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Facts
The assessee, a partnership firm operating Hotel Luciya Palace, filed its income tax return for AY 2018-19 declaring Nil income. The Assessing Officer completed the assessment with an addition of Rs. 7,54,397, disallowing interest expenditure on the grounds that the firm had diverted interest-bearing funds to its partners for personal use. This addition was confirmed by the CIT(A).
Held
The Tribunal found that both the AO and CIT(A) failed to adequately examine the true nature of debit balances in the partners' accounts and ascertain if interest-bearing funds were indeed diverted. Consequently, the Tribunal remanded the matter back to the Assessing Officer for a fresh examination and reconsideration, ensuring the assessee is given a reasonable opportunity of being heard.
Key Issues
Whether the disallowance of interest expenditure by the assessee firm, on the premise of diversion of interest-bearing funds to partners' personal accounts, is justified without a thorough examination of the origin and nature of the debit balances in the partners' accounts.
Sections Cited
143(3A), 143(3B)
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Income Tax Appellate Tribunal, “SMC” BENCH, COCHIN
Before: Shri Inturi Rama Rao
O R D E R This appeal filed by the assessee is directed against the order of the National Faceless Assessment Centre / Commissioner of Income- tax (Appeals) [“CIT(A)” for short] dated 12.03.2024 having DIN & Order No.ITBA/NFAC/S/250/2023-24/1062459140(1) for the assessment year 2018-2019.
The brief facts of the case are that the assessee is a partnership firm engaged in the business of running of a hotel by the name and style as Hotel Luciya Palace. The return of income for the assessment year 2018-2019 was filed on 17.09.2018 declaring Nil income. Against the said return, the assessment was completed by the Assessing Office, i.e., Deputy Commissioner of Income-tax, Circle 1(1) & TPS, Thrissur (“the AO” hereinafter) vide order dated 2nd March, 2021 passed u/s.143(3A)
. Kanichaiys Enterprises. & 143(3B) of the Income-tax Act, 1961 (“the Act” hereinafter) at a total income of Rs.7,54,397. While doing so, the AO made an addition by disallowing interest expenditure by holding that the assessee firm had diverted interest bearing funds to the partners for personal use.
Being aggrieved by the above assessment order, the assessee filed an appeal before the CIT(A) contended that no disallowance of interest is warranted, inasmuch as, during the year under consideration no drawings were made by the partners. Further, there is an overall decrease in the net debit balance or overdrawn debit balance in the partners current account and the debit balances in the partners current account is also due to losses incurred in earlier years.
Being aggrieved by the order of the CIT(A), the assessee is in appeal before us in the present appeal. When the appeal was called for, none appeared on behalf of the assessee despite due service of notice, however, filed written submission. Therefore, I proceed to dispose of the appeal on merits.
The learned Sr.DR relied upon the orders of the lower authorities.
I have heard the learned Sr.DR and perused the material available on record. The only issue that arises for my consideration is whether the disallowance of interest on the ground that the assessee firm had diverted interest bearing funds to the partners account is justified. The AO had made an addition by disallowing the interest expenditure by holding that the assessee firm had diverted interest bearing funds to the personal account of the partners of the firm. It appears that the AO has . Kanichaiys Enterprises. merely carried away by the debit balances appearing in the partners account without thoroughly examining how the debit balances in the partners capital account had arisen. Even the CIT(A) also merely confirmed the action of the AO without examining the true nature of the debit balances of the partners account. The CIT(A) also not dealt with the contention of the assessee that no drawings were made by the partners of the firm and the debit balance in the partners account had arisen only because of earlier years share of loss of the firm. Therefore, I am of the considered opinion that the matter requires to be remanded to the file of the Assessing Officer, with direction to examine the debit balances of the partners account and find out whether the interest bearing funds had been diverted to the partners account or not. Needless to say, the AO shall allow a reasonable opportunity of being heard to the assessee, before passing any order.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on this 06th day of February, 2025.