TMI Blog2023 (5) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, are not relying upon the same. Coming to the original partnership deed no doubt as per clause-7 of the same, no interest on capital is allowable to the partners. However, clause 8 clearly specifies that if further funds are required over and above the capital contributed by the partners, the same can be arranged/borrowed from the individuals, banks, finance companies or other persons. Clause-8 further specifies that any interest on such funds borrowed for the purpose of the partnership business shall be treated as expenditure of the partnership firm, meaning thereby there is no restricted clause with regard to the quantum of interest payable on such funds over and above the capital borrowed for the purpose of partnership business and the same shall be treated as expenditure of the partnership firm. The connotation individuals/other persons used in clause 8 of the original partnership deed in any sense cannot exclude the partners because the partners are also individual (s) and/or other person(s) and therefore, the interpretation to the persons mentioned in clause-8 cannot oust the partners, who are collectively working for the partnership firm, but having individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S. No. Name of the Party Amount of loan as on 1st day of the year Rate of Interest paid or charges Amount of Interest Received or Paid. 1. Smt.Santosh Arora 36,54,105/- 15% 4,93,304/- 2. Mr. Vikas Arora 65,07,699/- 15% 8,78,540/- 3. Mr. Vishal Arora 27,40,579/- 15% 3,69,978/- Total 1,29,02,383/- 17,41,822/- Consequently, the Assessing Officer with regard to the interest paid to such related parties @ 15% in excess of normal interest at the rate of 12%, raised the query and asked the Assessee to give a note on the liability of interest paid to the related parties. In response, the Assessee though filed its reply to all the queries as raised by the Assessing Officer, but not on the issue of excess interest paid. 2.1 The Assessing Officer by perusing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership deed after issuing of show cause notice. The revised partnership deed creates doubt that it is formed to escape the tax liability to be created after addition on account of interest paid to the partners. The Assessing Officer also observed that moreover on perusal of 3CD report for the F.Y. 2015-16 and 2016-17, revealed that the Assessee has claimed as interest paid to partners which prove that the Assessee prepared the revised partnership deed after the issuance of show cause notice. In view of the same, revised partnership deed filed by the Assessee is not acceptable. Accordingly interest paid to the partners is disallowed being not allowable in view of section 40(b)(iv) of the Act and is not in accordance with the terms of the partnership deed. 4. The Assessee being aggrieved, preferred first appeal before the ld. Commissioner and in support of its case also filed written submissions, main portion of which is relevant for adjudication of the issue in hand, is reproduced herein below: The Learned AO has recorded that the payment of Interest on Unsecured Loan was not allowed as per our original partnership Deed and thus the interest was disallowable u/s 40(b)(iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it Report. 5. Interest @15% has been paid on Unsecured Loans from related parties as we were in dire need of Funds at that time and Finance was not easily available on such a short notice at that time. So we had taken funds from related parties on Higher Interest Rates. This is further substantiated by the fact that we had our Income exempt u/s 10AA of the Act, so even if we had paid lesser/no interest, Firm's Tax Liability would have been low as compared to related parties who have to pay Tax on such income at a rate higher than that of the Firm. ITR of partners along with Computation are also attached as proof of payment of tax by partners. So, tax of Rs 75,710.00 has been more paid by the partners due to payment of Interest on Loan accounts of partners. So, we had no intention of evading any Tax Liability and interest was paid as per genuine needs. Moreover, there cannot be double taxation on the same transaction. As the tax on interest has already been paid by the partners and now, if any disallowance is made in the hands of the partnership Firm and tax is levied, we request you to refund the taxes paid by the partners on such interest. 6. 10A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not applicable here and the cases, there is mention of enhancement of profits. In this case, this is an expenditure which has been wrongly claimed by the assessee, which is not allowable as per old partnership deed. Hence, the circular of Hon'ble CBDT and the judgment of Hon ble ITAT Mumbai are not applicable in this case and hence, this ground is also dismissed. 6. The Assessee being aggrieved is in appeal before us and in support of its case drew our attention to the Clause no. 8 original of Original Partnership Deed, and claimed that Clause 8 is very much clear with regard to payment of any interest, on further funds, if required over and above the capital contributed by the partners, which can be arranged/borrowed from individuals, banks, finance companies or other persons. For ready reference clause 8 of the Original partnership Deed is reproduced below: 8. That if any further funds be required over and above the capital contributed by the partners, the same can be arranged/borrowed from individuals, banks, finance companies or other persons. Any interest on such funds borrowed for the purpose of the partnership business shall be treated as expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other persons in its true sense. 7. On the contrary, the ld. DR refuted the claim of the Assessee and at the outset submitted that the deed of changes in partnership deed dated 22.02.2017 is neither registered nor produced before the Assessing Officer prior to issuance of show cause notice dated 06.02.2021. Therefore, both the authorities have legitimately doubted the same. With regard to the clause No. 8 of the original deed of partnership, the ld. DR submitted that in clause No. 8, the partner word is missing and therefore, the wording used as individual or other persons cannot be attributed as partners. Further clause 8 can not be relied upon because it is substituted by change in Deed, which goes to show that there was ambiguity. 7.1 The ld. DR also relied upon the judgment passed by the Hon ble High Court in the case of Sood Brij and Associates vs. CIT-XVIII, New Delhi (2011) 15 taxman.com 76 (Delhi) and claimed that the remuneration payable left to future mutual agreement between the partners who are entitled to decide and quantify the quantum, which can be any amount of figure, but not more than the maximum amount stated in section 40(b)(v) of the Act and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, but having individual status/personality, thus we are in agreement with the Ld. AR that there was no ambiguity in clause 8 of the original partnership deed, therefore did not require Amend the same. Hence, considering clause-8 of the original partnership deed, we are inclined to allow the claim of the Assessee and consequently, the addition made by the Assessing Officer on account of disallowance of interest expenditure is deleted. 8.3 We further observe that the provisions of section 40(b)(iv) prescribes that any payment of interest to any partner which is authorised 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, in so far as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum, shall not be deducted in computing the income chargeable under the head profits and gains of business or profession. We have already held that as per clause-8 of the original partnership deed, the interest is allowable and it is not the case here that the partnership deed ceased to exist. Hence, the judgment in the case of Sood Brij and Associates vs. CIT-XVIII, N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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