SHRI MOHAN BHIKACHAND PORWAL,BELGAUM vs. INCOME TAX OFFICER, WARD - 1(3), BELGAUM

Briefly stated, the facts of the case are that the assessee is an individual who filed his return declaring total income at Rs.2,90,060/-. As a partner in a firm M/s. H.B. Porwal & Sons, Belgaum, the assessee declared remuneration amounting to Rs.1,65,000/- which was credited in his `individual’ capital account of the firm. However, interest of Rs.68,134/- credited to his `HUF’ status was not included in the total income. On a perusal of the partnership deed, the Assessing Officer (AO) observed that the assessee was partner in the partnership firm in the individual capacity alone and not in HUF. The AO included such interest amounting to Rs.68,134/- which was not offered for taxation. This view of the AO got countenanced in the first appeal.

I have virtually heard both the sides and perused the relevant material on record. The issue is about taxability of interest income of Rs.68,134/- which was claimed to be belonging to the `HUF’ status of the assessee and hence not includible in the total income of the `individual’ status in which the instant return was filed.

Though the assessee claimed before the AO that both the individual and HUF statuses were partners in the said firm, but it is an admitted position that only individual is partner and HUF is not so in M/s. H.B. porwal & Sons. That being the position, the contention of the assessee that the assessee was partner in HUF capacity as well, cannot be approved. However, the point to be noted is that the interest can be taxed only in the hands of the person who contributed the amount in the firm on which the said interest was awarded. If money came from the coffers of the assessee in individual capacity, then the interest income has to be taxed in such individual capacity alone. On the other hand, if the amount came to the partnership firm in the status of HUF, then the corresponding income cannot be included in the hands of the assessee individual, which will find its destination only in the computation of total income in the capacity of HUF. Balance sheet of M/s. H.B. Porwal & Sons, Belgaum is not available on record and the consequential fact as to who contributed the amount on which interest was allowed, cannot be ascertained. In such circumstances, I set-aside the impugned order and remit the matter to the file of the AO for a redo. In such fresh proceedings, the AO will verify the accounts of partnership firm indicating payment of interest of Rs.68,134/-. If the amount on which such interest was allowed has been shown as payable to the HUF status of the assessee, then no addition can be made in the individual status and vice versa. Needless to say, the assessee will be allowed reasonable opportunity of hearing.

In the result, the appeal is allowed for statistical purposes. Order pronounced in the Open Court on 09th November, 2022.