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Facts
The assessee filed an appeal against an order confirming the disallowance of interest and remuneration paid to partners. The appeal was filed with a delay of 40 days, which was condoned by the Tribunal.
Held
The Tribunal held that the restriction of interest for 5 months was not justified as the business commenced in October 2016 and interest was paid on the last day of the financial year. Similarly, the disallowance of remuneration was not justified as there is no restriction on payment of remuneration to partners under section 40(b) of the Act.
Key Issues
Whether the disallowance of interest and remuneration paid to partners is justified, especially when the partnership firm commenced business and paid these amounts as per the accounting practices.
Sections Cited
143(3), 154, 40(b)
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Before: Shri S.S. Viswanethra Ravi & Shri Ratnesh Nandan Sahay
Year: 2017-18 Meenakshi Traders, Vs. The Income Tax Officer, 6, Second Main Road, New Colony, Non Corporate Ward 22(1) Chrompet, Chennai 600 044. Tambaram. [PAN:ABDFM9151E] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Ms.T.V. Muthu Abhiramani, Advocate ��थ� की ओर से/Respondent by : Ms. Sandhya Rani Kure, JCIT सुनवाई की तारीख/ Date of hearing : 17.09.2025 घोषणा की तारीख /Date of Pronouncement : 23.09.2025 आदेश /O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 12.03.2025 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2017-18.
We find that this appeal is filed with a delay of 40 days. The assessee filed an affidavit for condonation of delay stating the reasons. Upon hearing both the parties and on examination of the said affidavit, we find the reasons stated by the assessee are bonafide, which really prevented in filing the appeal in time. Thus, the delay is condoned and admitted the appeal for adjudication.
Ground Nos. 1 to 4 filed by the assessee are general in nature and requires no adjudication.
Ground Nos. 5 to 8 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the disallowance of a sum of ₹.1,83,248/- on account of interest paid to the partners in the facts and circumstances of the case.
At the outset, we note that the Assessing Officer allowed a sum of ₹.1,83,248/- paid on account of interest to partners in the original assessment proceedings under section 143(3) of the Act. Thereafter, the Assessing Officer disallowed the same under rectification order passed under section 154 of the Act. On perusal of the rectification order, we note that the Assessing officer restricted the interest only for 5 months. The ld. CIT(A) confirmed the same.
The ld. AR Ms. T.V. Muthu Abirami, Advocate drew our attention to paper book and argued that the said sum on account of interest paid to the partners are allowable though the partnership firm came into existence from 26.10.2016. The ld. AR submits that the restriction of payment of interest is not justified as the provision of Income Tax Act does not say so.
The ld. DR Ms. Sandhya Rani Kure, JCIT supported the order passed by the ld. CIT(A).
On perusal of the ledger account of the partners in the books of account regarding payment of interest, we note that the assessee paid interest on capital to the respective partners as on 31.03.2017 as interest is to be paid on the last day of the financial year. The Assessing officer made such disallowance taking into account the fact that the operation of the business was started from 26.10.2016 and restricted the interest for 5 months is not justified as rightly pointed out by the ld. AR. Therefore, the disallowance made by the Assessing officer and confirmed by the ld. CIT(A) towards payment of interests to the partners are deleted. Thus, the grounds raised by the assessee are allowed.
Ground Nos. 9 to 10 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the disallowance of a sum of ₹.4,45,000/- on account of remuneration paid to the partners, the ld. AR submits that the payment of remuneration to partners are not justified as provision of section 40(b) of the Act does not say so.
We find the computation of total income placed at page 29 of the paper book and as per book profit, the allowable remuneration to partners is at ₹.11,20,009/-, but, however, the assessee restricted its claim to ₹.6,95,000/-. We find the details of remunerations to partners at page 33 of the paper book and the total remuneration paid supports the claim of the assessee at ₹.6,95,000/-, but, however, it is observed that the maximum remuneration allowable on account of payment of remuneration to partners is ₹.7,62,005/-, even then the assessee restricted the remuneration to ₹.6,95,000/-. We find force in the argument of the ld. AR that there is no restriction of payment of remuneration to partners under section 40(b) of the Act. Therefore, the disallowance made by the Assessing Officer, which was confirmed by the ld. CIT(A), in our opinion is not justified and the addition made thereon is deleted. Thus, the grounds raised by the assessee are allowed.
In view of our decision on merits, the additional grounds filed by the assessee becomes infructuous.
In the result, the appeal filed by the assessee is allowed. Order pronounced on 23rd September, 2025 at Chennai.