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2018 (10) TMI 717

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 guise of investment. Therefore, we consider it is fair and just to disallow the proportionate interest on the amounts advanced to the partners. - Disallowance of interest for diversion of fun .....

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sion 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 partners. The Ld.CIT in his order u/s 263 in para No.5 found that the assessee has made the investments with ShriCh.NVS Reddy of ₹ 2,67,94,681/- and Ch.Chandra Reddy of ₹ 3,84,35,845/- and bo .....

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rsons 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) confirmed the addition made by the AO and directed the AO to disallow the interest from the interest paid to the partners. 6. Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before this Tribu .....

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flect 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 paid interest of ₹ 60,28,175/- on the partners capital accounts and as per the balance sheet no interest free funds are available to the assessee. The assessee could not establish the business intere .....

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peal 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 if the interest isrequired to be offered, the same would be offered as and when it is received. Therefore argued that the addition made by the AO to be deleted and the order of the Ld.CIT(A) be set asi .....

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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 interest rate of 18%. Therefore, we uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee on this ground. 12. In the result, appeal of the assessee is dismissed. The above order was pronounc .....

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