2025 (2) TMI 1515 - AT - Income Tax

Duplicate taxation of disallowed interest prevented; verify AOP return and delete corresponding entry in member assessment.

Where an AOP has disallowed interest in its return and added it back to total income under the tax law, the same interest should not be taxed again in the ... Disallowance u/s 40(b) - taxation of receipt by member of an AOP when expense is disallowed in the hands of the AOP - Double taxation - HELD THAT:- Once the interest expenses have been disallowed suo-moto by the AOP u/s 40(b) while filing it’s return of income, then the said interest cannot again be taxed as income in the hands of the assessee (being a member of the said AOP), since this would amount double taxation. Accordingly, the matter is being restored to the file of Assessing Officer, for verify whether such interest has been offered as income by AOP in it’s return of income, and if that be the case, then the said interest income is hereby directed to be deleted in the hands of the assessee. Appeal of assessee is allowed subject to the aforesaid aforesaid verification. Issues: Whether interest income of Rs. 59,08,339/- which was disallowed suo-motu in the hands of the AOP under Section 40(b) of the Income-tax Act, 1961 can be treated as taxable income in the hands of a member of the AOP.Analysis: The issue turns on whether an amount of interest that has been disallowed and added back to the total income of the AOP under Section 40(b) of the Income-tax Act, 1961 can later be taxed as income in the hands of an individual member of that AOP. The material on record establishes that the interest in question was disallowed by the AOP in its return under Section 40(b). Given that treatment, taxation of the same amount again in the hands of a member would result in duplicate taxation. The appropriate course identified is to verify the return of the AOP to confirm whether the interest had been offered or otherwise treated as income by the AOP; if so, the corresponding entry in the member's assessment must be deleted. The record does not contain contrary evidence to displace the factual position asserted regarding the AOP's disallowance under Section 40(b).Conclusion: The interest income of Rs. 59,08,339/- shall not be taxed again in the hands of the member if it was disallowed and added back in the return of the AOP under Section 40(b) of the Income-tax Act, 1961; the matter is restored to the Assessing Officer to verify the AOP's return and, if the AOP has offered or disallowed the interest as stated, delete the interest from the member's assessment.