The Allahabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the interest paid to legal heirs of deceased partners could not be disallowed if the TDS had already been deducted.
The appellant Savla Agencies, has filed an appeal regarding disallowance of interest paid to the legal heirs of the deceased partners. The Assessing Officer had disallowed the claim of interest payment to the legal heirs of the deceased partners Chetan Savla.
Tanmay Sadh, on behalf of the assessee submitted that, once the partner of the firm expired, he ceases to be a partner and consequently the credit balance in the capital account of the partner is treated as loan and the interest on such loan is an allowable deduction.
He further claimed that the AO had disallowed the claim of the assessee only on the ground that the assessee has passed the entry only at the end of the financial year transferring the amount from the capital account of Chetan Savla to the loan account in the name of the legal heirs. He also pointed out that once the partner expired, the credit balance in the capital account would be converted into the loan account and therefore, the interest payment on the said amount was an allowable claim.
A.K. Singh, appeared for the revenue.
The Bench allowed the appeal and held that, legal heirs on this amount which was in the nature of loan and the interest was already subjected to TDS under section 194A of the Act, the same could not be disallowed.
A single Bench of Vijay Pal Rao (Judicial Member) observed that,
“The AO has made the disallowance by considering the entries made on 31st March, 2011 without considering the fact that after the death of the partner of the firm this amount ceases to be the credit in the capital account of the partner and consequently takes the character of loan from the deceased partner / legal heirs of the deceased partner. The capital introduced by a partner of the partnership firm is always for business purposes and it is not an amount which is kept with the partnership firm only for earning the interest because it was also the need of the partnership firm for doing the business by utilising the said amount”.
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