Loading judgment…
Facts
The assessee, a firm engaged in finance and money lending, filed its return for AY 2006-07 which was processed under Section 143(1). The assessment was later reopened under Section 147, and the Assessing Officer disallowed Rs.5,00,000/- paid as interest to partners, claiming it was not related to income derived by the assessee and not for business purposes. This disallowance was upheld by the CIT(A).
Held
The Tribunal found that the interest paid to partners was authorized by the partnership deed, within the permissible 12% limit under Section 40B, and was actually paid during the year as per the firm's cash basis accounting. The reasoning of the lower authorities, that the interest was not for business activity, was held to be unsustainable in law, and the addition was set aside.
Key Issues
Whether interest of Rs.5,00,000/- paid to partners as per partnership deed is an allowable deduction under Section 40B of the Income Tax Act, 1961, when lower authorities held it was not related to business activity and capital was not utilized for business purposes.
Sections Cited
143(1), 244A, 147, 143(2), 142(1), 40B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri Inturi Rama Rao & Shri Sonjoy Sarma
Assessment Years: 2006-07 Muthoot Bankers ITO, Ward-2, Aluva v. PMC.14/493-Z, Thuruthiyil Towers, M.C. Road, Perumbavoor- 683542. PAN : AAFFM5503K. (Appellant) (Respondent) Appellant by : Shri R Krishnan, CA Respondent by : Smt. Leena Lal, Snr AR. Date of Hearing : 03.06.2025 Date of Pronouncement : 13.06.2025 O R D E R Per Sonjoy Sarma: This appeal is filed by the assessee against the order dated 25.11.2024 by the CIT(Appeal, ADDl/JCIT(A)-4, Chennai (hereinafter referred to as ‘CIT(A)’] for the assessment year 2006– 07.
Brief facts of the case are that the assessee is a firm engaged in finance and money lending. The assessee has filed return of income for assessment year 2006-07 declaring total income of Rs.4,62,590/- and the return was processed u/s 143(1) of the Act and refund of Rs.6,830/- including interest u/s 244A of Rs.333. Subsequently, the Assessing Officer noticed that there was no Muthoot Bankers amount shown under partners’ capital a/c in the balance sheet and a credit balance of Rs.197,3999.85 was shown in partner’s current a/c. The Assessing Officer further observed that interest paid to partner amounting to Rs.5,00,000/- was not allowable since it was not in relation to income derived by the assessee. Thereafter, the assessment was reopened u/s 147 of the Act. The case was taken up for scrutiny by issuing notices u/s 143(2) and 142(1) of the Act. In response, the assessee submitted copies of partnership deed and agreement with M/s Muthoot Fincorp Ltd. The assessee had submitted that the firm is following cash system of accounting, where expenditure is claimed only when it is actually paid. Though Rs.52.82 lakhs was payable to the partner @12 p.a., thefirm paid only Rs.5,00,000/- due to lack of funds. The assessee relied on the decision of Mumbai Bench of the Tribunal in the case of ITO vs. MM Textiles (31 SOT 207). However, the Assessing Officer rejected the explanation and held that interst expenditure was not incurred in relation to income, therefore, disallowed Rs.5,00,000/- on account of interest paid to partners by assessing total income of the assessee at Rs.37,410/-.
Aggrieved by the above order, the assessee preferred an appeal before the ld. CIT(A) wherein the ld. CIT(A) upheld the Assessing Officer’s findings reiterating the absence of active business operation and unutilization of partners’ capital for business purposes.
Dissatisfied with the above order, the assessee is in appeal before us raising various grounds. However, the primary contention of the assessee is that the disallowance made by the Assessing Officer and sustained by the ld. CIT(A) is not correct and needs to be set aside. The ld. AR stated that the disallowance of Muthoot Bankers interest paid to partners was duly authorized by partnership deed and within permissible limit of section 40B of the Act. He submitted that act does not prescribe any condition that the capital introduced by the partners must be utilized exclusively for business purposes to allow interest u/s 40B, further the assessee earned business income by way of interest from M/s Muthoot Fincorp Ltd. to the tune of Rs.5026.56 for delayed settlement of sale consideration. The ld. AR reiterated that the firm is following cash system of accounting and non-receipt of agricultural income does not preclude the liability of the business expenditure if it had actually been paid in accordance with the deed. He also stated that the reasoning adopted by both lower authorities are wrong and the same may be set aside.
On the other hand, the ld. DR supported the decisions of lower authorities.
We, after hearing the rival submission and perusing the materials available on record, find that the only question has arisen to determine is whether the interest of Rs.5,00,000/- paid to partners as per partnership deed has actually been paid during the year is eligible u/s 40B of the act. We note that section 40B permits deduction to interest paid to the partners provided that it is authorized by the partnership deed not exceeding 12% with simple interest per annum. In the present case, the assessee paid interest in accordance with terms and conditions of the partnership firm and rate of interest did not exceed 12% p.a. and moreover the assessee-firm is following cash basis accounting and payment of Rs.5,00,000/- was actually made during the year. In view of the above, we hold that the reasoning adopted by the lower authorities disallowing interest paid to the partners solely on
In the result, the appeal of the assessee is partly allowed.
Order pronounced on 13.06.2025.