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of <h1>Tribunal partially allows appeal, removes excess interest disallowance.</h1> <h3>Savla Agencies Versus Joint Commissioner of Income Tax, Range-I, Allahabad</h3> Savla Agencies Versus Joint Commissioner of Income Tax, Range-I, Allahabad - TMI Issues Involved:1. Disallowance of interest on capital of Rs. 3,27,465.2. Direction to verify the legal heir status of the new partner.3. Disallowance of interest paid to the legal heirs of the deceased partner.Issue-wise Detailed Analysis:1. Disallowance of Interest on Capital of Rs. 3,27,465:The assessee, a partnership firm, challenged the disallowance made by the Assessing Officer (AO) of Rs. 3,27,465 on account of excess payment of interest on the capital account of the partners. The AO recalculated the interest based on the closing balance as on 31st March 2011, contrary to the assessee's method of calculating interest on a daily product basis. The AO's interpretation of Clause 6 of the partnership deed was that interest should be calculated on the closing balance at the end of the accounting year. The Tribunal found that the partnership deed allowed interest @ 12% per annum on the amount outstanding to the credit of the partners' accounts, and this interest should be calculated based on the actual duration of the credit balance, not just the closing balance. The Tribunal held that the method followed by the assessee was proper and consistently applied over the years. Therefore, the disallowance made by the AO was deleted, and the grounds raised by the assessee on this issue were allowed.2. Direction to Verify Legal Heir Status of New Partner:The CIT(A) directed the AO to verify whether the new partner, Sh. Devaang Savla, was the legal heir of the deceased partner, Sh. Chetan Savla, and to give relief accordingly. The Tribunal noted that Sh. Devaang Savla was not a legal heir of the deceased partner but was the son of another partner, Sh. Tarun Savla. The Tribunal found this direction of the CIT(A) to be without basis and contrary to the facts. Therefore, this direction was deemed unnecessary.3. Disallowance of Interest Paid to Legal Heirs of Deceased Partner:The AO disallowed the interest payment of Rs. 5,81,781 to the legal heirs of the deceased partner, Sh. Chetan Savla, arguing that the interest could only be allowed as a deduction on borrowed capital under Section 36(1)(iii) of the Income Tax Act, and not under Section 40(b) after the partner's death. The Tribunal observed that once the partner expired, the credit balance in the capital account should be treated as a loan, and the interest on such a loan is an allowable deduction. The CIT(A) had remanded the matter to the AO for verification, which was beyond the CIT(A)'s jurisdiction. The Tribunal modified the CIT(A)'s order and remanded the issue back to the AO for readjudication, considering the amount as a loan from the deceased partner's legal heirs and allowing the interest deduction accordingly.Conclusion:The appeal of the assessee was partly allowed. The Tribunal deleted the disallowance of Rs. 3,27,465 for excess interest on the capital account and remanded the issue of interest paid to the legal heirs of the deceased partner back to the AO for reconsideration. The direction to verify the legal heir status of the new partner was found unnecessary. The order was pronounced in open court on 06.01.2023 at Allahabad, U.P.
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