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2023 (5) TMI 624 - AT - Income TaxLiability of interest paid to the related parties u/s 40(b)(iv) - Interest paid to partner of the firm - AO by holding that since the interest has been paid @ 15% as against allowable rate of interest of 12% as per section 40(b)(iv) the amount exceeding 12% simple interest per annum is not allowable, proposed to add the excess payment of 3%, HELD THAT:- It is a fact that prior to issuance of show cause notice the Assessee could not furnish the amended partnership deed by which clause-8 of the original partnership deed itself has been substituted and word partner has also been included and provision for entitlement to the interest @ 15% per annum or such other rate as may be decided by the partners, on the amount standing to the credit of the Loan accounts of the partners has also been made. Therefore, prima facie, the genuineness of such deed of partnership is doubtful and even otherwise, the said partnership Deed is neither registered either by the Notary Public or by the Registration Authority, hence, prima facie, we also are not confident to consider the same as genuine and therefore, are not relying upon the same. Coming to the original partnership deed no doubt as per clause-7 of the same, no interest on capital is allowable to the partners. However, clause – 8 clearly specifies that if further funds are required over and above the capital contributed by the partners, the same can be arranged/borrowed from the individuals, banks, finance companies or other persons. Clause-8 further specifies that any interest on such funds borrowed for the purpose of the partnership business shall be treated as expenditure of the partnership firm, meaning thereby there is no restricted clause with regard to the quantum of interest payable on such funds over and above the capital borrowed for the purpose of partnership business and the same shall be treated as expenditure of the partnership firm. The connotation “individuals/other persons” used in clause 8 of the original partnership deed in any sense cannot exclude the partners because the partners are also individual (s) and/or other person(s) and therefore, the interpretation to the persons mentioned in clause-8 cannot oust the partners, who are collectively working for the partnership firm, but having individual status/personality, thus we are in agreement with the Ld. AR that there was no ambiguity in clause 8 of the original partnership deed, therefore did not require Amend the same. Hence, considering clause-8 of the original partnership deed, we are inclined to allow the claim of the Assessee and consequently, the addition made by the Assessing Officer on account of disallowance of interest expenditure is deleted. Provisions of section 40(b)(iv) prescribes that 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, shall not be deducted in computing the income chargeable under the head profits and gains of business or profession As already held that as per clause-8 of the original partnership deed, the interest is allowable and it is not the case here that the partnership deed ceased to exist. Appeal filed by the Assessee stands allowed.
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