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2023 (6) TMI 1110 - AT - Income TaxInterest on capital paid to the partner - payment of interest by the two partnership firms towards use of partners’ capital - Expenditure incurred on account of commercial expediency or not? - whether is in the nature of “expenditure” or not for the purpose of section 36(1)(iii) read with section 40(b) or whether interest payment is allowable under the provisions of the Income Tax Act? - As argued if at all any disallowance has to be made in the hands of the firm, the same cannot be taxed in the hands of concerned partners - HELD THAT:- When the partnership firm and its partners are seen holistically and in combined manner, the payment of interest to partners and its allowability in the hands of the partners does not lead to deriving of any additional advantage by a firm since the same interest is taxable in the hands of the partners simultaneously. Being so, in our opinion, the interest payment to partners by these firms to be allowed as a deduction while computing the income of these firms. However, the same shall be limited to the extent of allowability u/s 40(b) of the Act. in the present case, in the assessment years 2011-12, 2012-13, 2016-17 and 2017-18 has been allowed. The same cannot be questioned in the assessment years 2013-14 to 2015-16. Similarly, in the case of M/s. Century Silicon City it has been allowed in the assessment years 2012-13, 2016-17 & 2017-18. Hence, it cannot be questioned in the assessment years 2013-14 to 2015-16 and the revenue cannot be allowed to take different view in different assessment year as the judicial discipline requires consistency in these proceedings. On this count also, this disallowance is not justified. From the proviso to section 28 (v) of the Act, it is seen that if there is any disallowance of interest in the hands of the firm due to clause (b) of section 40, income in the hands of the partner has to be adjusted to the extent of the amount not so allowed to be deducted in the hands of the firm. Hence, it is seen that the operation of the proviso to section 28(v) of the Act will come into play only if there is some disallowance in the hands of the firm under clause (b) of section 40 of the Act. In our opinion, the argument of the ld. A.R. is justified. Therefore, on this count we are of the opinion that since the amount has been taxed in the hands of partners u/s 28(v) of the Act same to be allowed in the hands of the assessee u/s 40(b) of the Act, otherwise it amounts to double taxation. In the present case, it is not the case of either of the parties’ interest payment is not exceeding the limit provided in section 40(b) - Hence, we direct the AO to allow the deduction to the extent of limit prescribed in section 40(b) of the Act. It is needless to mention herein that what is allowed in the hands of these assessees u/s 40(b)(iv) of the Act as a deduction, same to be taxed in the hands of the respective partners u/s 28(v) of the Act. In view of the above, we allow the grounds of appeals raised by both the assessees.
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