What did the Tribunal hold?

The Tribunal upheld the disallowance of interest in the hands of the firm, as the supplementary deed was not registered. However, it directed the AO to verify if the partners' assessments were rectified to account for the disallowed interest, as per Section 155(1A) and CBDT Circular No. 636.

The assessee, a Limited Liability Partnership (LLP), paid interest to its partners. The Assessing Officer (AO) disallowed this interest payment because the supplementary partnership deed authorizing it was not registered. This disallowance reduced the loss disclosed by the firm.

What were the issues?

Whether interest paid to partners is deductible when the supplementary partnership deed is unregistered. Whether partners' assessments need rectification if interest is disallowed in the firm's hands.

Gadana Properties LLP. vs ITO | ITAT Chennai 2017

Income Tax Appellate Tribunal, ‘B’ BENCH: CHENNAI

Before: SHRI SANJAY ARORA & SHRI GEORGE MATHAN

Hearing: 14.11.2017Pronounced: 15.11.2017

आदेश / O R D E R

PER GEORGE MATHAN, JUDICIAL MEMBER:

Order of the Commissioner of Income Tax (Appeals)-2, Chennai, in dated 20.01.2017 for the AY 2012-13.

Mr.M.Palanichamy, JCIT represented on behalf of the Revenue and Mr.D.Anand, Advocate, represented on behalf of the assessee.

ITA No.711/Mds/2017 :- 2 -:

It was submitted by the Ld.AR that the assessee is a partnership firm under LLP being the Limited Liability Partnership. The same was constituted by Partnership Deed dated 25.06.2010. It was a submission that a Supplementary Partnership Deed amending the original LLP was created on 27.01.2011. It was a submission that however, the said Supplementary Deed was not registered. Consequently, the AO had disallowed the interest paid to the partners and consequently reduced the loss disclosed. It was a submission that the partners of the assessee’s firm had disclosed the interest in their returns and had paid taxes thereon.

It was a submission that in Circular No.636 of the CBDT dated 31.08.1992, Para Nos.48.1 & 48.2 in view of the explanation which had been added to Sec.10(2A), the remuneration of interest which is disallowed in the hands of the firm is not to suffer tax in the hands of the partners. It was a prayer that the AO may be directed to exclude the interest which has been offered by the partners in their respective hands and which has been disallowed in the hands of the firm in view of the provisions of Sec.155(1A).

In reply, the Ld.DR vehemently supported the order of the Ld.CIT(A) and the AO.

We have considered the rival submissions. Admittedly, in the hands of the firm, the AO has disallowed the interest paid to the partners to the extent of Rs.28,68,361/-. The AO has disallowed this amount in view of ITA No.711/Mds/2017 :- 3 -:

the provisions of Sec.40(b)(ii) on the ground that the same is not authorized by the Partnership Deed or any of the Supplementary Deeds which is registered. This has also been approved by the Ld.CIT(A). The assessee has been unable to show before us that the Supplementary agreement dated 25.01.2011 is a registered agreement. This being so, we find no error in the findings of the Ld.CIT(A) on this issue. However, in view of the Circular issued by the CBDT in Circular No.636 dated 31.08.1992 clearly shows that if any interest or remuneration paid to the partners is disallowed in the hands of the firm or the amount is varied in the subsequent proceedings, the partner’s assessment is to be rectified in view of the provisions of Sec.155(1A). The Ld.AR has submitted before us that this has not been done in the case of the partners of the assessee’s firm. In these circumstances, the AO has to verify as to whether the partner’s assessment have been rectified as per the provisions of Sec.155(1A) and if it has not been done, as the disallowance of the interest paid to the partners have been disallowed in the hands of the firm and the same has been confirmed by this Tribunal in the earlier paragraphs, the AO has to rectify the assessment in the case of the partners granting appropriate relief in appropriate proceedings, for which the concerned partner/s shall move the AO. In these circumstances, the appeal filed by the assessee is partly allowed.

ITA No.711/Mds/2017 :- 4 -:

In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the Open Court on November 15, 2017, at Chennai.

GADANA PROPERTIES LLP.,CHENNAI vs. ITO, CHENNAI

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