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Income Tax Appellate Tribunal, “D(SMC
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-2, Chennai in dated 12.12.2017 for assessment year 2005-06
M/s. GRNVS Builders, a firm, claimed interest receipts from the deposits held in various banks as business income and adjusted the interest expenditure incurred towards partners capital account, consequently admitted a nill income.
During the assessment, the AO held that the interest received from bank deposits has to be assessed as an income from “other sources” only and hence the assessee’s claim of interest expenditure towards partners capital account was denied. Aggrieved, the assessee filed an appeal before the ld. CIT(A) and the Ld. CIT(A) dismissed the appeal.
Aggrieved against the order of the Ld. CIT(A), the assessee filed this appeal pleading that the interest paid is deductible against the income of the firm irrespective of whether the income is assessable under the head “business” or “other sources”. The Ld. CIT(A) erred in stating that interest received would not form part of “book profits” of the partnership firm. The Ld. CIT(A) failed to appreciate the fact that the interest from the deposits arose out of funds contributed by the partners and hence, the interest paid to the partners in accordance with partnership deed is an allowable expenditure etc.
At the time of hearing, the Ld. AR relied on the ITAT decision reported in CIT vs J.J. Industries (2013) 35 taxmann.com 103 (Guj) and pleaded that the tribunal held that for the purpose of ascertaining such ceiling on the basis of book profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income u/s. 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable
:- 3 -: deduction the partners u/s. 40(b) of the Act. Per contra, the Ld. DR supported the orders of the lower authorities.
We heard the rival submissions and gone through the relevant material. It is seen from the paper book furnished by the assessee that the sources of funds are at Rs. 37,51,791/-, comprising partners capital at Rs. 2 lakhs, partners current account at Rs. 30,19,424/- and unsecured loan of Rs. 5,32,367/-. Out of which, the deposits and advances lying with various banks are at Rs. 35,56,837/-. Thus, it is clear from the books of account that the entire interest from the impugned deposits arose out of partners funds. The facts being so, when the assessee paid interest on the capital contributed by the partners in accordance with partnership deed, it is an allowable deduction. Further, we are of the view that the decision relied on by the assessee, supra, is also applicable to the facts of this case and hence the assessee is entitled to claim the interest expenditure. The AO shall allow accordingly.
In the result, the assessee’s appeal is allowed.
Order pronounced on Tuesday, the 30th day of October, 2018 at Chennai.