Interest on Partner's Capital Not Restricted to Business Start Date: ITAT Deletes ₹1.83 Lakh Disallowance [Read Order]
Observing that the Income Tax Act does not limit the deductibility of interest paid to partners based on the business commencement date, the Tribunal deleted the disallowance.
Interest - Partner's Capital - Restricted - Business Start Date - ITAT - Disallowance - taxscan
Interest - Partner's Capital - Restricted - Business Start Date - ITAT - Disallowance - taxscan
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) deleted an addition of ₹1,83,248 and held that the Assessing Officer (AO) was incorrect to restrict the allowance of interest paid to partner's capital merely because the partnership firm commenced its operations part-way through the financial year.
Meenakshi Traders (assessee), a partnership firm, had paid interest on the capital contributed by its partners and claimed the full amount as a deduction for the Assessment Year 2017-18. During rectification proceedings under Section 154 of the Income Tax Act, the Assessing Officer noted that the firm's business operations only commenced on October 26, 2016.
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Based on this date, the AO restricted the interest allowance only to a five-month period, thereby disallowing a sum of ₹1,83,248. Aggrieved by the AO’s order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) confirmed the addition.
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Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The counsel argued that the relevant provisions of the Income Tax Act governing the allowance of interest paid to partners do not impose any restriction tied to the date of business commencement.
The Counsel for the assessee submitted that the interest was calculated on the capital balance as on March 31, 2017, the last day of the financial year, and was therefore fully allowable.
The two-member bench, comprising S.S.Viswanethra Ravi (Judicial Member) and Ratnesh Nandan Sahay (Accountant Member), considered the arguments and reviewed the partner's ledger accounts. The Tribunal noted that the interest was paid on the capital to the respective partners as on the last day of the financial year.
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The bench concluded that the restriction of interest only for five months based on the date of business operations was not justified. The tribunal ruled that the law permits the deduction of interest paid on partner’s capital irrespective of the commencement date of the business and deleted the disallowance of ₹1,83,248. The appeal filed by the assessee was allowed.
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