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Facts
The assessee, Paltex, appealed an order from the CIT(A)/NFAC for AY 2013-14. The grounds of appeal concerned the AO's treatment of a loan as business income, disallowance of interest expenses on partner's capital, and disallowance of interest on unsecured loans.
Held
The Tribunal held that the addition of Rs. 2.50 lakhs as unexplained credit was deleted as the assessee proved identity, creditworthiness, and genuineness. The consequential interest disallowance of Rs. 19,333/- was also allowed. Grounds relating to interest on partner's capital and unsecured loans were restored to the AO for fresh examination.
Key Issues
Whether unsecured loans and interest thereon were correctly treated by the AO and CIT(A), and if disallowance of interest expenses on partner's capital was justified.
Sections Cited
68, 40(b), 57(iii), 36(1)(iii), 28(v), 71
AI-generated summary — verify with the full judgment below
PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of Ld. CIT(A)/NFAC dated 23.12.2024 for assessment year (AY) 2013-14. The assessee has raised following grounds of appeal:
“1. The AO erred in treating Rs. 2,50,000/- as business income which was received as loan. As well as disallowing interest expenses of Rs. 19,333/-.
2. The AO erred in disallowing the interest on partners capital of Rs. 5,69,325/-.
3. The AO erred in disallowing interest expenses of Rs, 4,76,026/- which was against the unsecured loan utilised for loan given against which interest has been received.
General ground about to add or amend the grounds of appeal.
Rival submissions of both the parties have heard and record perused. The learned Authorised Representative (ld. AR) of the assessee submits from the assessee has raised three grounds of appeal, first grounds of appeal relates to addition under section 68 of ₹ 2.50 lakhs, in treating unsecured loan from Anjana Prajapati as unexplained cerdit. The lower authority has treated unsecured loan as unexplained credit only for the reasons that complete bank statement of lender pertaining to credit entry was not furnished.
Second addition relates to disallowance of interest expenses paid to partners of assessee-firm of ₹ 5,69,325/-. And third addition/disallowance relates to interest paid on unsecured loans. In support of ground No.1, the ld AR of the assessee submits that the assessee has filed complete copy of bank statement of lender and also filed application for seeking permission to file additional evidence. The assessee could not file such relevant copy of bank statement of credit entry, due to inadvertent. The additional evidence is necessary for proper determination of issue and keeping in view of natural justice, additional evidence may be taken on record and considered for adjudication of ground No.1. Once, identity, creditworthy and genuineness if proved, addition under section 68 is not justified.
In support of ground No.2, the ld AR of the assessee submits that assessee is a partnership firm, paid interest to its partner to the extent of ₹ 5,69,325/-, which was disallowed by assessing officer on the ground that it was claimed under the head income from ‘other sources’ in instead of business income. The interest was paid to its partner in accordance with section 40(b). The payments of interest was authorised by the partnership deed, rate of interest was within 12% per annum which is permitted, and such interest was paid only after execution of partnership deed. The interest was paid for retaining working capital to meet the business contingencies, administrative expenses and statutory obligations. Even in absence of business receipts, such expenses qualify under the doctrine of business experiences. In without prejudice submission, it was submitted that if the said interest is not allowed under section 57, it ought to be allowed as a business loss under profit and gains from business and the resultant the loss be eligible for set-off against income from ‘house property’ and income from other sources under section 71. The partners have offered such interest income in their individual income and paid due tax thereon. Therefore, in substance, there is no loss to revenue. The provisions of section 36(1)(iii) are not applicable to the interest on partners capital, rather, such payments are to be governed exclusively by section 40(b).
In support of such submission the learned AR of the assessee relied upon the decision of Pune Tribunal in Quality industries Versus JCIT (183 TTJ 350). In other alternative submission, the learned AR of the assessee submits that as per provisions to section 28(v), if the interest amount is disallowed in the hands of the firm, necessary downward adjustment must be made in the hands of partner, to avoid the double taxation. Thus, allowability of interest in the hands of firm is tax neutral or results into marginal tax.
Hence the disallowance of ₹ 5,69,325/- is unsustainable and in law and merits deletion.
Similar disallowances was made in assessment year 2012-13, against which appeal is pending before ld CIT(A).
4. Ground No. 3 relates to disallowance of interest on unsecured loans of ₹ 4,76,026/-. The learned AR of the assessee submits that assessee had claimed deduction of interest paid on unsecured loans amounting to ₹ 4,76,026/-. The said loans were utilised for giving advances, on which interest income of ₹ 4,69,383/-was duly offered under the head income from ‘other sources’. The entire interest income of ₹ 4,69,383/- is directly traceable to the advances funded out of the unsecured loans. There is no other source of funds available with the firm, except partner’s capital, and hence, nexus of borrowed funds and the loans advanced is evident. The details of interest and expanded along with the letter conformation accounts have been filed in the paper book. The disallowance was made mechanically without appreciating the financials in the holistic manner. Even otherwise, if there was no turnover during the year, the interest payments qualify under section 57(iii) as being for the purpose of earning taxable income. Thus, the disallowance of ₹ 4,76,026/- is liable to be deleted in full.
On the other hand, learned Senior Departmental Representative (ld. Sr. DR) submits that he supports the order of AO and ld. CIT(A) on all the grounds of appeal. On the admission of additional evidence on ground No1, for filing complete details of bank statement of credit/ lender, the learned Senior DR for the revenue submits that assessee has not shown sufficient ground in its application, whether it fulfils the conditions of Rule 27 of Income Tax (Appellate Tribunal) Rule-1963. Unless and until, the assessee fulfilled conditions of Rule-27(supra), the assessee is not eligible for admission of additional evidence. So far as merit of addition of loan amount, which the subject matter of ground No.1, the learned senior DR for the revenue submits that assessee failed to furnish any evidence about the creditworthy of lender thus, the assessing officer and the CIT(A) were fully justified in making an confirming the addition. On the other remaining two grounds of appeal the learned senior DR for the revenue submits that he fully supports the reasoning given by lower authorities.
6. I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I also deliberated on various case laws relied by ld. AR of the assessee. Firstly, I am considering the admission of additional evidences filed by the assessee in support of grounds No.1. I find that the Assessing Officer (AO) made addition of unsecured loan and confirmed by ld CIT(A) by taking view that the assessee has not furnished the copy of complete bank statement lender showing credit entry.
Now before me, the assessee has filed copy of bank pass book of creditor namely Anjana D Prajapati showing the debit entry in the name of assessee-firm. Thus, the relevant debit entry in the bank pass book is essential evidence to prove the transaction of loan. Copy of bank statement is self-explanatory and is duly attested by partner of the assessee-firm, thus, keeping in view of the facts that such evidence is essential for complete adjudication of the issue under consideration, hence, the additional evidence furnished by the assessee is admitted for consideration.
Now turning to the merit of the ground, I find that lower authority has treated unsecured loan as unexplained credit only for the reasons that complete bank statement of lender pertaining to credit entry was not furnished. On considering the details of bank statement of lender, I find no cash was deposited soon before debit entry of Rs. 2.50 lacs in favour of the assessee. The identity of lender was not disputed; the assessee has paid interest to the lender. Payment of interest in disallowed for the reasons that loan was added. Moreover, the amount is not huge, and the lender was having sufficient credit in her bank account. Thus, in my view the assessee has proved identity, creditworthy and genuineness of the credit. Hence, the addition of Rs. 2.50 lacs is deleted. Once the addition of loan is deleted, the interest disallowance of Rs. 19,333/- which is consequential, the same is also allowed. In the result, ground No.1 of the appeal is allowed.
So far as ground No. 2 is concerned, I find that the assessing officer disallowed such interest expenditure under the income from other sources. As there was no business income of assessee-firm, thus, the assessee claimed such interest expenses against the income from ‘other sources’. The ld CIT(A) upheld that action of assessing officer by taking view that there is no business turnover. Before me, the ld AR of the assessee vehemently urged that the interest was paid to its partner in accordance with section 40(b). The payments of interest was authorised by the partnership deed, rate of interest was within 12% per annum which is permitted, and such interest was paid only after execution of partnership deed. The interest was paid for retaining working capital to meet the business contingencies, administrative expenses and statutory obligations.
Even in absence of business receipts, such expenses qualify under the doctrine of business experiences. I find that copy of partnership deed is filed before me, which duly authorise the interest of partner’s capital; however, the lower authorities have not examined such facts as the assessee mixed up this issue with the issue of other interest paid against other loans. No doubt that the assessee is eligible for interest expenses, if it was paid for retaining working capital to meet the business contingencies, administrative expenses and statutory obligations, but such stand was not taken before lower authorities.
So far as other alternative submission lf ld AR of the assessee is concerned, that if the said interest is not allowed under section 57, it ought to be allowed as a business loss under profit and gains from business and the resultant the loss be eligible for set-off against income from ‘house property’ and income from other sources under section 71, even such contention is also raised for the first time before Tribunal. In find that other interest expenses of Rs. 4,76,026/- which is subject matter of ground No.3. The lower authorities disallowed such expenses by taking view that no nexus is proved by the assessee. Before me, the ld AR of the assessee submitted that entire interest income of ₹ 4,69,383/- is directly traceable to the advances funded out of the unsecured loans. It was also argued that there is no other source of funds available with the firm, except partner’s capital, and hence, nexus of borrowed funds and the loans advanced is evident. The details of interest and expanded along with the letter conformation accounts have been filed in the paper book. I find that lower authority not allowed both the interest expenses for the want of nexus and relevant evidence, therefore, I deem it appropriate to restore both the grounds that is ground No. 2 & 3 to the file of assessing officer to examine both the interest disallowance as per the submissions of assesse recorded hereinabove. Needless to direct that before passing the order afresh, the assessing officer shall allow reasonable opportunity to the assessee. The assessee is also directed to provide all the necessary evidence to substantiate its claim. In the result, grounds No. 2 & 3 are allowed for statistical purpose.
In the result, the appeal of the assessee is partly allowed.