The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) has held that the claim of interest paid to the firm on overdrawn capital is an allowable business expense.
Bhawneshwar Kumar, the assessee challenged the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [NFAC], Delhi, dated 22.06.2021 wherein action of the CIT(A) in the sustenance of penalty amounting to Rs.46,634/- under section 271(1)(c) of the Income Tax Act, 1961.
The assessment was completed u/s 143(3) vide order dated 08.12.2015, wherein the assessed income was determined at Rs.5,76,381/- against the returned income of Rs.NIL. During the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed loss from business and profession at Rs.15,25,972/- and the same was adjusted against income under the head “income from house property” and salary income.
The Assessing Officer held that salary and interest are allowable bythe partnership deed as well as in terms of Section 40(b) of the Act and the adjustment of a loss of interest paid to the partnership firm is not allowable against salary income and income from house property. The CIT(A) upheld the findings of the Assessing Officer holding that the assessee cannot agitate the issue by filing an appeal as he has lost his right to file the appeal by agreeing to the proposed addition during the assessment proceedings.
It was contended by the counsel for the assessee, Shri Lalit Takyar that the same flows from the partnership deed wherein the assessee receives interest from the firm, the same is offered as business income, and where the assessee pays interest to the firm on overdrawn capital, the interest is claimed as an allowable business expense.
It was stated by Smt. Priyanka Dhar, counsel for the revenue that there was a clear-cut finding in the penalty order that the assessee has deliberately and consciously furnished inaccurate particulars of income and relied on the order of the lower authorities.
A Single member Coram consisting, of Shri Vikram Singh Yadav, AM viewed that the assessment and penalty proceedings are independent proceedings and the AO has to arrive at an independent finding as to why the matter calls for levy of penalty u/s 271(1)(c) of the Act. The claim of interest paid by the assessee to the partnership firm where the assessee is a partner and from where the assessee also draws the remuneration.
It was held that as there has been a delay in filing of the return of income, the AO is well within his right to restrict the carry forward of the net loss so claimed by the assessee and the claim set off under the same head of income against other heads of income during the year under consideration, the assessee is well within his rights to claim the same.
The Tribunal directed to delete the penalty levied under section 271(1)(c) and the appeal of the assessee was allowed.
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