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2022 (12) TMI 398 - AT - Income TaxTDS u/s 40 (a)(ia) - additions made towards disallowance of interest paid on partners capital account - assessee is following mercantile system of accounting, income and expenditure pertains to relevant accounting period is required to be accounted whether or not such expenditure/income is received by the assessee - HELD THAT:- When it comes to deductibility of any expenditure, it is subject to provisions of section 40(a)(ia) of the Act and as per said provision, expenditure debited to profit and loss account cannot be allowed as deduction, in case the assessee has not deducted TDS on said expenditure. The provisio provided to section 40(a)(ia) further states that said expenditure can be allowed as deduction in the year in which the assessee has deducted TDS and remits to Government account. Assuming for a moment, the assessee has made a provision for interest payment to partner in the earlier assessment year 2013-14, but same cannot be allowed as deduction because of non-deduction of tax at source. Further, it is a tax neutral exercise, because if assessee provides interest in the last financial year, to that extent profits of the assessee would come down and at the same time for non-deduction of TDS if expenses is disallowed then profit would remain same. Therefore, for assessment year 2013-14 there is no net effect on the profit declared by the assessee. As per provisions of section 40(a)(ia) even if assessee debited expenditure, but same needs to be allowed as and when the assessee deducts TDS on said expenditure. In this case, the assessee has deducted TDS on impugned expenditure for the assessment year 2014-15, which has to be allowed irrespective of method of accounting followed by the assessee. AO as well as the CIT(A) are erred in disallowing interest paid to outgoing partner’s account and thus, we direct the AO to delete additions made towards disallowance of interest paid on partners capital account. Appeal filed by the assessee is allowed.
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