TMI Blog2008 (2) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ust/September 1991, appellant assessee granted interest free advances to its sister concerns which were disallowed by the Department on the ground that the said advances were not given from the firm's Own Funds but from interest bearing loans taken by the assessee-firm from third parties. Accordingly, the assessee's claim for deduction under Section 36(1)(iii) was disallowed by the Department for the AY 1992-93. However, vide order dated 3.1.03, the Tribunal deleted the disallowance saying that the assessee had given such advance from its Own Funds. 5. In the next AY 1993-94, the same situation took place. Once again vide order dated 1.1.03, the Tribunal deleted disallowance for AY 1993-94. It is important to note that the Department accepted the orders passed by the Tribunal in favour of the assessee for both the AYs 1992-93 and 1993-94. At the same time, we need to emphasise, at this stage, that the interest free advance given to the sister concern was repaid on year to year basis. The said advance/loan got finally repaid in AY 1997-98. 6. During the AY 1994-95 no further advances were made by the assessee-firm in favour of its concerns. However, during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of interest to the partner exceeds 12/18% per annum. In this case, according to learned counsel, all the conditions of Sections 40(b)(iv) have been satisfied and, therefore, the assessee was entitled to the benefit of deduction thereunder. In this connection, it was further argued that deduction under Section 40(b)(iv) is not for expenditure; that it was a statutory deduction and that the contribution by the partner to the firm cannot be equated to a loan to the firm and that the former falls only under Section 40(b)(iv) and, therefore, the said Section 40(b) was a stand-alone section having no connection with the provisions of Section 36(1)(iii) of the 1961 Act. Further, according to learned counsel, in this case Section 36(1)(iii) had no application as this was a case of payment of interest to the partner on his capital contribution which cannot be equated to monies borrowed by the firm from third parties, hence the present case fell only under Section 40(b)(iv) and not under Section 36(1)(iii) of the 1961 Act. 11. Mr. Prag P. Tripathi, learned Addl. Solicitor General appearing for the Department, submitted that object behind enactment of Finance Act 1992 is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of interest by the partner to the firm. Explanation 2 : Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented" respectively,)- (i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause. Explanation 3 : Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim deduction under Section 36(1)(iii) and that it was not disentitled to claim such deduction on account of applicability of Section 40(b)(iv). It is important to note that Section 36(1) refers to Other Deductions whereas Section 40 comes under the heading Amounts not Deductible. Therefore, Sections 30 to 38 are Other Deductions whereas Section 40 is a limitation on that deduction. It is important to note that Section 28 to 43C essentially deal with Business Income. Sections 30 to 38 deal with Deductions. Sections 40A and 43B deal with Business Disallowances. Keeping in mind the said scheme the position is that Sections 30 to 38 are deductions which are limited by Section 40. Therefore, even if an assessee is entitled to deduction under Section 36(1)(iii), the assessee(firm) will not be entitled to claim deduction for interest payment exceeding 18/12% per se. This is because Section 40(b)(iv) puts a limitation on the amount of deduction under Section 36(1)(iii). 15. It is vehemently urged on behalf of the assessee that partner's capital is not a loan or borrowing in the hand of a firm. According to the assessee, Section 40(b)(iv) applies to partner's capital wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew in view of change in law brought about by Finance Act 1992. Prior to 1.4.93 payment of interest to the partner had to be added back to the assessable income of the firm whereas after Finance Act 1992 such payment became an item of deduction for computing the assessable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for AYs 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been left out from consideration is that the loans which were given in August/September 1991 to the sister concerns got wiped out only in AY 1997-98. As stated above, for AY 1992-93 and AY 1993-94, the Tribunal held that the loans given to the sister concerns were out of the firm's Funds and that they were advanced for business purposes. Once it is found that the loans granted in August/September 1991 continued upto AY 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12% per annum, the assessee was entitled to deductions under Section 36(1)(iii) read with Section 40(b)(iv) of the 1961 Act. 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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