TaxTMI 
TaxTMI 
2025 (3) TMI 1720
X X X X Extracts X X X X
X X X X Extracts X X X X
....bmission and various documents filed before them. 3] Appellant craves to urge additional grounds at the time of hearing, if necessary." 3. The assessee is a partnership firm engaged in the business of grains, pulses and oil seeds, etc. For the year under consideration, the assessee filed its return of income on 23/09/2013, declaring total income of Rs. 1,01,430. The case was selected for scrutiny under CASS. The Assessing Officer concluded assessment determining total income of Rs. 11,79,787, by making addition of Rs. 9,20,513, as interest under section 36(1)(iii) of the Income Tax Act, 1961 ("the Act") and addition of Rs. 1,57,844, under section 40(a)(ia) of the Act. 4. The learned CIT(A), on the issue of disallowance of interest paid by the assessee of Rs. 9,20,513, under section 36(1)(iii) of the Act, while dealing with the issue, vide Para-7.0 to 7.4 / Page-11 to 13, held that interest amount attributable to the interest free advances shall be allowed to the assessee. The findings of the learned CIT(A) are as under:- "7.0 Ground No. 2: The appellant has challenged the addition made by AO of Rs. 9,20,513/ -u/s.36(1)(iii) on account disallowance of interes....
X X X X Extracts X X X X
X X X X Extracts X X X X
....debit balance is treated as withdrawal of capital, there was no question of charging of interest on the debit balance of Rs. 3,80,970. 7.3 The above submission of the appellant is vague in nature. The appellant has submitted that the debit balance of proprietorship concern of partner should be treated as withdrawals of capital and accordingly the said amount shall not tantamount to interest free advances extended by firm. As per the accounting principles, the same is not shown as withdrawals in the books of accounts by the appellant. FURTHER, it is worth noting that the interest on partner's capital account is paid on whole amount of Rs. 18,84,147/- and not after deduction of Rs. 3,80,970/-. The interest paid to partner is claimed as expenses by the firm, whereas no interest is charged on the amount of Rs. 3,80,970/- extended to his proprietorship concern. As the appellant firm has availed deduction of interest on whole of the amount of partner's capital balance, there is no reason to consider the advance extended to his partnership as withdrawal of the capital. Therefore, the submission made by the appellant in this regard is not considered as it contains misleadi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AR is baseless. The profit of the firm is generally divided among the partners by way of Remuneration, Interest and Share in Profit. However, the remuneration to partner and interest are allowed as deduction in the hands of the firm from the taxable profit. So far as Income Tax Act, 1961 is concerned, the remuneration and interest on partner's capital is considered as expenditure and their allowability is governed by provision of section 40(b). As a specific provision is enacted to govern the deduction towards interest on capital, the contention of the appellant that the interest on capital is in lieu of share of profit is not acceptable. As the firm is enjoying the deduction of interest as expenditure, it establishes that the capital of partner is interest bearing funds for the firm. 7.6 In conclusion, the AO erred in not considering that interest free advances were out of interest free loan availed by the appellant. Consequently, the interest of Rs. 5,30,902 i.e., 15% of Rs. 35,39,351 (interest free advances) deserves to be deleted from the total addition of Rs. 9,20,513/- made by the AO u/s.36(1)(iii). Accordingly, the addition is reduced by Rs. 5,30,902/-. Theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....grave;-vis section 40(a)(ia), the appellant submitted as under: "Alternatively and without prejudice to the above, if it is presumed that the charges, paid to Shri. Shivnathrai S. Agrawal, is nothing but interest, still the provisions of section 40(a)(ia) are not applicable to the facts of the case. For the said amount of interest has actually been deducted (paid) by the said party from the amount of trade liability receivable to the appellant. The provisions of section 40(a)(ia) are applicable only in respect of amount payable as on the date of balance sheet. In other words, if expenditure (Interest) is actually paid in the said financial year, the provisions of section 40(a)(ia) can not been invoked. The appellant relies on the decision of hon'ble courts mentioned hereunder. The copies of judgments are enclosed herewith for ready reference. a) M/s Arcadia Share & Stock Brokers Pvt. Ltd. vs DCIT, Range 4(1), Mumbai, ITA No. 1871/Mum/2013 dated 22.12.2014, ITAT Bench, Mumbai b) Shri. Jitendra Mansukhalal Shah vs DCIT Mumbai, ITA No. 2293/Mum/2013, dated 04.03.2015, ITAT "J" Bench, Mumbai. (Page No. 80 to page No. 82 of paper book of other documents). ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 8.3 From the plain reading of provision of section 40(a)(ia), it can be seen that the section uses the phrase "payable". In grammatical sense, the terms "paid" and "payable are different in nature and are anonyms to each other. As the section uses the phrase "payable", the appellant has cited various judicial pronouncement of Hon'ble Tribunals in its favour. However, the prolonged debate of "paid" and "payable" is now already settled by Hon'ble Supreme Court in the case of Palam Gas Services v. CIT, 517 Taxpundit 101 (Civil Appeal No. 5512 of 2017, judgment dated 3-5-2017) where it has approved the view of Hon'ble Calcutta High Court in the case of Commissioner of Income Tax v. Crescent Export Syndicate, which reads as under: 22. The same view was taken by a Division Bench of the Calcutta High Court in Commissioner of Income Tax v. Crescent Export Syndicate, (supra). It was held:- "12.3. It is noticeable that Section 40(a) is applicable irrespective of the method of accounting followed by an assessee. Therefore, by using the term 'payable' legislature included the entire accrued liability. If assessee was following mercantile system of acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e held that the word 'payable' occurring in Section 40(a)(ia) refers to only those cases where the amount is yet to be paid and does not cover the cases where the amount is actually paid. If the provision is interpreted in the manner suggested by the appellant herein, then even when it is found that a person, like the appellant, has violated the provisions of Chapter XVIIB (or specifically Sections 194C and 200 in the instant case), he would still go scot free, without suffering the consequences of such monetary default in spite of specific provisions laying down these consequences. The Punjab & Haryana High Court has exhaustively interpreted Section 40(a(ia) keeping in mind different aspects. We would again quote the following paragraphs from the said judgment, with our complete approval thereto: "26. Further, the mere incurring of a liability does not require an assessee to deduct the tax at source even if such payments, if made, would require an assessee to deduct the tax at source. The liability to deduct tax at source arises not on account of the assessee being liable to the payee but only upon the liability being discharged in the case of an assessee followin....