SHRI PRAFULLA DAYARAM PIPADA,,AHMEDNAGAR vs. INCOME-TAX OFFICER, WARD - 2,, AHMEDNAGAR

PER R.S. SYAL, VP :

This appeal by the assessee is directed against the order

passed by the CIT(A)-2, Pune on 21-11-2018 in relation to the

assessment year 2015-16.

confirmation of disallowance of interest paid on debit balance of

the assessee-partner’s capital account in the partnership firm.

individual who derived income from house property and interest.

During the course of assessment proceedings, the Assessing

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Officer (AO) observed that the assessee was a partner in M/s.

Pipada Motors, a partnership firm, from which remuneration of

Rs.9,98,358/- was received and to which interest of

Rs.20,94,755/- was paid on debit balance of the capital account

with the resultant net minus income from the firm at

Rs.10,96,397/-. Such negative income was adjusted against

income from house property etc. The assessee could not place

necessary documents before the AO, which led to the passing of

the assessment order u/s.144 of the Income-tax Act, 1961

(hereinafter also called `the Act’), in which deduction of interest

of Rs.20,94,755/- was denied. The matter was taken up before the

ld. CIT(A), but without success. Aggrieved thereby, the assessee

has come up in appeal before the Tribunal.

relevant material on record. The assessee has been a partner in

M/s. Pipada Motors, from which he received remuneration of

Rs.9,98,358/-. Because of excess withdrawals, the firm charged

interest of Rs.20,94,755/- from the assessee. The case of the

assessee is that interest paid to the firm should be allowed as

deduction in the same manner as the interest received from the

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firm is charged to tax u/s.28(v) of the Act. To put it differently,

once the receipt of interest from the firm is treated as `business

income’ chargeable u/s 28(v) of the Act without any other

consideration, the payment of interest to the firm should also be

treated as `business expenditure’ without any further

consideration because interest payment to firm is negative interest

income from the firm and both should be treated alike.

advanced on behalf of the assessee. Section 28(v) provides that :

“Any interest, salary, bonus, commission, remuneration by

whatever name called due to or received by a partner of a firm

from such firm” is treated as income falling under the head

`Profits and gains of business or profession’. The fact that interest

from a firm in which the assessee is a partner is charged to tax as

‘business income’, does not ipso facto leads to the conclusion that

interest paid to the firm on excess withdrawals should also be

automatically allowed as deduction under the same section by

treating it as the negative interest income. One needs to look at

the relevant provision for taxing an income or allowing a

deduction. Section 28(v) of the Act governs only the taxability of

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salary and interest income from firm. Au contraire, the

deductibility of interest is managed by section 36(1)(iii) of the

Act, which is a special provision. I am reminded of the legal

maxim generalia specialibus non derogant, which means that

special provision overrides general provisions. Once there is a

special provision dealing with the deductibility of interest

expenditure in terms of section 36(1)(iii), it is impermissible to

contend that section 28(v), covering interest income from firm,

should also be read to deal with interest expenditure paid to firm.

It is, ergo, held that the deductibility of interest under Chapter IV-

D is covered only under the express provision of section 36(1)(iii)

and has to pass through the mandate of this provision irrespective

of the fact that such interest is paid to the partnership firm in

which the assessee is partner or otherwise.

provides that the deduction shall be allowed for “the amount of

interest paid in respect of capital borrowed for the purposes of

business or profession”. This transpires that deduction of interest

under this head is permissible only if the capital is borrowed and

such borrowing is for the purpose of business. If the purpose of

5 ITA No.26/PUN/2019 Prafulla Dayaram Pipada

borrowing is non-business, the payment of interest on such

borrowing will go outside the ambit of section 36(1)(iii). A

hypothetical situation in the setting under which the case is

proceeding can be when an amount is withdrawn by a partner

from a partnership firm and such amount is utilized for personal

purpose, say, marriage etc. Interest paid to partnership firm on

such withdrawal will not qualify as business expenditure. The

test of user of funds for business purpose, enshrined under section

36(1)(iii), must be satisfied before becoming eligible for

deduction of interest paid to a partnership firm in which the

assessee is a partner, which is failing in this theoretical case.

CIT(A) on the raison d’etre that the amount withdrawn from the

firm was utilized for purchasing share in some running Hotel as

per the Purchase Agreement dated 28-06-2013, which was a

business purpose. The ld. CIT(A) relied on the proviso to section

36(1)(iii) of the Act and denied the deduction by observing that

no income from the hotel was shown by the assessee for the year.

interest paid in respect of capital borrowed for acquisition of an

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asset “for any period beginning from the date on which the

capital was borrowed for acquisition of the asset till the date on

which the asset was first put to use, shall not be allowed as

deduction”. This proviso makes a pitch for disallowance of

interest only when the asset acquired with the borrowed funds is

not put to use. In other words, no disallowance can be made if the

borrowed funds are utilized for acquiring an asset which does not

produce any income albeit it has been put to use. The relevant

criterion for disallowing interest is to examine the date up to

which the asset acquired with the borrowed funds was first put to

use. If the asset has been actually put to use, deduction of interest

cannot be denied even if no income resulted from such an asset.

The ld. CIT(A) has gone with the `income criterion’ and not the

`user criterion’ for disallowing the interest, which is not justified.

the running hotel in the year 2013. He, however, failed to place

any concrete evidence either before the AO or the ld. CIT(A) to

demonstrate the activities of the hotel as to whether it was really

in operation during the year. Similar position obtains before the

Tribunal as well. Since the assessment order was passed u/s.144

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and the assessee could not lead evidence before the authorities

below in this regard, I consider it expedient to remit the matter to

the file of the AO for examining the question of deductibility of

interest on the touchstone of the discussion made herein above.

Needless to say, the assessee will be allowed a reasonable

opportunity of hearing to put forth the relevant evidence in

support of his case.

Sd/- (R.S.SYAL) उपा�य�/ VICE PRESIDENT पुणे Pune; �दनांक Dated : 28th June, 2022 Satish आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent 2. 3. The CIT(A)-2, Pune 4. The Pr.CIT-1, Pune 5. DR, ITAT, ‘SMC’ Bench, Pune गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.26/PUN/2019 Prafulla Dayaram Pipada

Date 1. Draft dictated on 28-06-2022 Sr.PS 2. Draft placed before author 28-06-2022 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *