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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: Sh. Amit ShuklaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the revenue against the order of the ld. CIT(A)-27, New Delhi dated 08.08.2016.
2. Following grounds have been raised by the revenue: “1. The ld. CIT (A) has erred in law and on facts in deleting the addition of Rs.2,10,35,583/-.
The ld. CIT (A) has erred in law and on facts in not considering that the interest paid to others and its partners are not allowable as business expenditure u/s 37(1) of the Act as the assessee has used this colorable device to evade the taxes.
The ld. CIT (A) has erred in law and facts in not considering that the capital introduced by the partners has in fact no relation to income earned by the assessee as the assessee has been earning mainly royalty income from its franchises which are their associated concerns.”
2 Kamla Kant & Company 3. The brief facts of the case are that the assessee filed the return of income on 29.09.2011 declaring an income of Rs.22,62,64,270/- which has been assessed u/s 143(3) of the Income Tax Act, 1961 on income of Rs.24,79,85,714/- by making disallowance of interest paid to Partners & others of Rs.2,10,35,583/- and disallowance on account of advertisement expenses. The ld. CIT (A) deleted both the additions. The revenue is before us regarding the disallowance of interest paid to Partners.
Heard the arguments of both the parties and perused the material available on record.
The relevant facts required for the adjudication are as under: a) The partner capital account as on 31.03.2013 Name Opening Interest Remuneration Profit Total Balance as adjusted by deceased partner and Kamla 65092156 7751724 187500 71519681 144551062 143970490 Kant Chaurasia Kamal 93191527 9953202 187500 71519681 17451911 154271439 Kishor Chaurasia Smt. 64329701 3235872 0 13276108 80841681 0 Sudama Devi Chaurasia Total 222613385 20940798 375000 156315472 400244655 298241929 b. The debtors of the firm from which the firm earned royalty income are as under: i) KP Pan Flavours Pvt. Ltd. Rs. 82,47,967 ii) KP Pouches Pvt. Ltd. Rs. 18,07,879 iii) KAIPAN Pan Masala Pvt. Ltd. Rs.3,58,54,392
3 Kamla Kant & Company iv) Kay Pan Masala Pvt. Ltd. Rs. 4,91,21,325 Kay Pan Sugandh Pvt. Ltd. Rs. 32,43,457 v) vi) Rajshree Flavours Pvt. Ltd. Rs. 12,500 KP Fragrances Pvt. Ltd. Rs. 74,80,718 vii) viii) Kay Pan Sugandh Pvt. Ltd. Rs.5,50,97,585 ix) Kay Flavours Pvt. Ltd. Rs. 5,81,73,895 Total: Rs.21,90,39,718
The Assessing Officer held that the firm is adjusting their funds for the debtors and withdrawing the capital and hence the interest paid to the partners capital needs to be disallowed.
We have gone through the provisions of Section 36(1)(iii) of the Income Tax Act, 1961.
36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (iii) the amount of the interest paid in respect of capital26 borrowed26 for the purposes of the business or profession : [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset [***] (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause
Thus, a plain reading of the Act, entitles the assessee to claim deduction of interest on the partners capital, if the interest is payable, if there is a borrowing and that borrowing is for the purpose of the business. The only exception to debiting
4 Kamla Kant & Company of interest in P&L account is, if such capital is borrowed for acquisition of an asset or for extension of existing business and that too till such asset was first put to use. In the instant case, there is nothing on record to prove that the assessee’s case come under the purview of the provision of the Act. The balance sheet reads as under: Liability Asset Partners capital Rs.29,82,41,000/- Sundry debtors Rs.21,90,39,700/-
The sundry debtors arise in the normal course of business, hence it cannot be said that the partners capital is not utilized for the purpose of business. The interest on the capital borrowed from the partners by the firm is an allowable expense.
Further, the provisions of Section 28 are as under: 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (i) the profits and gains81 of any business or profession81 which was carried on by the assessee at any time during the previous year ; (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm : Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ;]
Thus, interest received on capital is taxable in the hands of the partner under Section 28. That means that interest is taxable under the head Profits or Gains of Business or 5 Kamla Kant & Company Profession. Such interest shall form part of the total income of the partner and taxable at normal slab rates.
A concurrent reading of Section 28(v), Section 40(b) and Section 36(1)(iii) and the facts of the case, the assessee in the instant case is entitled to claim the interest paid to the partners on the borrowed capital.
In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 28/02/2020.