TMI Blog2023 (1) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount then payment of interest on the opening balance will not be proper and justified. Similarly, if the partner withdraws the amount at the fag end of the financial year then the payment of interest only on the closing balance would also be not proper and justified when a credit balance remained for the whole financial year except on the last date of financial year. Therefore, the approach of the AO in calculating the interest by considering only the closing balance as on the end of the financial year is not proper and justified. Accordingly, so far as the interest calculated by the assessee firm on daily product basis is concerned, the same is proper and justified. Since the method of calculating the interest by the assessee is a proper and consistently followed year after year therefore, the same cannot be disturbed for the year under consideration. Accordingly, the disallowance made by the AO on account of excess payment of interest to the partners is deleted. The ground no. 1 to 7 of the assessee s appeal are allowed. TDS u/s 194A - Disallowance of interest paid to the legal heirs of the deceased partners - AO disallowed the claim of interest payment to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and arbitrary to the extent that in para 5.2 of the impugned order dated 30.06.2022 the Ld. CIT(A) has discussed the issue regarding the addition of Rs.3,27,465 on account of payment of excess interest to the partner of the firm, however, the same has not been adjudicated nor any decision with regard to the said issue has been rendered by the CIT(A). 3. Because the Ld. CIT(A) failed to considered that the assessing authority has erred in law and on fact in holding that natural inference of the clause 6 of partnership deed is that the amounts outstanding at the end of the year shall be the amount for calculation of interest @12% which is permissible under Section 40(b) of the Income Tax Act and thereby meeting the said disallowance of interest on capital of Rs.3,27,465 as so called excess interest paid on capital account of partners. 4. Because the Ld. CIT(A) has failed to considered that the appellant has correctly calculated the interest and capital account on daily product basis method which is widely accepted and most appropriate method of calculating interest and has been consistently followed by the appellant firm. 5. Because the Ld. CIT(A) has failed to cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ueries raised and submissions made following observations are made 1. During the year under consideration the partnership was constituted of following partners having their share mentioned against each. a) Chandra Kant 20% b) Tarun Savla 20% c) Chetan Savla 20% d) Smt. Sangeeta Savla 20% e) Smt. Chhaya Savla 20% This partnership is evidenced by the partnership deed dated 01.04.2004. As per clause no. 6 of this deed it is stated- that the firm shall pay interest at the rate of 12% per annum on the capital contribution of the partners. The rate of interest can be changed by the mutual consent of the partners. No other clause is there in the aforesaid partnership deed for the calculation or allowability of interest to the partners. On 05-04-2010 unfortunate demise of Sri Chetan Savla occurred as in@dent of robbery took place in his person and he was shot dead in the said incident. Thereafter, partnership was reconstituted w.e.f. 8 April 2010 with following partners with equal share in profit/loss: a) Chandra Kant b) Tarun Savla c) Devaang Savla d) Smt Sangeeta Savla e) Smt Chhaya Savla As per clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. Please explain as to why Rs 327,465/-should not be disallowed and added towards your income for the year under consideration. 3. Thus, the AO propose to disallow the interest payment of Rs. 3,27,465/- on account of excess payment by calculating interest @ 12% on the credit balance in the capital account as on 31st March, 2011 as against the claim of the assessee for interest payment on the capital account of partners on the basis of the actual period of credit balances in the respective accounts during the year under consideration. Thus, the assessee calculated the interest on the daily product basis whereas the AO took the closing balance in the capital account and re-computed the allowable interest under section 40(b)(iv) of the Income Tax Act read with Clauses of the partnership firm which allows interest payment to the partners @ 12%. The AO has not disputed the fact of demise of one of the partners Sh. Chetan Savla on 5th April, 2010. 4. Aggrieved by the order of the Assessing Officer, the assessee filed the appeal before the CIT(A) but could not succeed on this issue. 5. Before the Tribunal, the learned AR of the assessee has submitted that the AO is not just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that though the CIT(A) has recorded the relevant facts on this issue but no finding has been given by the CIT(A). 6. On the other hand, the learned DR has submitted that the AO has considered Clause 6 of the partnership deed which provides payment of interest to the partners on the amount outstanding in their capital account and the interest shall be calculated and credited to account of each partner at the close of accounting year. Therefore, the interest is required to be calculated on the closing balance at the end of the accounting year. He has relied upon the orders of the authorities below. 7. I have considered the rival submissions as well as relevant facts recorded by the AO. The Assessing Officer has disallowed the interest of Rs. 3,27,465/- on account of excess payment to the partners on the capital account. The AO has calculated the interest @ 12% on the closing balance in the partner s capital account as on 31st March, 2011. The AO has supported his decision by referring to the Clause 6 of the partnership deed which reads as under:- 6. That interest @ 12% per annum or at such maximum rate as may be prescribed under section 40(b)(iv) of the Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shri Chetan Savla (who died unfortunately in an incident of robbery in which he was shot dead) partnership deed was reconstituted w.e.f. 08.04.2010 and in place of late Shri Chetan Savla one Devaang Savla was made partner and other 4 partners remain the same. Further, the Ld AO also observed that as per clause 6 of the New Partnership Deed interest to the partners was to be allowed @ 12 % per annum or such maximus rate as may be prescribed u/s 40 (b) (iv) of the Act or any other applicable provision as may be enforced in the income tax assessment of the partnership firm in the relevant accounting period shall be payable to the partners on the amount outstanding to the credit of the account of the partners. Such interest shall be calculated and credited to the account of each partner at the close of the accounting year. 9. Thus, the CIT(A) has not adjudicated the issue by giving a concluding finding. However, since the method of calculating the interest by the assessee is a proper and consistently followed year after year therefore, the same cannot be disturbed for the year under consideration. Accordingly, the disallowance made by the AO on account of excess payment of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Borrowed Money is given as under-: The words borrowed money are used to indicate and denote money actually borrowed as a loan in the ordinary sense and not also to indicate and denote money which, though obtained on some other basis and in some other kind of transaction, could be, on the failure of such basis and such transaction, made out to be borrowed money in essence and in low The term borrowed money must be construed in its natural and ordinary meaning and implies a real borrowing and a real lending. Lakshmanier v. Income Tax and Expenses Profits Tax Commissioner, AIR 1953 SC 145, 147. [Excess Profits Tax Act (1940), Sch. II, R.2-A]. In view of the above discussion I hold that money lying in the capital account of Shri. Chetan Savla after 05.04.2010 is not entitled for any interest. Consequently interest on this account amounting to Rs. 5,81,781/- debited in Profit loss a/c and claimed as deduction is disallowed and added towards the income of the assessee for the year under consideration. 11. The learned AR of the assessee has submitted that once the partner of the firm expired, he ceases to be a partner and consequently the credit balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een passed on 31-03-2011 only after ascertaining final balance due to deceased partner after the closing book entries were made. Thus, mere passing of entries on 05-04-2010 or 31-03-2011 will not change the character as the amount was never withdrawn from firm and also that no assets has been liquidated in the re-constituted firm to release the amount of erstwhile capital. Further immediately after the death of partner the amount does not remain capital then the question arises what is the nature of such amount remaining with the firm Thus, it is submitted that such amount takes the character of loan to be repaid to legal heir of deceased immediately after death and reconstitution of firm and it cannot be denied that money is not borrowed fund. b) That it must have been borrowed for the purpose of its business: The money in question was always used for the purposes of business as interest over such amount was always allowed as deduction in the form of interest on partner's capital in previous years and also till 05-04-2010 (date of death). After the date of death when the money was never withdrawn from firm it cannot be said that it is not used for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved in the impugned order that this payment of interest to the legal heirs does not fall under section 40(b)(iv) of the Income Tax Act and it can be considered under section 36(1)(iii) or section 37 of the Income Tax Act. Since the CIT(A) has no jurisdiction to remand the matter therefore, the impugned order of the CIT(A) qua this issue is not inconformity with provisions of section 250 and 251 of the Income Tax Act. Further, the AO has made the disallowance by considering the entries made on 31st March, 2011 without considering the fact that after the death of the partner of the firm this amount ceases to be the credit in the capital account of the partner and consequently takes the character of loan from the deceased partner / legal heirs of the deceased partner. The capital introduced by a partner of the partnership firm is always for business purposes and it is not an amount which is kept with the partnership firm only for earning the interest because it was also the need of the partnership firm for doing the business by utilizing the said amount. Accordingly, the claim of interest paid to the legal heirs on this amount which is in the nature of loan and the interest was alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
