TaxTMI 
TaxTMI 
2023 (5) TMI 624
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....sued to the Assessee. By perusing the details of unsecured loans claimed by the Assessee, the Assessing Officer observed that the Assessee has paid interest @ 15% to the following three related parties: S. No. Name of the Party Amount of loan as on 1st day of the year Rate of Interest paid or charges Amount of Interest Received or Paid. 1. Smt.Santosh Arora 36,54,105/- 15% 4,93,304/- 2. Mr. Vikas Arora 65,07,699/- 15% 8,78,540/- 3. Mr. Vishal Arora 27,40,579/- 15% 3,69,978/- Total 1,29,02,383/- 17,41,822/- Consequently, the Assessing Officer with regard to the interest paid to such related parties @ 15% in excess of normal interest at the rate of 12%, raised the query and asked the Assessee to give a note on the liability of interest paid to the related parties. In response, the Assessee though filed its reply to all the queries as raised by the Assessing Officer, but not on the issue of excess interest paid. 2.1 The Assessing Officer by perusing the provisions of section 40(b)(iv) of the Act, observed that the partners of the firm and interest payments to partners is governed by section 40(b)(iv) of the Act, which stipulates following th....
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..... The Assessing Officer also observed that moreover on perusal of 3CD report for the F.Y. 2015-16 and 2016-17, revealed that the Assessee has claimed as interest paid to partners which prove that the Assessee prepared the revised partnership deed after the issuance of show cause notice. In view of the same, revised partnership deed filed by the Assessee is not acceptable. Accordingly interest paid to the partners is disallowed being not allowable in view of section 40(b)(iv) of the Act and is not in accordance with the terms of the partnership deed. 4. The Assessee being aggrieved, preferred first appeal before the ld. Commissioner and in support of its case also filed written submissions, main portion of which is relevant for adjudication of the issue in hand, is reproduced herein below: "The Learned AO has recorded that the payment of Interest on Unsecured Loan was not allowed as per our original partnership Deed and thus the interest was disallowable u/s 40(b)(iv). However, The Learned AO has made a mistake while reading our Partnership Deed as payment of interest on Unsecured Loan was in fact allowed by our original Deed also, only rate of interest was not specified. The....
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....parties on Higher Interest Rates. This is further substantiated by the fact that we had our Income exempt u/s 10AA of the Act, so even if we had paid lesser/no interest, Firm's Tax Liability would have been low as compared to related parties who have to pay Tax on such income at a rate higher than that of the Firm. ITR of partners along with Computation are also attached as proof of payment of tax by partners. So, tax of Rs 75,710.00 has been more paid by the partners due to payment of Interest on Loan accounts of partners. So, we had no intention of evading any Tax Liability and interest was paid as per genuine needs. Moreover, there cannot be double taxation on the same transaction. As the tax on interest has already been paid by the partners and now, if any disallowance is made in the hands of the partnership Firm and tax is levied, we request you to refund the taxes paid by the partners on such interest. 6. 10AA deduction on additions and AMT Credit We also submit that as per Income tax Circular No. 37/2016 dated 02/11/2016, on any disallowance made by AO, deduction under Chapter Vl-A should be allowed. The main lines of circular are reproduced below: "the....
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....on'ble ITAT Mumbai are not applicable in this case and hence, this ground is also dismissed." 6. The Assessee being aggrieved is in appeal before us and in support of its case drew our attention to the Clause no. 8 original of Original Partnership Deed, and claimed that Clause 8 is very much clear with regard to payment of any interest, on further funds, if required over and above the capital contributed by the partners, which can be arranged/borrowed from individuals, banks, finance companies or other persons. For ready reference clause 8 of the Original partnership Deed is reproduced below: "8. That if any further funds be required over and above the capital contributed by the partners, the same can be arranged/borrowed from individuals, banks, finance companies or other persons. Any interest on such funds borrowed for the purpose of the partnership business shall be treated as expenditure of the partnership firm." 6.1 The Ld. AR further claimed that Clause 8 also clearly reflects that any interest on such funds borrowed for the purpose of partnership business, shall be treated as expenditure of the partnership firm. The partners who have given loans to the Assessee firm in....
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....2.2021. Therefore, both the authorities have legitimately doubted the same. With regard to the clause No. 8 of the original deed of partnership, the ld. DR submitted that in clause No. 8, the partner word is missing and therefore, the wording used as "individual or other persons" cannot be attributed as partners. Further clause 8 can not be relied upon because it is substituted by change in Deed, which goes to show that there was ambiguity. 7.1 The ld. DR also relied upon the judgment passed by the Hon'ble High Court in the case of Sood Brij and Associates vs. CIT-XVIII, New Delhi (2011) 15 taxman.com 76 (Delhi) and claimed that the remuneration payable left to future mutual agreement between the partners who are entitled to decide and quantify the quantum, which can be any amount of figure, but not more than the maximum amount stated in section 40(b)(v) of the Act and therefore, in view of the judgment of the Hon'ble High Court, the interest over and above the rate specified in the partnership deed and the provisions of section 40(b)(v) of the Act, is not allowable. 8. We have given thoughtful consideration to the peculiar facts and circumstances of the case and the contentions ....