The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, while upholding the deletion of addition made under section 68, held that partners are entitled to the interest on their loan accounts with the firm, at rates as prescribed under the Income Tax Act, 1961.
The aforesaid observation was made by the Delhi ITAT, when an appeal was preferred before it by the Revenue, as against the order dated 28.10.2019, of the Commissioner of Income Tax (Appeals), New Delhi (CIT(A)), and Cross Objection bearing No. CO 132/Del/2020 filed by the assessee, pertaining to Assessment Year (AY) 2014-15.
The ground of the Revenue’s appeal being the question as to whether, on the facts and in the circumstances of the case, the CIT (A) has erred in deleting the addition of Rs, 29,80,649/- made by the AO, to the income of the assessee, on account of disallowance out of amount claimed under the head ‘interest paid to partners’ in P&L account, ignoring the fact that partnership deed filed does not mention or authorize about the payment of any interest to partners, the brief facts of the case were that the assessee was a firm of six partners, engaged in the business of trading of apparels, who had e-filed its return for the AY 2014-15, on 30.11.2014 ,declaring the income of Rs. 25,08,170.
After the initial processing of the return under Section 143(1) of the Income Tax, 1961, the case was selected for complete scrutiny through CASS. Thereafter, statutory notice was served, in response to which details / information called for, were submitted by the assessee, as were examined by the Assessing Officer (AO).
During the assessment proceedings, the AO perused the details of unsecured loans and found that interest of Rs. 29,80,679/- has been paid to the partners from whom the firm had obtained unsecured loans but tax had not been deducted at source therefrom. And on query, the assessee explained that it was not required to deduct TDS in view of the provisions of section 194A(3)(iv) of the Income Tax Act.
The explanation was however, not acceptable to the AO, who disallowed the said interest debited to P&L account, observing inter alia that, the interest payment to partners is not authorised by the deed of partnership. He, therefore, made the disallowance under Section 40(b)(ii) and added to the income of the assessee.
The AO also found that the assessee had debited Rs. 1,49,968/- to P&L account, under the head ‘interest and penalties. And, since the assessee had itself disallowed Rs. 27,559/-, the AO disallowed Rs. 1,22,409/- under section 37(1) of the Income Tax Act, being not an allowable deduction.
The AO also found that the assessee had declared profit of Rs.3,46,50,000/- from sale of land/building, based on which, he required the assessee to show cause as to why the said profit be not considered as credits under section 68 as no detail has been submitted.
In reply, the assessee stated that TDS under section 194IA had been deducted on the amount of sale consideration received and that the payment had also been accepted through banking channel. He therefore added that the deal is genuine and that it calls for no addition.
The AO however, did not accept the explanation and added Rs. 3,46,50,000/- to the income of the assessee, under Section 68 of the Income Tax Act and disallowed 1/10th out of expenses debited to P&L account, observing that the possibility of personal use cannot be ruled out, which resulted in disallowance of Rs. 2,46,358/- out of claim of Rs. 24,63,580/- under the head ‘Misc. Expenses’ and disallowance of Rs. 6,73,368/- out of claim of Rs. 67,33,677/- under the head “Travelling and Conveyance”. The disallowance thus, aggregated to Rs. 9,17,726/- out of total claim of Rs. 91,97,257/-under the aforesaid two heads of account.
Accordingly, the Ld. AO computed the total income of the firm at Rs. 4,11,80,980/- on 27.12.2016 under Section 143(3) of the Income Tax Act.
The assessee preferred an appeal before the CIT (A), who deleted the disallowance of Rs.29,80,679/-, being interest paid to the partners to the firm; deleted addition of Rs.3,46,50,000/- made by the AO under section 68 of the Income Tax Act; restricted the disallowance to Rs. 74,785/- out of Misc. Expenses claimed at Rs. 2,46,358/-; sustained 10% disallowance out of tour and travel expenses claimed at Rs. 18,60,985/-, thereby allowing the rest of the claim under other heads of expenses. And, it is being aggrieved by the by the deletion of disallowance of interest of Rs. 29,80,679/- paid to the partners; deletion of addition of Rs. 3,46,50,000/- under section 68 of the Act and allowing by the CIT(A), of long-term capital loss of Rs. 9,770/- instead of short-term capital gain computed by the Ld. AO in remand report, that the Revenue has preferred the instant appeal before the Delhi ITAT.
With, Shri Sumit Kumar Verma, the Sr. DR, having supported the order of the AO, Sh. Mohit Gupta, CA, Sh. Neeraj Singh, CA, Sh. Nitin Sharma, CA, the ARs on behalf of the assessee, relied and supported the finding of the CIT(A) and drew ITAT’s attention to the submissions contained in the Cross Objection filed by the assessee before the Tribunal.
Hearing the opposing contentions of both sides, and thereby perusing the materials available on record, the ITAT observed:
“We have carefully considered the rival contentions and perused the records. We observe that the Ld. AO disallowed the assessee’s claim of interest payment to the partners for two reasons, namely non-deduction of TDS and non-authorisation of interest payment to partners by the deed of partnership. The Ld. AO rejected the contention of the assessee that as per section 194A(3)(iv) income credited or paid by a firm to a partner fall outside the ambit of the provision of sub-section (1) of section 194A without assigning any reasons at all. He made the impugned disallowance on flimsy ground ignoring that deed of partnership filed before him was incomplete which fact has been verified by the Ld. CIT(A) from the assessment record. Instead of obtaining complete set of deed of partnership from the assessee during assessment proceedings, the Ld. AO chose to make the impugned disallowance on the basis of missing para 10 to 18 of the deed of partnership and the last page thereof. This is not fair.”
“The assessee was clearly denied the opportunity of producing the complete set of deed of partnership during assessment proceedings. The assessee made an application under rule 46A of the Income Tax Rules, 1962 for filing complete set of deed of partnership (copies at pages 75 to 83 of the Paper Book) which the Ld. CIT(A) rightly admitted as additional evidence. Para 10 thereof mentions that the partners shall be entitled to interest on their loan accounts with the firm at such rates as are prescribed under the Act. In this view of the matter, we hold that the Ld. CIT(A) was perfectly justified in deleting the impugned disallowance”, the coram of Shamim Yahya, the Accountant Member, and Astha Chandran, the Judicial Member added.
Thus, the ITAT held:
“We, therefore, decline to interfere and uphold the order of the Ld. CIT(A) on the issue and reject these ground No. 2 and 3 of the Revenue. In the result, the appeal of the Revenue stands dismissed.”
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