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2018 (10) TMI 717

Revision u/s 263 - addition towards interest on advances to partners - advances given to partners - The assessee did not admit any interest / profit from these investments but paid the interest on partners capital accounts promptly - Held that:- Payment of interest to the partners as at the end of the year and not collecting the interest from the partners on the amounts advanced to them for diversion of funds for non business purposes would distort the profits of the firm and as rightly observed the Ld.CIT(A) it is lopsided and does not reflect the true and correct picture of the profits of the firm. - The assessee could not establish the business interest or availability of interest free funds to give advances to the partners in the g .....

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sessing Officer(AO) passed an order u/s 143(3) on 27.12.2011 determining total income of ₹ 43,66,360/- against the returned income of ₹ 41,66,360/-. The Ld.CIT has taken up the case for revision and passed an order u/s 263 on 05.03.2014. The AO given effect to the order of the Ld.CIT vide order u/s 143(3) r.w.s.263 dated 24.03.2015. The assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) has allowed the appeal of the assessee partly. Against the order of the Ld.CIT(A) the assessee preferred appeal before the Tribunal. 3. Ground No.1 and 4 are general in nature which does not require specific adjudication. 4. Ground No. 2 is related to the addition of ₹ 40.46 lakhs made by the AO towards interest on advances to p .....

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) that the assessee is following cash system of accounting and the interest would be charged as and when the same is received from the debtors. The Ld.CIT(A) observed that the partners are interested persons in the business and they may not pay interest at all on the advances received by them and on the other hand the assessee has paid the interest on partner s capital accounts at the end of the each year and the system of accounting followed by the assessee does not reflect the true and correct picture of business affairs. The Ld.CIT(A) viewed that when partners receive interest on their capital contribution, and do not pay the interest on advances taken by them, it leads to lopsided and unnatural results. Therefore, the Ld.CIT(A) confirme .....

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m the partners on the amounts advanced to them for diversion of funds for non business purposes would distort the profits of the firm and as rightly observed the Ld.CIT(A) it is lopsided and does not reflect the true and correct picture of the profits of the firm. For a query from the bench, the Ld.AR submitted that the firm has not collected the interest from the partners till date and no action was taken against partners for recovery of the interest on the loans. This attitude shows that the assessee is systematically making efforts to reduce profits of the firm and thereby evading the tax. The assessee firm has paid the interest of ₹ 1,23,51423/- during the year under consideration on borrowed funds. Similarly, the assessee has pai .....

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with the assessee s AR and the Ld.AR agreed for enhancing the rate of interest to 18% and accordingly the Ld.CIT(A) enhanced the addition. 10. Aggrieved by the order of the CIT(A), the assessee filed appeal before this Tribunal. During the appeal hearing, the Ld.AR argued that the assessee has given advance of ₹ 1.00crore to Nigam Developers for development of the property and hence the advances were given for business purposes and no interest is chargeable. The assessee s AR further submitted that he has not agreed for charging the interest for diversion of funds non business purposes but accepted that the payment of interest was @18% on borrowings. The Ld.AR further argued that the assessee is following cash system of accounting and .....

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would admit the income as and when it is received, the assessee has not proved with any evidence that the assessee has made any efforts to collect the advances along with interest till date. No attempt has been made by the assessee to collect the interest on advances given to debtor till date. This attitude clearly shows that the assessee has intentionally diverted interest bearing funds for non business purposes and has no intention to collect the interest to suppress the profits. Therefore, we are unable to accept the contention of the assessee and hold that the Ld.CIT(A) has rightly confirmed the disallowance of interest for non-business purposes and enhanced the interest from 12% to 18%, since the assessee has borrowed loans for interes .....

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