The Bangalore bench of income tax appellate tribunal has recently held that a firm is not taxable for interest on borrowed capital paid to partners when the same is already taxed from partners under Section 28(v) of the Income Tax Act, 1961.
Section 28(v) of the Income Tax Act provides that any income by way of interest, salary, bonus etc. received by a partner from the partnership firm shall be chargeable to tax under the head profits and gains from business or profession.
Assessees Century Shelters and Century Silicon City are partnership firms in Real Estate business and carry on the business of buying, selling and developing immovable property. Their assessment order was framed under Section 143(3) of the Income Tax Act disallowing the interest on borrowed capital paid to the partners by these firms.
Further the AO has also noted that the firm and its partners are separate entities for the purpose of taxation; and therefore, regardless of an amount being offered as income in the hands of partners, expenditure is not allowable in the hands of the firm has to be disallowed. Thus the assessing officer disallowed the interest expenditure of Rs 4,80,00,000/- and passed the impugned assessment order.
Aggrieved assessee filed appeal before CIT(A). The CIT(A) upheld the decision of the assessing officer therefore assessee filed second appeal before the tribunal.
Sheetal Borkar, the counsel for the assessee submitted that if at all any disallowance has to be made in the hands of the firm, the same cannot be taxed in the hands of concerned partners.
K. Sankar Ganesh, the counsel for the revenue supported the contentions of the lower authorities.
The Two-member bench of tribunal comprising Chandra Poojari, Accountant Member and Anikesh Banerjee, Judicial Member allowed the appeal filed by the assessee and observed that what is allowed in the hands of these assessees under Section 40(b)(iv) of the Income Tax Act Act as a deduction, same to be taxed in the hands of the respective partners under Section 28(v) of the Act and directed the AO to allow the deduction to the extent of limit prescribed in Section 40(b) of the Income Tax Act.
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