AI Insights
The case revolves around the disallowance of interest paid to partners on unsecured loans by the Assessee, Guildart Unit-2, during the assessment year 2018-19. The Assessing Officer disallowed the interest payment exceeding 12% per annum as per section 40(b)(iv) of the Income-tax Act, citing non-compliance with the partnership deed terms. The Assessee contested this in the first appeal, arguing that the partnership deed allowed such interest and that the revised deed was submitted to clarify the rate. The Commissioner of Income-tax (Appeals) upheld the disallowance, leading to the Assessee's appeal to the Tribunal. The Tribunal, after examining the original partnership deed and the circumstances of the case, ruled in favor of the Assessee, allowing the interest deduction claimed.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 116087 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 6 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
28-03-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
C
Next Hearing Date
12-03-2023
Assessment Year
2018-2019
Appeal Filed On
21-09-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘C’ NEW DLEHI BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SHRI N.K. CHOUDHRY, JUDICIAL MEMBER ITA No. 1188/Del/2021 Assessment Year: 2018-19 Guildart Unit-2, D-8, Docket-8, UPSIDC, SEZ, Moradabad. PAN: AAGFG2213F VersuS ACIT, Central Circle-31, New Delhi (Appellant) (Respondent) Appellant by : Sh. K. Sampath, Ld. Adv. & Sh. V. Rajkumar, Ld. Adv. Respondent by : Sh. Anuj Garg, Ld. Sr. DR Date of hearing: 13.03.2023 Date of order : 29.03.2023 ORDER PER N.K. CHOUDHRY, J.M. This appeal has been preferred by the Assessee against the order dated 07.09.2021, impugned herein, passed by the learned Commissioner of Income-tax (Appeals) (in short “Ld. Commissioner”), National Faceless Appeal Centre (NFAC), Delhi, u/s. 250 of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2018-19. ITA No. 1188/Del/2021 2 2. In the instant case, the Assessee declared a total income of Rs.23,77,610/- and Rs.71,16,153/- u/s. 115JC of the Act by filing its return of income on dated 25.09.2018, which was later on revised on 27.09.2018 by which the total income declared was also revised to Rs.48,75,180/- and Rs.96,13,718/- u/s. 115JC of the Act. Subsequently, the case of the Assessee was selected for scrutiny through CASS and consequently, statutory notices were issued 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 1 st 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. ITA No. 1188/Del/2021 3 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 three conditions for allowability of interest to the partners of the firm: a). The payment should be in accordance with the terms of the partnership deed; and b). It should relate to any period falling after the date of such partnership deed; and c). It should not exceed the amount calculated at the rate of twelve percent simple interest per annum. 2.2 The Assessing Officer by holding that since the interest has been paid @ 15% as against allowable rate of interest of 12% as per section 40(b)(iv) of the Act, the amount exceeding 12% simple interest per annum is not allowable, proposed to add the excess payment of 3%, i.e., 3,48,364/- (17,41,822/15x3) in the income of the Assessee being not allowable. 2.3 The Assessing Officer further by considering the first condition of Rs.40(b)(iv), which stipulates that “ the payment should be in accordance with the terms of the partnership deed”, and the Assessee’s reply to notice dated 22.12.2020, whereby the Assessee has furnished a copy of registered ITA No. 1188/Del/2021 4 partnership deed dated 13.07.2005, in clause 7 of which it has been agreed between the partners that “ no interest on capital shall be paid to the partners”, observed “that since the payment of interest is not in accordance with the terms of partnership deed, in place of disallowable excess 3% amount of interest as per section 40(b)(iv), the entire interest payment of Rs.17,41,822/- paid to the partners is being added to the income of the Assessee firm and consequently, in view of the above, show caused the Assessee on 06.02.2021 as to why the assessment should not be completed as per the draft order. 3. In response to the said show cause notice, the Assessee submitted a copy of revised partnership deed dated 22.02.2017 wherein it is mentioned that the partners shall be entitled to the interest @ 15% per annum. Therefore, comparing both the partnership deeds, the Assessing Officer came to the conclusion that no such discussion regarding the entitlement of interest is mentioned in the copy of the original partnership deed furnished at the beginning of the assessment proceedings. Therefore, it is concluded that the Assessee has now furnished the revised partnership deed after issuing of show cause notice. The revised partnership deed creates doubt that it is formed to escape the tax liability to be created after addition on account of interest paid to the partners. 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 ITA No. 1188/Del/2021 5 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 said confusion may had arose in the mind of the learned AO due to below mentioned facts: In our books of accounts as well as Partnership Deed, we have divided the funds introduced by partners into two forms - as capital and as Unsecured Loans. We have not given any interest on amount shown as capital in books of accounts, but have given Interest @ 15% on Unsecured Loans. Our partnership deed specifies that no interest will be given on capital balances as per Point 7 of deed (which we have not given), but any amount of interest can be given on Unsecured Loans as per Point 8 (which we have given @ 15%), further supported by Point 6. ITA No. 1188/Del/2021 6 2. The Learned AO had rejected our amended Partnership Deed claiming that we had not submitted the amended partnership deed prior to draft Assessment Order by AO. However the AO has not specified that Amended partnership deed was not asked by AO at any time during the assessment proceedings. Only a copy of partnership deed is asked by the AO in the first notice for requirements under scrutiny. During the tenure of partnership, many changes may be made in partnership deed through small amendments. So, we had submitted only the original deed. Moreover Interest on unsecured Loans was already allowed by Original Partnership Deed (as per point 1 above) and thus we did not think any need to submit amended partnership deed which only specifies rate of interest on Loan 3. Moreover the AO had specified, that we had given interest in F.Y. 2015- 16 and 2016-17 and thus amended partnership Deed is not valid. This is totally baseless as our original partnership deed already allowed interest on unsecured loan and we had only specified interest rate to be paid to partners on their unsecured loans. Our amended Partnership Deed is thus perfectly valid and enforceable. 4. The interest paid to partners was not in the capacity of partners but as separate individual capacity and thus independent from application of section 40(b) (iv). We have also deducted TDS on interest paid to these individuals as per Sec 194A treating these persons as separate from partners and the same also disclosed in Audit Report. 5. Interest @15% has been paid on Unsecured Loans from related parties as we were in dire need of Funds at that time and Finance was not easily available on such a short notice at that time. So we had taken funds from related 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 ITA No. 1188/Del/2021 7 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 Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter Vl-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter Vl-A is admissible on the profits so enhanced by the disallowance. ” The same ruling has also been given by ITO vs. Anthelio Business Technologies Pvt. Ltd. (Mumbai ITAT) (ITA 976/Mum/15) and ITAT Jaipur in Amrapali Exports Vs DCIT (ITA No. 454/JP/2019) where the Tribunal held that the circular will apply to Sec 10AA too. So, we further request you to allow deduction u/s 10AA if ITA No. 1188/Del/2021 8 any additions are confirmed against us in Appeal and also allow us to carry forward AMT credit on account of any additional tax demand. It is also submitted that we were eligible for 50% deduction u/s 10AA for AY 2018- 19." 5. The ld. Commissioner by considering the submissions made and the Partnership Deeds filed by the Assessee and the conclusion drawn by the Assessing Officer in making the addition in hand, confirmed the said addition of Rs.17,41,822/- by holding as under: “I have gone through the assessment order and the submissions made by the assessee. The Assessing Officer had made the addition of Rs. 1741822 on the basis of original partnership deed, where there was no discussion regarding the entitlement of interest @ 15% per annum. The assessee filed revised partnership deed, which was not accepted by the Assessing Officer. The Assessing Officer held that the revised partnership deed was not filed with 3CD report. I fully agree with the contention of the Assessing Officer as the revised partnership filed after the show cause is clearly on afterthought to evade taxes. Hence, the addition of Rs. 17,41,822/- is confirmed and the appeal is dismissed. The assessee has made contention that it is eligible for deduction u/s 10AA on enhanced income . Since it is on addition made on wrong submission by the assessee, hence the circular of C.B.D.T. is not applicable here and the cases, there is mention of enhancement of profits. In this case, this is an expenditure which has been wrongly ITA No. 1188/Del/2021 9 claimed by the assessee, which is not allowable as per old partnership deed. Hence, the circular of Hon'ble CBDT and the judgment of Hon’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 ITA No. 1188/Del/2021 10 expenditure of the partnership firm. The partners who have given loans to the Assessee firm in fact having two accounts – one relates to capital contributed by the partners and the other relates to the loans given by the partners over and above the capital contributed and therefore, the Assessee is entitled for the expenditure claimed. Clause-7 no doubt placing an embargo that no interest on capital shall be paid to the partners, but not restricting the payment of interest on loans given by the partners to the Assessee firm, which is even otherwise covered by clause-8 of the original partnership deed dated 13.07.2005. 6.2 The ld. AR further drew our attention to the changes made in the partnership deed, vide revised deed dated 22.02.2017 wherein clause 8 of the original deed has been substituted in the following terms: “8. That if any further funds be required over and above the capital contributed by the partners, the same may be arranged/borrowed from partners, other individual, banks, finance Companies or other persons. That all partners shall be entitled to the interest @ 15% per annum or such other rate as may be decided by the partners, on the amount standing to the credit of the Loan accounts of the partners. Any interest on such loan funds, borrowed for the purpose of the partnership business, shall be treated as expenditure of the partnership firm.” ITA No. 1188/Del/2021 11 And claimed that by changes made in the partnership deed, now it has become crystal clear that if further funds are required over and above the capital contributed by the partners, the same may be arranged/borrowed from partners etc. and the partners shall be entitled to the interest @ 15% per annum or such other rate as may be decided by the partners on the amount standing to the credit of the loan accounts of the partners. As the changes in the partnership deed has been made on 22.02.2017 and the assessment year involved in the instant case is 2018-19, therefore, the same may be taken into consideration. 6.3 At last the ld. AR claimed that clause 8 clearly specified the words individual and other persons as well. Therefore, the partners can not be ousted from the definition of individual or other persons in its true sense. 7. On the contrary, the ld. DR refuted the claim of the Assessee and at the outset submitted that the deed of changes in partnership deed dated 22.02.2017 is neither registered nor produced before the Assessing Officer prior to issuance of show cause notice dated 06.02.2021. 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 ITA No. 1188/Del/2021 12 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 raised by the parties and the documents referred to above and the conclusions drawn by the authorities below. It is a fact that prior to issuance of show cause notice dated 06.02.2021, the Assessee could not furnish the amended partnership deed dated 22.02.2017 by which clause-8 of the original partnership deed itself has been substituted and word partner has also been included and provision for entitlement to the interest @ 15% per annum or such other rate as may be decided by the partners, on the amount standing to the ITA No. 1188/Del/2021 13 credit of the Loan accounts of the partners has also been made. Therefore, prima facie, the genuineness of such deed of partnership is doubtful and even otherwise, the said partnership Deed is neither registered either by the Notary Public or by the Registration Authority, hence, prima facie, we also are not confident to consider the same as genuine and therefore, are not relying upon the same. 8.1 Coming to the original partnership deed dated 13.07.2005, no doubt as per clause-7 of the same, no interest on capital is allowable to the partners. However, clause – 8 clearly specifies that if further funds are required over and above the capital contributed by the partners, the same can be arranged/borrowed from the individuals, banks, finance companies or other persons. Clause-8 further specifies that any interest on such funds borrowed for the purpose of the partnership business shall be treated as expenditure of the partnership firm, meaning thereby there is no restricted clause with regard to the quantum of interest payable on such funds over and above the capital borrowed for the purpose of partnership business and the same shall be treated as expenditure of the partnership firm. 8.2 The connotation “individuals/other persons” used in clause 8 of the original partnership deed in any sense cannot exclude the partners because the partners are also individual (s) and/or other person(s) and therefore, the interpretation ITA No. 1188/Del/2021 14 to the persons mentioned in clause-8 cannot oust the partners, who are collectively working for the partnership firm, but having individual status/personality, thus we are in agreement with the Ld. AR that there was no ambiguity in clause 8 of the original partnership deed, therefore did not require Amend the same. Hence, considering clause-8 of the original partnership deed, we are inclined to allow the claim of the Assessee and consequently, the addition made by the Assessing Officer on account of disallowance of interest expenditure is deleted. 8.3 We further observe that the provisions of section 40(b)(iv) prescribes that any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed, in so far as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum, shall not be deducted in computing the income chargeable under the head profits and gains of business or profession. We have already held that as per clause-8 of the original partnership deed, the interest is allowable and it is not the case here that the partnership deed ceased to exist. Hence, the judgment in the case of Sood Brij and Associates vs. CIT-XVIII, New Delhi referred to above, as relied upon by the ld. DR, is not of any help being factually dissimilar. ITA No. 1188/Del/2021 15 9. In the result, the appeal filed by the Assessee stands allowed. Order pronounced in the open court on 29.03.2023. Sd/- Sd/- (ANIL CHATURVEDI) (N.K. CHOUDHRY) ACCOUNTANT MEMBER JUDICIAL MEMBER *aks/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT Assistant Registrar ITAT New Delhi Draft dictated Draft placed before author Approved Draft comes to the Sr.PS/PS Order si gned and pronounced on Date of uploading on the website File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.
Mehul