TOM GEORGE,PALAKKAD vs. THE INCOME TAX OFFICER, WARD-1 & TPS, PALAKKAD

The brief facts of the case are that the assessee is a partner in the firm of M/s. Kizhakkeparambil Natural Rock Constructions LLP and filed his return of income on 06/09/2019. Subsequently, the case was selected for limited scrutiny under CASS and notices u/s. 143(2) and 142(1) were issued. The assessee had received a remuneration of Rs. 39,99,577/- from the firm and the interest of Rs. 42,37,308/- from the firm but not reported the said incomes in the return of income filed by him. Thereafter, a show cause notice was issued to the assessee. In response to the show cause notice, the assessee filed a letter on 17/12/2020 and submitted that the assessee had taken a loan from M/s. KLM Axiva Finvest for the purpose of investment in the firm and paid an interest of Rs. 60,13,337/- to the said finance company. The assessee had not submitted any details about the remuneration received from the firm and therefore the same was proposed to be added in the total income of the assessee.

In respect of the interest income received from the firm, it comes about Rs. 42,37,308/- which was not offered for taxation, the assessee submitted that the loan was taken from the finance company for the purpose of investment in the firm and paid the interest of Rs. 60,13,337/- and therefore the interest received from the firm is much lesser than the interest paid on the loan obtained from the finance company and therefore the said interest claimed was restricted to the interest income received from

As against the said order, the assessee filed an appeal before the Ld.CIT(A). The assessee had disputed the inclusion of the remuneration received from the firm as well as the excess interest expenses as income on the ground that the remuneration is an income from business / profession and therefore to earn the said income, the other expenditures incurred by the assessee would be eligible for set off. The assessee further contended that the assessee had taken a loan from the finance company after paying the interest at 18% and invested the said amount in the capital account of the firm and out of the said investments, the assessee had received the interest income from the firm and therefore the interest expenditure should be set off as against income earned by the assessee from the business / profession. The Ld.CIT(A) had not accepted the claim of the assessee since

As against the said order, the assessee is in appeal before this Tribunal.

At the time of hearing, the Ld.AR submitted that the AO had failed to consider the fact that the loan amount of Rs. 1,13,59,179/- was paid to two individuals for purchasing the lands in the name of the firm which was later on accounted in the assessee’s capital account and therefore the said amount is also eligible to be treated as capital contribution4 and consequently the interest paid on the said amount is also eligible for setting off against the interest income earned from the firm. The Ld.AR further submitted that the adoption of rate of interest at 12% as against the 18% paid by the assessee on the loan amount by the AO is also not correct since the section 40(b)(iv) prohibits the payment of the interest by the firm to the partners and not the payment of interest by the assessee on the loan amount borrowed by him and therefore the same yardstick could not be followed for the payment of interest on the loan amount. The Ld.AR further submitted that the AO had failed to consider the fact that the payment of Rs. 1,13,59,179/- was paid to the two sellers while purchasing the agricultural lands in the name of the firm and the said payments were taken into account in the capital account of the assessee and therefore the said payments are also towards the capital contribution and therefore the interest paid on the said amounts are also eligible for set off as against the interest received from the firm. The Ld.AR also relied on the orders of the Coordinate Bench and prayed to allow the appeal.

We have heard the arguments of both sides and perused the materials available on record.

In the present appeal, we found that the assessee is a partner in a firm and received the remuneration as well as the interest on his capital contributions. To contribute towards the capital, the assessee had also availed the loan from the finance company and paid the interest at 18%. The assessee had received the interest from the firm on his capital account at 12%. The assessee had submitted that the remuneration received by the assessee is also an income from the business or profession and also the interest received from the firm on the capital contribution is also an income from business or profession. As per section 28(v) of the Act, the remuneration received by the assessee from the firm is liable for taxation. The Ld.CIT(A) had considered the said issue and arrived a conclusion that the remuneration received from the firm is exempt in the hands of the assessee if the said amount is disallowed in the hands of the firm. Otherwise, the said remuneration is liable to be taxed under the caption of “Income from business or profession”. Before us, the assessee had not raised any grounds with regard to the remuneration received from the firm and therefore we have not expressed any opinion on the said income earned by the assessee from the firm.

Insofar as the set off of the interest, it is the case of the assessee that the assessee had obtained loan from the finance company and directly transferred a sum of Rs. 1,45,92,462/- as an investment in the form of capital and the balance Rs. 1,13,59,179/- was paid to the two sellers from whom the firm has purchased properties. The AO had not accepted the payments made to the said two sellers since the loan amount was paid to the two sellers and not directly to the firm’s capital account. Before us, the assessee had submitted the sale deed executed with the said two sellers on

Further, we are of the view that the interest calculated on the loan amount by the AO at 12% as against the interest at 18% levied by the finance company is also not correct. The Act does not restrict the interest paid on the loan amount equal to the interest earned from the firm on the capital account. Therefore while calculating the interest on the loan amount, we direct the AO to adopt the interest at 18% not at 12% as adopted by the AO in the assessment order.

In the result, the appeal filed by the assessee is partly allowed.