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Facts
The assessee, Star Plastics, is a partnership firm engaged in manufacturing and trading of PVC pipes. The Assessing Officer (AO) made additions for interest on partner's drawings and disallowed interest paid on capital. The assessee contended that withdrawals were made from interest-free funds, but failed to provide substantiating evidence.
Held
The Tribunal held that the material on record indicated partners had overdrawn from their accounts, and no interest was charged by the firm despite making substantial interest payments. The disallowance of interest on overdrawn amounts was justified, relying on the Allahabad High Court decision in Laxmi Ice Factory v. CIT.
Key Issues
Disallowance of interest on drawings made by partners from the firm's accounts.
Sections Cited
143(3) of the Income Tax Act, 1961
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI SONJOY SARMA, JM
Assessment Year: 2013-14 Star Plastics .......... Appellant II/285, Kanjani Road, Ayyanthole, Thrissur 680003 [PAN: AAKFS1090C] vs. ACIT, Circle - 2(1), Thrissur .......... Respondent Assessee by: Shri Harikrishnanunny, CA Revenue by: Smt. Leena Lal, Sr. D.R. Date of Hearing: 04.06.2025 Date of Pronouncement: 05.08.2025 O R D E R Per: Inturi Rama Rao, AM This appeal filed by the assessee is directed against the order of the National Faceless Appeal Centre, Delhi [CIT(A)] dated 20.05.2024 for Assessment Year (AY) 2013-14.
Brief facts of the case are that the appellant is a partnership firm engaged in the business of manufacturing and trading of PVC pipes, solvent cements, etc. The return of income for AY 2013-14 was filed on 12.11.2014 declaring total income of Rs. 6,40,51,982/-. Against the said return of income, the assessment was completed by Star Plastics the ACIT, Circle – 2(1), Thrissur (hereinafter called "the AO") vide order dated 15.03.2016 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) at total income of Rs. 6,85,10,450/-. While doing so, the AO made addition of interest paid on drawings of partner of Rs. 31,08,158/- and disallowance of interest paid on capital of Rs. 11,40,000/-. The AO was of the opinion that an amount of Rs. 2,23,60,847/- withdrawn by the partners from the current account with interest bearing funds, therefore, the appellant firm should have been charged interest. Accordingly, made addition of Rs. 31,08,158/-.
Being aggrieved, an appeal was filed before the CIT(A) contending that the withdrawals are made by the partners out of interest free funds available with the assessee firm. However, the CIT(A) rejected the above contention, as the appellant had failed to prove availability of interests free funds in the hands of the firm.
Being aggrieved, the appellant is in appeal before this Tribunal in the present appeal.
We have heard the rival contentions and perused the material available on record. The issue in the present appeal relates to the disallowance of interest on drawings made by the partners of the firm. The AO made the notional disallowance of interest on the excess drawings made by the partners. The contentions of the appellant that interest free funds were utilised for the purpose of Star Plastics drawings of the partners were not substantiated by producing necessary evidences. The material on record clearly shows that the partners have overdrawn from the account. No interest is charged while the firm itself makes substantial interest payments. Disallowance of interest on the amount overdrawn is justified. Reliance in this regard is placed on the decision of the Hon'ble Allahabad High Court in the case of Laxmi Ice Factory v. CIT [2005] 276 ITR 596. Thus the AO had rightly made disallowance of interest. We find no illegality or perversity in the orders of the learned lower authorities.
In the result, the appeal filed by the assessee stands dismissed.