2015 (12) TMI 608

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.... non business purposes. 2. The assessee firm is engaged in the business of manufacturing and export of handmade woolen carpets, durries and fabrics. It filed return on 17/11/2008 at Rs. 40,29,390/-. The case was scrutinized U/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act). The ld Assessing Officer observed that during the year under consideration, the assessee had debited Rs. 45,74,663/- under the head of interest paid. There was a debit balance of Rs. 95,27,195/- in the capital account of Shri Deepak Khanna, who is a partner of the firm. No interest had been charged on the debit balance sheet. The Assessing Officer gave reasonable opportunity of being heard on this issue, which was availed by the assessee vide le....

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....ld Assessing Officer worked out the disallowance at Rs. 11,43,263/-. 3. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the learned CIT(A), who had allowed the appeal by observing as under:- "4.3 I have carefully perused the order of the A.O. and the submissions of the AR and concur with the submissions of the AR on the following grounds: 1) The partnership deed in the case of appellant allows for such interest free withdrawals by the partners. The firm has not charged any interest on the capital account of the partners nor any interest has been paid. 2) Moreover, while the debit balance in the account of Shri Deepak Khanna, one of the partners was Rs. 95,27,195/-, ....

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....terest on credit of the capital account and charging interest on debit of the partner's account since inception. During the year under consideration, there was a debit balance of Rs. 95,27,195/- in the account of Shri Deepak Khanna whereas the credit balance of Rs. 95,49,041/- in the account of Smt. Arti Khanna. In totality there was credit balance in partner's capital account. If the firm pays interest on credit balance of one partner, it should also charge the interest on debit balance. Finally, the firm has to pay interest to the partner on cumulative capital account of both the partners. He further relied on the decision of the Hon'ble Supreme Court in the case of Munjal Sales Corporation Vs. CIT & Ors. 298 ITR 298 wherein it has be....