TMI Blog2005 (8) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... ble under the provisions of s. 40(b) of the IT Act. The learned CIT(A) has failed to appreciate the facts of the case as also the correct legal position and, therefore, it may kindly be held that the entire interest paid to the partners of Rs. 6,59,492 as authorized by the partnership deed may kindly be held to be allowable to the assessee in computing the income." 2. Briefly stated, the facts of the case are that the appellant is a registered firm engaged in the business of manufacturing of silver utensils. During the course of assessment proceedings, it was found by the AO that the interest to the partners was paid on the opening balance. The AO has issued a show-cause notice requiring the assessee to explain as to why interest should n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks, the action of the AO was confirmed. Being aggrieved, this issue is further carried to the second appeal stage. 4. Parties have been heard and the impugned orders were perused in the light of a precedent cited from the side of the assessee. Through this appeal, a legal issue has been raised, whether calculation of interest for the purpose of s. 40(b)(iv) can be made on day-to-day basis of account of the partner or on the basis of the opening balance of the partner especially when the total withdrawals have not exceeded the share of profit credited in the respective capital accounts of the partners. To settle this issue, we have examined the facts in brief. The assessee being a registered firm, executed a partnership deed on the 1st day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". (a) ------ (b) in the case of any firm assessable as such, (iv) any payment of interest to any partner which is authorized 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 insofar as such amount exceeds the amount calculated at the rate of eighteen per cent simple interest per annum; or" In view of this substitution in s. 40(b), a firm assessable as such shall not be entitled for deduction from asst. yr. 1993-94 in computing income chargeable under the head 'Profits and gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril, 1993. One of the main features of the new scheme of taxation of the firm was that in case a firm has evidenced by an instrument wherein shares of partners were specified and authorizes a partner to charge interest, salary, commission etc., then it is entitled for the claim subject to a limitation of 18 per cent simple interest. Due to all those changes, the firms in general, have effected necessary changes in their respective partnership deeds as it has also happened in the case of the assessee firm as is evidenced from cl. 6 of the partnership deed reproduced hereinabove. With this background, now we have to address ourselves on the specific controversy that whether the interest is to be calculated on the reducing balance or at the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance on day-to-day basis so as to compute the rate of interest at 18 per cent, the limit prescribed under the Act. Fundamentally, the AO went wrong to apply this method of computation of interest because if on one hand the drawings were made by the partners, then on the other hand, their respective profits should also have been credited on day-to-day basis. In such a situation, it is also an incorrect observation of the learned CIT(A) that the firm did not have the amount being actually utilized during the said period. From the above factual matrix, it is abundantly clear that the partners have not withdrawn excessively so as to reduce the amount of opening capital at any point of time. In other words, the firm had in fact utilized the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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