ACIT, FARIDABAD vs. M/S. INDO INDUSTRIAL ENGINEERS, FARIDABAD

With this appeal, the Revenue has challenged the correctness of the order of the Commissioner of Income Tax (Appeals) – Faridabad dated 30.01.2015 pertaining to assessment year 2007-08.

The first grievance of the Revenue relates to the deletion of the disallowance of Rs. 43.80 lakhs made by the Assessing Officer on account of interest on borrowing qua interest free advances and second grievance of the revenue relates to the deletion of disallowance of Rs. 12 lakhs on account of salary payable to partners.

Briefly stated, the facts of the case are that return filed on 09.10.2007 declaring total income of Rs. 4.90 crores was assessed u/s 143(3) of the Act vide order dated 07.12.2009 at a total income of Rs. 5.40 crores.

Subsequently, the Assessing Officer came to the know that the assessee has paid substantial amount of interest on borrowings made by it amounting to Rs. 1.53 crores on which the Assessing Officer has made an addition of Rs. 6.84 lakhs. The Assessing Officer further found that the assessee had made investment in land amounting to Rs. 3.79 crores and during the course of survey proceedings, the investment of Rs. 3.65 crores was surrendered by the assessee. Assessment was reopened by issue of notice u/s 148 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'.

During the course of assessment proceedings, the Assessing Officer observed that the assessee is paying interest on borrowings and had debited interest amount of Rs. 1.53 crores whereas the amount of Rs. 3.65 crores is lying with the partners and utilised by them on which no interest has been charged. The Assessing Officer accordingly computed the disallowance of interest @ 12% on Rs. 3.65 crores and made addition of Rs. 43.80 lakhs.

Proceeding further, the Assessing Officer found that the assessee has charged partner’s remuneration at Rs. 48 lakhs whereas as per the partnership deed, the salary payable to partners was at Rs. 36 lakhs. The Assessing Officer according disallowed excess remuneration of Rs. 12 lakhs. The assessee carried the matter before the ld. CIT(A) and explained that the assessee firm was having sufficient interest free funds in the firm in the partner’s capital and, therefore, the investment of Rs. 3.65 crores in the property was not out of borrowed funds and, therefore, there is no question of any disallowance of interest.

In so far as the disallowance on account of remuneration is concerned, it was brought to the notice of the ld. CIT(A) that the remuneration of Rs. 48 lakhs has been paid as per amended partnership deed and inadvertently the Assessing Officer has considered the pre-amended partnership deed where the remuneration to partners was at Rs. 36 lakhs.

After considering the facts and submissions, the ld. CIT(A) found that the assessee firm was having sufficient capital in the name of the partners on which interest on capital has been paid on the opening balance of the capital. The ld. CIT(A) further found that net profit for the year under consideration was more than the amount found to be invested in the property in the name of the partners. Therefore, disallowance of interest was deleted.

The ld. CIT(A) further found that the remuneration paid to partners was as per amended partnership deed wherein it has been specifically mentioned that the partner’s remuneration shall be Rs. 48 lakhs per annum. The ld. CIT(A) directed for deletion of addition of Rs. 12 lakhs.

Before us, the ld. DR strongly stated that though the assessee has claimed that the investment in property in the names of partners was out of withdrawals made from the firm, but there is no mention of withdrawals in the partners capital account. Therefore, it cannot be said that the investment comes out from the partners own capital fund.

It is the say of the ld. DR that since Rs. 3.65 crores was paid to the partners and yet interest has been paid on their capital account, without debiting the withdrawals in the respective capital account the assessee has utilised interest bearing funds for non business purposes and, therefore, the Assessing Officer has rightly disallowed proportionate interest. In so far as the disallowance of remuneration is concerned, the ld. DR accepted that the disallowance was made as per pre-amended partnership deed.

We have given thoughtful consideration to the orders of the authorities below. There is no dispute in so far as the surrender of Rs. 3.65 crores is concerned. It is not in dispute that the investment found in the properties at the time of surrender was offered for taxation. The bone of contention is that if the said amount has come out of partner’s capital account, then the interest bearing funds appears to have been utilised for making interest free withdrawals by the partner. We do not find any merit in such allegation by the AO. We find that the partner’s capital account as on 31.03.2002 clearly shows sufficient funds to meet out the investment of Rs. 3.65 crores. Moreover, the net profit for the year under consideration credited in the respective capital account totals to Rs. 4.92 crores, which itself, is sufficient to cover the investment. The AO has not brought on record anything to establish direct nexus between the interest bearing funds and their utilisation by partners in personal capacity. Considering the facts in totality, we do not find any reason to interfere with the findings of the CIT(A). Accordingly, Ground No. 1 is dismissed.

In so far as Ground No. 2 is concerned, the undisputed fact is that the AO has inadvertently considered the pre-amended partnership deed wherein the remuneration to partners was provided at Rs. 36 lakhs. We find that in the amended partnership deed, the remuneration to partners is at Rs. 48 lakhs and the same has been claimed by the assessee and is, therefore, allowable. It is not the case of the AO that the partner’s remuneration is not as per the provisions of section 40(b)(v) of the Act. Accordingly, no interference is called for. Ground No. 2 also stands dismissed.

In the result, the appeal of the revenue in is dismissed.