TaxTMI 
TaxTMI 
2023 (1) TMI 321
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....nor any decision with regard to the said issue has been rendered by the CIT(A). 3. Because the Ld. CIT(A) failed to considered that the assessing authority has erred in law and on fact in holding that natural inference of the clause 6 of partnership deed is that the amounts outstanding at the end of the year shall be the amount for calculation of interest @12% which is permissible under Section 40(b) of the Income Tax Act and thereby meeting the said disallowance of interest on capital of Rs.3,27,465 as so called excess interest paid on capital account of partners. 4. Because the Ld. CIT(A) has failed to considered that the appellant has correctly calculated the interest and capital account on daily product basis method which is widely accepted and most appropriate method of calculating interest and has been consistently followed by the appellant firm. 5. Because the Ld. CIT(A) has failed to considered that the assessing authority has misinterpreted the clause 6 of the partnership deed which categorically provide for interest @ 12% p.a. or at such maximum rate as may be prescribed under Section 40 (b)(iv) of the Income Tax Act, 1961 or any other applicable provision as may....
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....vla 20% e) Smt. Chhaya Savla 20% This partnership is evidenced by the partnership deed dated 01.04.2004. As per clause no. 6 of this deed it is stated- "that the firm shall pay interest at the rate of 12% per annum on the capital contribution of the partners. The rate of interest can be changed by the mutual consent of the partners." No other clause is there in the aforesaid partnership deed for the calculation or allowability of interest to the partners. On 05-04-2010 unfortunate demise of Sri Chetan Savla occurred as in@dent of robbery took place in his person and he was shot dead in the said incident. Thereafter, partnership was reconstituted w.e.f. 8 April 2010 with following partners with equal share in profit/loss: a) Chandra Kant b) Tarun Savla c) Devaang Savla d) Smt Sangeeta Savla e) Smt Chhaya Savla As per clause 6 of this deed interest to the partners shall be allowed as under: "that interest at the rate of 12% per annum or such maximum rate as may be prescribed under section 40(b) (iv) of the Income Tax Act, 1961 or any other applicable provision as may be enforced in the income tax assessment of the partnership firm in the relevant accounting....
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....ssessee for interest payment on the capital account of partners on the basis of the actual period of credit balances in the respective accounts during the year under consideration. Thus, the assessee calculated the interest on the daily product basis whereas the AO took the closing balance in the capital account and re-computed the allowable interest under section 40(b)(iv) of the Income Tax Act read with Clauses of the partnership firm which allows interest payment to the partners @ 12%. The AO has not disputed the fact of demise of one of the partners Sh. Chetan Savla on 5th April, 2010. 4. Aggrieved by the order of the Assessing Officer, the assessee filed the appeal before the CIT(A) but could not succeed on this issue. 5. Before the Tribunal, the learned AR of the assessee has submitted that the AO is not justified in making the disallowance of interest paid on the capital account of the partners by re-calculating the interest on the closing balance as on 31st March, 2011 instead of considering the actual period of credit balance in the capital accounts. The learned AR has further submitted that the interest paid to the partners on capital account @ 12% is as per the terms a....
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....d credited to account of each partner at the close of accounting year. Therefore, the interest is required to be calculated on the closing balance at the end of the accounting year. He has relied upon the orders of the authorities below. 7. I have considered the rival submissions as well as relevant facts recorded by the AO. The Assessing Officer has disallowed the interest of Rs. 3,27,465/- on account of excess payment to the partners on the capital account. The AO has calculated the interest @ 12% on the closing balance in the partner's capital account as on 31st March, 2011. The AO has supported his decision by referring to the Clause 6 of the partnership deed which reads as under:- "6. That interest @ 12% per annum or at such maximum rate as may be prescribed under section 40(b)(iv) of the Income Tax Act, 1961 or any other applicable provisions as may be enforced in the Income Tax Assessment of the Partnership Firm in the relevant accounting period shall be payable to the partners on the amount outstanding to the credit of the account of the partners. Such interest shall be calculated and credited to the account of each partner at the close of the accounting year." 8. Thus....
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....ed @ 12 % per annum or such maximus rate as may be prescribed u/s 40 (b) (iv) of the Act or any other applicable provision as may be enforced in the income tax assessment of the partnership firm in the relevant accounting period shall be payable to the partners on the amount outstanding to the credit of the account of the partners. Such interest shall be calculated and credited to the account of each partner at the close of the accounting year." 9. Thus, the CIT(A) has not adjudicated the issue by giving a concluding finding. However, since the method of calculating the interest by the assessee is a proper and consistently followed year after year therefore, the same cannot be disturbed for the year under consideration. Accordingly, the disallowance made by the AO on account of excess payment of interest to the partners is deleted. The ground no. 1 to 7 of the assessee's appeal are allowed. 10. Ground no. 8 is regarding disallowance of interest paid to the legal heirs of the deceased partners. The Assessing Officer has disallowed the claim of interest payment to the legal heirs of the deceased partners Sh. Chetan Savla in para 3.3 of assessment order as under:- "3.3. Regarding....
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....d in low The term "borrowed money must be construed in its natural and ordinary meaning and implies a real borrowing and a real lending. Lakshmanier & v. Income Tax and Expenses Profits Tax Commissioner, AIR 1953 SC 145, 147. [Excess Profits Tax Act (1940), Sch. II, R.2-A]." In view of the above discussion I hold that money lying in the capital account of Shri. Chetan Savla after 05.04.2010 is not entitled for any interest. Consequently interest on this account amounting to Rs. 5,81,781/- debited in Profit & loss a/c and claimed as deduction is disallowed and added towards the income of the assessee for the year under consideration." 11. The learned AR of the assessee has submitted that once the partner of the firm expired, he ceases to be a partner and consequently the credit balance in the capital account of the partner is treated as loan and the interest on such loan is an allowable deduction. The AO has disallowed the claim of the assessee only on the ground that the assessee has passed the entry only on 31st March, 2011 at the end of the financial year transferring the amount from the capital account of Sh. Chetan Savla to the loan account in the name of the legal heirs. ....
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.... amount does not remain capital then the question arises what is the nature of such amount remaining with the firm Thus, it is submitted that such amount takes the character of loan to be repaid to legal heir of deceased immediately after death and reconstitution of firm and it cannot be denied that money is not borrowed fund. b) That it must have been borrowed for the purpose of its business: The money in question was always used for the purposes of business as interest over such amount was always allowed as deduction in the form of interest on partner's capital in previous years and also till 05-04-2010 (date of death). After the date of death when the money was never withdrawn from firm it cannot be said that it is not used for the purposes of business. No assets have been liquidated and no investments has been sold so the amount was used in business as before the date of death and after also. c) That the assessee must have paid interest on the said amount and claimed it as deduction. The amount in dispute is interest claimed as deduction of Rs 5,81,781 this amount has been paid/ credited to the loan account after deduction of TDS u's 194A. Hence interest ....