal purposes. No business purpose for allowing them free of interest was even suggested, beyond the general plea that they came out of profits and day to day cash flow, which, as found above, is not borne out by the accounts. The AO’s remark about the use of a BMW car by the partners was not the basis of the disallowance and needs no comment. Ground No. 2 is accordingly dismissed.

Ground No. 3 and the quantum of the disallowance

14. The assessee challenged the computation before the learned CIT(A) and filed its own working, but the impugned order does not deal with it at all. The AO’s working is not on record, and the reasons for the difference cannot be fully ascertained. A comparison of the assessee’s working with the ledgers in the paper book brings out two points. First, the assessee has worked out interest on the daily balance of each partner’s capital account and has set off the interest for the periods when the account was in credit. When a partner’s account is in credit, the assessee is in fact using the partner’s interest free money, and fairness requires that this be taken into account in a day to day computation. Second, the assessee’s working of Rs 3,84,712 for the investments starts only from 21.12.2015 and leaves out interest on the opening investment of Rs 30,00,000 from 01.04.2015 to 20.12.2015. That investment was held throughout the year and must form part of the computation. These are matters of verification from the books.

15. We therefore set aside the quantum of the disallowance under both Grounds No. 1 and 2 and restore it to the file of the AO. The AO shall recompute the disallowance at the rate of 12% adopted by him, which is not disputed before us. For the partners, the AO shall compute interest on the daily balances of each partner’s capital account, allowing set-off for the periods of credit balance. For the investments, the AO shall compute interest on the daily balance of the investment from 01.04.2015, including the opening investment of Rs 30,00,000. The AO shall verify the assessee’s working with the books of account and give the assessee a reasonable opportunity of being heard. Ground No. 3 is allowed for statistical purposes.

Ground No. 4 is general in nature and requires no adjudication.

16. In the result, the appeal filed by the Assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 08.10.2026