Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘SMC-1’, NEW DELHI
Before: Sh. N. K. Saini
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘SMC-1’, NEW DELHI Before Sh. N. K. Saini, Accountant Member Asstt. Year : 2008-09 Adman Advertising, Vs Asstt. Commissioner of Income F-137, Ashok Vihar, Phase-I, tax, Circle-34(1), Delhi-110052 New Delhi-110052 (APPELLANT) (RESPONDENT) PAN No. AAAFA7942D Assessee by : Sanjay Jain, CA Revenue by : Sh. V. R. Sonbhadra, Sr. DR Date of Hearing : 25.05.2016 Date of Pronouncement : 27.06.2016 ORDER
This is an appeal by the assessee against the order dated 14.05.2015 of ld. CIT(A)-XII, New Delhi.
The only grievance of the assessee in this appeal relates to the confirmation of disallowance of interest on capital of the partners amounting to Rs.1,96,345/-.
Facts of the case in brief are that the assessee was engaged in the business of the advertising and filed the return of income on 30.09.2008 declaring an income of Rs.9,08,540/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). Later on, 2 Adman Advertising the case selected for scrutiny. During the course of assessment proceedings the AO noticed that the assessee had claimed interest paid to the partners amounting to Rs.3,76,384/- which had wrongly been calculated on the opening balance. He asked the assessee to explain as to why the interest paid to partners had been calculated on the opening balance. The assessee intimated that such practice of calculating interest on opening balance was being followed consistently. The AO after considering the submissions of the assessee worked out the allowable interest at Rs.1,80,039/- and disallowed the excess interest of Rs.1,96,345/- in the following manner:
“I have considered the submission filed by assessee & found untenable. Interest paid to partners should have been calculated on net capital i.e. after deducting withdrawals. Interest allowable is computed as under: Name of the Sushila Rajiv Sunil Total partners Opening 3,73,198 10,44,645 17,18,693 31,36,537 Withdrawal 3,58,545 6,32,484 6,45,182 16,36,212 Balance 14,653 4,12,161 10,73,511 15,00,325 15,00,325×12×1 = 1,80,039/- 100 Total interest claimed by the assessee : 3,76,384/- Allowable interest : 1,80,039/- 3 Adman Advertising Excess interest : 1,96,345/- Keeping in view of above facts, I hereby disallow excess interest amounting to Rs.1,96,345/- paid to partners. (Addition of Rs.1,96,345/-)”
Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the partners were entitled to interest on their capital accounts in accordance with the provisions of the Income Tax Act, the assessee credited the interest to their respective capital account @ 12% of their opening balance and that the withdrawals were always more or less equal to their share or profit. It was further submitted that the balance of the capital accounts of the partners except for Smt. Sushila Jajodia, had not reduced as compared to the opening balance and that the reduction of the capital account of Smt. Sushila Jajodia was on account of debit of share of IDS and over withdrawals. Therefore, the addition for interest amounting to Rs.1,96,345/- may be deleted.
The ld. CIT(A) after considering the submissions of the assessee confirmed the disallowance by observing in paras 8.3 to 8.6 as under:
“8.3 It is seen that after withdrawal net capital balance has reduced in case of all the three partners namely Sushila Jajodia, Rajiv Jajodia and Sunil Jajodia. Therefore, Appellant cannot claim interest on the amount which was already withdrawn by him during the year. Reliance is 4 Adman Advertising placed on the judgment of Hon'ble ITAT, Hyderabad in the case of Architectural Associates vs. ACIT, 92 ITD 479, in which it has been held that interest has to be calculated on the net balance of capital of the partners. The contention of Assessee that amounts withdrawn are against current year's income is also not correct as no profit or loss accrues from day to day nor there is any such stipulation in the partnership deed. 8.4 Hon'ble Supreme Court in the case of Munjal Sales Corporation vs. CIT & Anr., 298 ITR 298 have held that Section 40(b)(iv) places a limitation of the deduction u/s 30 to 38 and, therefore, Section 40(b)(iv) is not a stand alone section and every Assessee in the first instance has to establish its right to claim deduction u/s 30 to 38 and then it is to be proved that he is not disentitled to claim deduction by reasons of applicability of Section 40(b)(iv). Therefore, in Appellant's case also he has to establish in the first instance that he was entitled to interest in view of the provisions of Section 36(l)(iii). It may be seen that partners have withdrawn the amount during the year and, therefore, the same has not been utilized for the purposes of Appellant's business. Therefore, Appellant firm has not established how the amount which was withdrawn by the partners were utilized for the purpose of Appellant's business. In view of this, interest has to be calculated only on the net balance of capital. 8.5 Appellant has claimed that this method has been adopted by him in the past. However, it is seen that Appellant has been receiving excess interest on opening balance of capital whereas withdrawals were being during the year. Further, Appellant has also not stated whether there were withdrawals by partners during the earlier years. Therefore, even if Appellant has been following this 5 Adman Advertising method in the past, claim of excess interest cannot be allowed. It may also be stated that res judicata is not applicable in income tax proceedings as each year is a separate proceedings. Reliance is placed on the judgment of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. & Anr. vs. Union of India & Ors., 282 ITR 273 (SC) and New Jehangir Vakil Mills Co. Ltd. vs. CIT, 49 ITR 137 (SC) in which it has been held that in income tax proceedings Res Judicata is not applicable and each year is a separate proceedings. 8.6 Therefore, the disallowance of Rs.1,96,345/- made by the Assessing Officer on account of interest paid to partners is confirmed.”
Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that in the preceding year also the assessee was following the same practice for charging the interest on the opening balance of the partners which has been allowed u/s 143(3) of the Act. It was further submitted that in succeeding year also no such disallowance was made.
In his rival submissions the ld. DR strongly supported the orders of the authorities below and further submitted that the assessee had not taken into consideration the withdrawals made by the partners and the AO after considering the withdrawals rightly worked out the allowable interest and added the excess interest charged by the 6 Adman Advertising assessee to its income. Therefore, the ld. CIT(A) rightly confirmed the disallowance made by the AO.
I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee was charging the interest on the opening balance of the partners without considering the withdrawals made during the year under consideration. In my opinion, the interest was to be charged on the amount invested by the partners in the partnership firm which was to be worked out after considering the withdrawal and the additions, if any, during the year under consideration. I, therefore, set aside the impugned order and direct the AO to work out the interest after considering the deposits and the withdrawals in the capital account of the partners. It appears that the AO reduced the total withdrawals of the years from the opening balance and worked out the interest on the closing balance of the capital account at the end of the year but he had not considered this vital fact that the withdrawals were not on a single day in the beginning of the year and the assessee had also calculated the interest on the opening balance without considering the withdrawals or the deposit, if any. However, the right course is, to calculate the interest on the actual amount contributed by the partners in the partnership firm during the whole of the year, in other words whenever there is withdrawals it is to be reduced and interest is to be worked out and if 7 Adman Advertising there is increase/addition in the capital account then also benefit of that addition is to be given. Accordingly, this issue is set aside to the file of the AO for re-adjudication in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the Court on 27/06/2016)