The Income Tax Appellate Tribunal, Bengaluru, last week held that if a partner is receiving interest upon the capital contributions made by him to the partner firm, then it is not liable to be taxed under the provisions of the Income Tax Act, 1961.
Here, in this case, the assesse, S.P. Hombanna was a partner at Soundarya Constructions. During the relevant year, the partnership firm borrowed a loan of Rs.11,45,607 earlier from him as capital earlier. He received a remuneration of Rs.9,87,295/- which was according to the clauses of the partnership agreement that entitled the partners an interest of 18% on their capital. This interest was earlier allowed for deductions by previous Assessing officers until 2010 when this remuneration so received by him was found by the Assessing officer to be liable for deduction.
The bench, consisting of Jason P. Boaz and Shri Lalit Kumar, was unconvinced by the assesse’s efforts to prove that the aforementioned remuneration was not the one received by him according to partnership clauses. Section 28 of the income tax act, which carries the heading of income from “profits or gains of business or profession” was held by the bench to be the appropriate provision for taxing such incomes received by the assessee.
The bench noted that the benefit of section 36 of the Income Tax Act cannot be granted to the assessee as there is no correlation or nexus between the capital contribution and the remuneration.
“For the purposes of invoking Section 36, it is essential that the amount of interest paid was in respect of the capital borrowed for the purpose of business or profession. Further interest-earning clause for the capital contribution is different from the remuneration of the partners. Hence it cannot be said that the partnership income had been earned only on account of capital contribution made by the partner or it was dependent upon capital contribution by the partners,” the bench said.
Read the full text of the Order below.
