Partnership firm wins appeal for interest deduction on partners' capital, related to rental property. The Tribunal allowed the appeal of the partnership firm, directing the AO to allow the deduction for interest paid on partners' capital under section ...
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Partnership firm wins appeal for interest deduction on partners' capital, related to rental property.
The Tribunal allowed the appeal of the partnership firm, directing the AO to allow the deduction for interest paid on partners' capital under section 24(b). The Tribunal considered the capital deployed for construction as borrowed capital, related to premises let out by the firm, falling under "Income from house property." This decision overturned the CIT(Appeals)'s disallowance and upheld the precedent set in a previous year's decision favoring the assessee.
Issues: Disallowance of deduction claimed by the assessee for interest paid to partners u/s 24(b).
Analysis: 1. The assessee, a partnership firm engaged in the business as a builder and developer, filed a return of income declaring total income. The firm had constructed commercial complexes and sold part of it, treating the buildings as stock in trade. The unsold part was let out, and rent received was offered as income from house property. The deduction u/s 24(b) was claimed on interest paid to partners' capital deployed for construction. The AO disallowed the deduction, stating partners' capital couldn't be treated as borrowed capital. He held the capital represented accumulated profits, disallowing the claimed interest deduction.
2. The disallowance was challenged before the CIT(Appeals), highlighting a similar deduction allowed in a previous year. However, the CIT(Appeals) upheld the disallowance, ignoring the precedent, and confirming the AO's decision. The assessee appealed to the Tribunal.
3. The Tribunal noted arguments from both sides. The DR supported the CIT(Appeals) order, while the assessee's counsel submitted a written response addressing all points raised. The counsel cited a previous year's decision favoring the assessee, upheld by the Tribunal. The Tribunal, following the precedent, directed the AO to allow the deduction for interest paid on partners' capital u/s 24(b), as it was related to premises let out by the assessee, falling under "Income from house property."
4. Consequently, the Tribunal allowed the appeal of the assessee, pronouncing the order on May 16, 2012.
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