SMRUDHI ASSOCIATES,MUMBAI vs. ITO 23(3)(3), MUMBAI

This appeal is time barred by 6 days. After hearing the rival submissions, we condone the delay as in our opinion it is a fit case for condonation of delay.

The facts relating to the case are that the Assessing Officer found that assessee had debited a sum of Rs.18,91,324/- as interest on unsecured loans towards work-in-progress account. It was further noted that partner’s capital account named Shri Ganesh Siva Thakur and K.S. Thakur, HUF had been debited with huge withdrawals amounting to Rs.1,42,25,000/- and Rs.1,20,00,000/- by the firm resulting in debit balance in their capital account amounting to Rs.2,14,64,488/- and Rs.74,01,898/- respectively. The Assessing Officer, therefore, asked assessee to explain as to why the interest debited to work-in-progress account of Rs.18,91,324/- should not be disallowed when the firm has not charged any interest on the excess withdrawals of its partners. The Assessing Officer was not satisfied with the explanation of the assessee and, therefore, he disallowed proportionate interest of Rs.14,00,206/-. When the matter went before CIT(A), CIT(A) also confirmed the order of Assessing Officer.

We heard the rival submissions and carefully considered the same alongwith the order of tax authorities below. We noted that there was no provision in the Partnership Deed, as submitted by the ld. AR, that the partners have to pay interest in case of drawings made from the partnership firm. The provisions of Sec. 40(b) of the Income Tax Act, 1961 (in short ‘the Act’) which deals with the disallowance to be made in case of any firm in respect of expenses which are otherwise allowable does not state about disallowance of any interest on the debit balances of the partners, rather the provisions of Sec. 40(b)(iv) of the Act allows payment of interest to the partners which is authorised by and is in accordance with the terms of the Partnership Deed provided the amount does not exceed the amount calculated @ 12% simple interest per annum. Section 4 of the Act defines ‘charging of income’ for any assessment year at any rate or rates at which the income tax shall be charged for that year. From this, for levying tax it is necessary that there must be income in the hands of the assessee. Sec. 2(24) of the Act defines ‘income’. It nowhere talks of such interest on the debit balances of the partners to be the income in the hands of the firm. Even Sec. 5 of the Act, which defines the scope of total income, doesn’t lay down that where the partners are having debit balance, there will be income accruing to the partnership firm by way of deeming interest. The ld. DR even though vehemently relied on the order of Assessing Officer, but could not bring to our knowledge any relevant provisions of the Act under which such income can be added in the hands of the firm. In view of this fact, we set aside the order of CIT(A) and delete the addition.

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