M/S.PUNNON BANKERS,CHENGANNUR vs. THE ITO, THIRUVALLA

Per CHANDRA POOJARI, AM:

These two appeals filed by the assessee are directed against the different orders of the CIT(A), Kottayam dated 02/07/2019 and pertain to the assessment years 2012-13 and 2013-14.

2. Since the issues involved in these two appeals are similar in nature, they were heard together and are being disposed of by this common order.

I.T.A. Nos.521&522/Coch/2019

3. The assessee has raised common grounds of appeal except for variance in figures:

1. The CIT(A) is not justified in sustaining the addition made in respect of the disallowance proportionate interest paid on the partner’s current account debit balance of Rs.90,36,108/-.

2. The authorities below erred in disallowing the proportionate interest of Rs.10,33,714/- on the presumption that interest bearing funds are drawn by partners for their personal us. Your appellant contended that the debit balance was due to the total of brought forward losses of the earlier years of the firm.

3. The authorities below failed to notice that the balance amount of Rs.12,13,750/- after brought forward losses of earlier years was the only amount utilized for non business purpose even after production of audited final accounts for those years and it is submitted that your appellant had given proper convincing explanations and statements to prove the claim that the disallowance is not in order and also the debit balance in the current account mostly represents the carried forward of loss for earlier years which the authorities below did not considered judicially is not at all justifiable.

4. In view of the above and any other ground urged at the time of hearing, it is prayed that the assessment made may please be deleted in full.

4. At the time of hearing, the Ld. AR did not press Ground No. 2 and hence, Ground No. 2 is dismissed as not pressed.

5. The next Ground No. 3 is with regard to disallowance of Rs.10,33,714/- being interest to the partners.

6. The facts of the issue are that on verification of the balance sheet filed by the assessee tor the Assessment year 2012-13 it was seen that the capital account of the partners showed a credit balance of Rs.3,61,35,429 whereas the current

I.T.A. Nos.521&522/Coch/2019 account of the partners showed debit balance of Rs.90,36,108/- before crediting the current years share of loss. While completing the assessment an amount of Rs. 39,15,808/- being interest on capital computed @12% on days as per clause 5 of partnership deed was allowed u/s 40(b). However no interest was charged on debit balance in the partner's current account. Since the amount shown in the current account was not used for business purpose during the previous year, the interest in proportion to the interest allowed u/s should have been disallowed in view of the Section 36(1)(ii) of the I.T. Act.

6.1 The assessee was requested to explain as to why there cannot be a proportionate disallowance of interest to account for over-drawing by partners vide letter dated 25/04/2017. The assessee explained that the amount of Rs.90,36,108/- represented brought forward losses for the years from the financial years 2002-03 to 2010-11 of Rs.78,22,358/- and the balance of Rs.12,13,750/- was the only amount drawn by the partners other than for business purpose during the previous year relevant to Assessment year 2012-13. However, while recording in the books of account and also in the balance sheet as on 31.03.2012, the said brought forward losses of earlier years was wrongly shown as drawings of partners by the accountant. Thus, the interest to be disallowed u/s 36(1)(iii) for utilization of fund, other than business purpose, on Rs 12,13,750/- @12%i was only Rs.1,45,650/- and which may be set off against the loss of Rs 3,29,763/- allowed to be carry forward vide assessment order dated 26.02.2015 for the Assessment year 2012-13.

I.T.A. Nos.521&522/Coch/2019 6.2 The explanation filed by the assessee was not accepted by the Assessing Officer siince an amount of Rs.39,15,808/- being interest on capital computed @12% on days as per clause 5 of partnership deed was allowed u/s 40(b) and no interest was charged on debit balance in the partner's account, a proportional disallowance to the interest allowed u/s. 40(b) should have been disallowed in view of the Section 36(1)(iii) of the Income-tax Act 1961. Amount involved is Rs 10,33,714/- which is worked as under.

7. On appeal, before the CIT(A), the Ld. AR argued that the debit balance shown in the current account represents the accumulated losses and therefore, cannot be treated as withdrawal by the Partners. The CIT(A) was of the view that interest to partners has to be allowed as per the clauses in the Partnership Deed subject to the provisions of section 40(b) of the Act. On perusal of the Partnership Deed of the Appellant, the CIT(A) found that the clause relating to the allowance of interest reads as under:

NOW THIS DEED WITNESSETH as follows:

I.T.A. Nos.521&522/Coch/2019

7.1 From the Partnership Deed, the CIT(A) found that the Partners are eligible for interest receipt @ 12% on the balance in Capital account as well as Current account. Therefore, it was apparent that total balance with Capital and Current account put together has to be considered for computation of interest payment to Partners. According to the CIT(A), there was no clause for exclusion of Current account for computation of interest in the Partnership Deed. Hence, the CIT(A) held that the computation of interest payment made by the Assessing Officer was in accordance with the Partners’s Deed. Therefore, the disallowance of Rs.10,33,714/- made by the Assessing Officer was upheld.

I.T.A. Nos.521&522/Coch/2019