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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI AMITABH SHUKLA
आदेश / O R D E R PER ABY T. VARKEY, JM: These are appeals preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter in short "the Ld.CIT(A)”), Delhi, both dated 05.12.2023 for Assessment Years (hereinafter in short "AY”) 2015-16 & 2016-17.
At the outset, the Ld.AR of the assessee submits that the assessee doesn’t press Ground Nos.11-13 for AY 2016-17, which is regarding the claim of loss during the floods. Therefore, the same stands dismissed.
& 193/Chny/2024 (AY 2015-16 & 2016-17) M/s.Lazerr India :: 2 ::
Both sides agreed that the only issue now remaining in both the captioned appeals is regarding the disallowance/addition of Rs.6,51,823/- for AY 2015-16 and Rs.4,40,479/- for AY 2016-17 made by the AO u/s.40b of the Income Tax Act, 1961 (hereinafter in short "the Act”).
Since the issue is common for both the years, the decision in the lead year i.e. for AY 2015-16, would decide the fate of this issue for AY 2016- 17.
The brief facts on this issue for AY 2015-16 are that assessee-firm had filed return of income for AY 2015-16, declaring total income of Rs.NIL; and the return was later re-opened u/s.147 of the Act and the AO noted that assessee has claimed interest on capital for a sum of Rs.6,75,823/-, whereas, according to him the partners’ capital contribution appearing from the balance sheet was showing only at Rs.2 lakhs and hence, as per the provisions of Sec.40b of the Act, assessee is eligible for deduction u/s.40b of the Act at Rs.24,000/- only and therefore, he disallowed the excess claim of Rs.6,51,823/- and added it back to the income of the assessee.
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A)
who confirmed the action of the AO.
Aggrieved, the assessee is in appeal before this Tribunal.
& 193/Chny/2024 (AY 2015-16 & 2016-17) M/s.Lazerr India :: 3 ::
We have heard both the parties and perused the material available on record. We note that the AO has disallowed the assessee’s claim of interest payments to the partners on the ground that the assessee has claimed as expenses the entire interest paid to it to its partners in order to reduce tax in its hands. According to AO, the partners’ capital contribution appearing from the balance sheet was only to the tune of Rs.2 lakhs and hence, as per the provisions of Sec.40b of the Act, assessee is eligible for deduction u/s.40b of the Act at Rs.24,000/- only and therefore, he disallowed the excess claim of Rs.6,51,823/-, which action of the AO has been confirmed by the Ld.CIT(A), which impugned action has been assailed before us. In order to adjudicate this issue, it would be gainful to refer to sec.40b of the Act, which reads as under:
s.40(b) in the case of any firm assessable as such,- (i) …. (ii) …. (iii) …. (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or 8. From a bare reading of the aforesaid provision, it is noted that in the case of a firm, if any payment of interest is made to any partner which is authorized by the terms of the partnership deed is allowable as deduction, if it doesn’t exceed 12% of simple interest per annum.
& 193/Chny/2024 (AY 2015-16 & 2016-17) M/s.Lazerr India :: 4 ::
Therefore, the first condition as per sec.40(b) of the Act, to allow the claim of interest payment by a firm to its partners is that the payment of interest should be authorized by the partnership deed and if the first condition is satisfied, then, the payment of interest should not exceed 12% (simple interest per annum).
In this context, it is noted that when the AO asked the assessee ‘as to why’ the interest claimed by it as deduction for making payment to its partners to the tune of Rs.6,51,823/- should not be disallowed, and the assessee had replied to the AO that partnership-deed has authorized payment of interest to its partners, which details/reply have been reproduced by the AO as under:
"With reference to the above, we would like to bring to your kind information that sum of Rs.6,75,823/- has been claimed as interest on capital for the year under review. In this regard, we would like to point out to you that the partners of M/s.Lazerr India have brought in additional funds besides capital account as well as current account balances. These amounts have been shown under sundry creditors for loans for the reason that these may be withdrawn based on the funds availability in the firm. The details of amounts received from partners which have been shown under sundry creditors are as shown below:
Mrs. Suha Kandaswamy – Rs.18,54,759.30/- Mr. P K Venkatesh – Rs.41,17,495.72/- Mr. P K Gayethri – Rs.4,74,612.00/-
Interest on capital claimed in the Profit & Loss Account of Rs.6,75,823/- includes interest paid on the above said amounts as well. Further, we may add here that respective partners have admitted these interest incomes in their return of income, paid taxes and filed the returns. We are attaching copies of statements in the case of the firm as well as for the partners in support of the above.
We may further that interest paid by the firm to its partners on their Capital account, Current account and loan account is allowable as deduction to the firm provided the partnership deed specifically authorizes the payment of & 193/Chny/2024 (AY 2015-16 & 2016-17) M/s.Lazerr India :: 5 :: interest on capital account, current account and loan account as per the provisions of section 40b of the IT Act, 1961. We are attaching the copy of the partnership deed for your immediate reference. We draw your kind attention to clause no.4 wherein additional funds and interest thereon have been specifically mentioned. In view of this, it is requested that disallowance of Rs. 6,51,823/- is not warranted. In view of the above facts and circumstances, we request your good self not to proceed further in this matter and complete the assessment by accepting the declared income”.
From perusal of the reply (supra), we note that even though, the assessee-Firm asserted that the partnership deed authorizes payment of interest on capital account, current account and loan account/additional fund and drew AO’s attention to Clause No.4 of the Partnership Deed, [wherein, it is provided that if partners infused additional funds into the firm, then, interest is authorized to be given to the partners] and accordingly, the assessee paid interest of Rs.6,51,823/- on the additional funds infused by the partners; and it was pointed out that the interest paid is only @12%, which is allowable deduction. And, it is noted that the copy of the Partnership Deed was placed before the AO, but, the AO has not found any infirmity in the Partnership Deed to disallow the interest claim. Thus, we find that AO didn’t find any infirmity in assesse’s assertion based on Partnership-Deed that the claim of deduction is allowable. We have gone through the partnership deed, and we don’t countenance the action of the AO/Ld.CIT(A) to have disallowed the deduction claimed on payment of interest to its partners, when it is authorized by the Partnership-deed to do so. Since the claim made by assessee satisfies the conditions laid down in sec.40(b)(iv) of the Act and & 193/Chny/2024 (AY 2015-16 & 2016-17) M/s.Lazerr India :: 6 ::
the partnership deed clause (4) authorizes payment of interest to the partners and the assessee has paid interest @12%, the deduction claimed is allowable; and therefore, we find that payment of interest to its partners was as per provisions of Sec.40b of the Act [sub-clause (iv)] and such a claim of deduction is allowable and therefore, it was perfectly justified in making the claim and the AO/Ld.CIT(A) erred in disallowing the same. And we direct deletion of addition of Rs.6,51,823/- for AY 2015-16 & Rs.4,40,479/- for AY 2016-17.
In the result, appeal filed by the assessee for AY 2016-17 is partly allowed and appeal filed by the assessee for AY 2015-16 is allowed.
Order pronounced on the 21st day of August, 2024, in Chennai.
Sd/- Sd/- (अिमताभ शु�ा) (एबी टी. वक�) (AMITABH SHUKLA) (ABY T. VARKEY) लेखा सद�य/ACCOUNTANT MEMBER �याियक सद�य/JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 21st August, 2024. TLN, Sr.PS आदेश क� �ितिलिप अ�ेिषत/Copy to:
अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF