SAGAR CORPORATION,MUMBAI vs. ACIT CIR 33(3), MUMBAI

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ITA 3184/MUM/2019Status: DisposedITAT Mumbai01 July 2021AY 2013-144 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the lower authorities erred in disallowing interest under Section 36(1)(iii). The aggregate partners' capital balances were positive and increased, indicating no diversion of funds for non-business purposes.

What were the facts?

The assessee firm debited interest expense, but the Assessing Officer noted a partner had negative capital balances. The AO disallowed interest, believing funds were used for drawings without charging interest on them.

What were the issues?

Whether interest expense is disallowable under Section 36(1)(iii) when a partner has a negative capital balance but the firm's aggregate capital is positive and increasing.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 234A,Section 234B,Section 234C,Section 271(1)(c)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “G” BENCH, MUMBAI

Before: HON’BLE SHRI C.N. PRASAD, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM

For Appellant: Shri Vimal Punmiya – Ld. AR
For Respondent: Shri T.S. Khalsa-Ld. Sr. DR

आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

1.

Aforesaid appeal by assessee for Assessment Year [in short referred to as ‘AY’] 2013-14 contest the order of Ld. Commissioner of Income-Tax (Appeals)-45, Mumbai, [in short referred to as ‘CIT(A)’], Appeal No. CIT(A)-45/AC-33(3) /ITA-390/2016-17 dated 28/04/2016 on following grounds: - “1. On the facts and in the circumstances of the case and in law the Ld CIT(A) erred in confirming the addition of Rs.8,42,922/- on account of disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.

2. The Ld. CIT(A) erred in confirming the charging of interest under section 234A, 234B and 234C of the Income Tax Act 1961.

3.

The Ld. CIT(A) erred in confirming the initiation of the penalty proceeding under section 271(1)(c) of the Income Tax Act 1961.”

As evident, in ground no.1, the assessee is aggrieved by confirmation of disallowance u/s.36(1)(iii) for Rs.8.42 lacs. Rest of grounds are either premature or consequential and hence, dismissed.

2.

We have carefully heard the rival submissions and perused relevant material on record including documents placed in the paper- book. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.

3. The material facts are that the assessee being resident firm was assessed u/s 143(3) on 18/03/2016 wherein impugned disallowance was made. The disallowance stem from the fact that during assessment proceedings, it was noted by Ld. AO that one of the partners of the firm i.e., Shri Ashok Kumar Bagia had negative opening as well as closing capital balance of Rs.44.80 Lacs & Rs.71.47 Lacs respectively. The firm debited interest expense of Rs.66.39 Lacs. Accordingly forming a belief that interest bearing funds were utilized for drawings and since no interest was charged on partner’s drawings, Ld.AO proceeded to make disallowance u/s.36(1)(iii). The same was computed at Rs.8.46 Lacs in para-4 of the assessment order. The action of Ld. AO, upon confirmation by Ld. CIT(A), is in further challenge before us. The Ld. CIT(A), inter-alia, opined that there was diversion of business funds for non-business purpose which justify disallowance u/s 36(1)(iii).

4.

Upon perusal of assessee’s financial statements as placed on record, we find that the assessee firm has two partners viz. Shri Ashok Kumar Bagla & Smt. Kiran Bagla. On Aggregate basis, the partners’ have positive balances during AYs 2011-12, 2012-13 & 2013-14. In fact, the capital balances have improved from Rs.14.62 Lacs during AY 2012- 13 to Rs.15.58 Lacs during AY 2013-14 which would show that there is an increase in partners’ capital balances during this year as against the allegation of Ld. AO that business funds were used for drawings. As per partnership deed, the assessee has neither paid interest on partner’s credit balance nor charged interest on drawings. There is no diversion of funds for non-business purpose which is evident from assessee’s Balance Sheet as placed on record. Even otherwise, share of profit of Rs.42.29 Lacs have accrued to Shri Ashok Bagla at year end which could be assumed to have arisen uniformly throughout the year. Therefore, in our opinion, lower authorities have erred in invoking the provisions of Sec.36(1)(iii) on the facts and circumstances of the case. By deleting the impugned addition, we allow ground no.1.

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