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IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 30TH DAY OF OCTOBER, 2017 PRESENT THE HON’BLE MRS. JUSTICE S.SUJATHA AND THE HON’BLE Dr. JUSTICE H. B. PRABHAKARA SASTRY INCOME TAX APPEAL No.5014/2012 BETWEEN: NETALKAR ENGINEERS B-22, IN ESTATE, UDYAMBAG, BELGAUM-590008 BY ITS PARTNER SHRI. SURAJ C NETALKAR AGE:32 YEARS, OCC:BUSINES, R/O 147, RANI CHANNAMMA NAGAR, 2ND STAGE, TILAKWADI, BELGAUM-590006.
…APPELLANT (BY SRI. SANGRAM S KULKARNI, ADV.)
AND:
ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE-2, BELGAUM
3RD FLOOR, FHIROZ KHIMJIBAI COMPLEX,
OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD,
BELGAUM.
THE COMMISSIONER OF INCOME TAX APPEALS,
BELGAUM
3RD FLOOR, FHIROZ KHIMJIBAI COMPLEX,
OPP. CIVIL HOSPITAL, DR. AMBEDKAR ROAD,
BELGAUM.
…RESPONDENTS (BY SRI.Y.V. RAVIRAJ, ADV.)
THIS APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT 1961, AGAINST THE ORDER PASSED IN ITA NO.180(PNJ)/2010 DTD:8.3.2011 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, APPEAL FILED BY THE REVENUE IS ALLOWED AND THE ORDER PASSED IN MA NO.19/PNJ/2011 DATED 30.03.2012 ON THE FILE OF THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI, DISMISSING THE APPEAL FILED BY THE ASSESSEE.
THIS APPEAL COMING ON FOR FINAL HEARING THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal is filed by the assessee under Section 260A of the Income Tax Act, 1961(for short, ‘the Act’) challenging the order passed by the Income Tax Appellate Tribunal, Panaji Bench (for short, ‘the ITAT’) in ITA No.180/PNJ/2010 dated 3.3.2010 and in MA No.19/PNJ/2011 dated 30.3.2012.
The appellant is a partnership firm engaged in the business of manufacturing crankshafts on job work basis. During the course of assessment proceedings for the Assessment Year 2007-08, the Assessing Officer disallowed the claim of interest made by the Assessee, as not in conformity with the terms of the partnership
3 deed. Aggrieved by the said order, the appellant preferred an appeal. During the course of appeal proceedings, the appellant highlighted the fact that as per the product method, the interest on capital works out at Rs.23,66,088/- and the assessee actually debited the interest at Rs.22,97,109/-. After calling for remand report from the assessing officer and considering the arguments advanced by both the parties, First Appellate Authority allowed the appeal. It was observed that as per provisions of Section 40(b)(iv) of the Act, any payment of interest to any partner which is authorized by and is in accordance with the terms of the partnership deed insofar, as such amount shall not exceed the amount calculated at the rate of 12% simple interest per annum. Being aggrieved by the same, the Revenue preferred the appeal before the ITAT, which came to be allowed. The appellant-assessee filed MA No. 19/PNJ/2011 under Section 254 of the Act for rectification of the said order submitting that the interest calculation made by the assesses is in conformity with the
4 terms of the partnership deed, such claim does not exceed the limit laid down under Section 40(b)(iv), which came to be dismissed. Hence, the assessee is in this appeal. At the time of the admission of this appeal, the following substantial questions of law were framed for consideration:- “ i) Whether on the facts and circumstances of the case and in law the appellant can be denied claim of the deduction of interest on capital to partners, as per Section 40(b)(ii) r.w.s. 40(b)(iv) when the same is authorized by the terms of the partnership deed and also is within the limits as per provisions of Income Tax Act 1961? ii) Whether on the facts and circumstances of the case the Tribunal was justified in rejecting the claim of the appellant of interest on partners’ capital account as authorized by the partnership deed and when the same is within the limits laid down by Income Tax Act, 1961 holding it as not allowable? iii) Whether the appellant can be denied a deduction of interest on capital to partners on
5 the ground of method of computation when a valid claim based on terms of partnership deed and provisions of Income Tax Act 1961 was made in the return and thereby not allowing claim made within the limits set out statute itself?”
Sri. Sangram S Kulkarni, learned counsel appearing for the assessee argued that Clause No.7 of the Partnership Deed provides that Capital in the Partners’ Capital Accounts both ‘fixed’ and ‘current’ carry an interest upto 18% per annum (However the lowest rate shall be @ 10% per annum), as agreed between the partners mutually from time to time. Such interest shall be calculated on ‘Daily Product/Balance Basis’. The ITAT misinterpreting the said Clause 7 held that the assessee has not claimed interest in conformity with the terms of the partnership deed, wherein the assessee has debited the interest by calculating on average basis. The interest claim was in terms of the partnership deed and in accordance with the provisions of the Act.
6 4. Sri. Y.V. Raviraj, learned counsel appearing for the Revenue would contend that in terms of the partnership deed, the interest has to be calculated on daily product basis. Hence, the decision taken by the ITAT is as per Section 40(b)(ii). However, it is admitted that if the interest is worked out as per daily basis, the same would be Rs.23,66,088/-, but the assessee computed the same on average basis which worked out to Rs.22,97,109/-.
We have given our anxious consideration to the rival submissions made at the Bar and perused the material on record.
Clause-7 of the Partnership Deed entered into between the partners of the firm reads thus: “7. THAT as permitted by Section 40(b)(iv) of the Income Tax Act, 1961 or any other provisions as may be in force for the time being, the Capital in the Partners Capital Accounts-both ‘Fixed’ & ‘Current’ carry on Interest upto 18% per annum (However the lowest rate shall be @ 10% p.a.), as agreed between
7 the partners, mutually, from time to time. Such interest shall be calculated on ‘Daily product/balance basis’ and credited to the current capital account of each partner at the close of the accounting year’.
Section 40b(ii) of the Act prescribed, in the case of any firm assessable as such, any payment of remuneration to any partner who is working partner, or of interest to any partner, if not authorized by, or is not in accordance with, the terms of the partnership deed, shall not be entitled for deduction in computing the income chargeable under the head of profits and gains of business or profession.
Clause-iv of Section 40(b) contemplates any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed, this amount of such payment should not be exceeded the amount as prescribed in this sub clause. Sub -clause iv of Section 40 provides deduction in the case of a
8 firm can be allowed in respect of interest if it is duly authorized by the terms of partnership deed however to the extent of prescribed limit as prescribed in the statute.
As could be seen from clause 7 of the partnership deed referred to above, the Capital in the Partners’ Capital Accounts both ‘fixed’ and ‘current’ carry on interest upto 18% per annum, as agreed between the partners mutually from time to time. Such interest shall be calculated on ‘Daily Product Basis’. View of the ITAT is that the Assessee debited the interest by calculating on average basis contrary to the partnership deed, this finding of the ITAT is unsustainable for the reasons that the interest if calculated on daily basis works out at Rs.23,66,088/-, which is higher than the amount claimed by the assessee calculating the interest on average basis at Rs.22,97,109/-. In such circumstances, there is no contradiction with Section 40(b)(iv) of the Act, which does not exceed 12% rate per annum.
For the aforesaid reasons, the substantial questions of law are answered in favour of the assessee and against the Revenue. The order passed by the ITAT in ITA No.180/PNJ/2010 dated 3.3.2010 and in MA No.19/PNJ/2011 dated 30.03.2012 are set-aside. The order passed by the Commissioner of Income Tax(Appeals) in ITA No.447/BGM/09-10 is confirmed.
The appeal stands allowed.
Sd/- JUDGE
Sd/- JUDGE
JTR