2002 (4) TMI 885 - AT - Income Tax

Business disallowance - Interest, salary, etc., paid by firm to partner, Assessment - Addition to income

Summary

Issues:
1. Disallowance of interest out of partners' capital account.
2. Addition of Rs. 1,63,200 under the head 'bogus purchase.'

Analysis:

Issue 1: Disallowance of interest out of partners' capital account
The Revenue filed four appeals against the CIT(Appeals) orders for the assessment years 1993-94 to 1996-97. The primary contention in all the appeals was the disallowance of interest out of partners' capital account. The Assessing Officer observed an appreciation in the value of the property held by the firm, leading to an enhancement of the capital accounts of the partners. Subsequently, interest at 18% was charged on the increased value and credited to the partners' capital accounts, which the Assessing Officer disallowed. However, the first appellate authority granted relief to the assessee, emphasizing the provisions in the Partnership Deed regarding interest on partners' credit balance. The partners unanimously decided to appreciate the building's value by Rs. 10 lakhs, supported by the rental income exceeding the written down value of the building. The Tribunal noted the legitimate appreciation of the building's value, the provision for interest in the Partnership Deed, and the retirement of a partner with the payment of her capital share. Drawing parallels to precedent cases, the Tribunal upheld the CIT(Appeals) order, dismissing the Revenue's appeal.

Issue 2: Addition of Rs. 1,63,200 under the head 'bogus purchase'
In the assessment year 1993-94, the Assessing Officer added Rs. 1,63,200 as 'bogus purchase' due to unverifiable spare parts purchases from two entities. Despite issuing summons and conducting inquiries, the parties could not be traced, with local testimonies denying their existence at the provided addresses. The CIT(Appeals) reversed this addition, citing the entries in the books of account and improved Gross Profit (G.P.) shown by the assessee. Upon review, the Tribunal noted the absence of concrete evidence establishing the existence of the suppliers, as critical details like trade license numbers were missing from the bills. The Tribunal concurred with the Assessing Officer's findings, emphasizing the lack of substantiating material to validate the purchases. Consequently, the Tribunal allowed the appeal partially for the assessment year 1993-94, while dismissing the other appeals.

In conclusion, the Tribunal upheld the CIT(Appeals) decision regarding the disallowance of interest out of partners' capital account, citing legitimate appreciation of asset value and adherence to Partnership Deed provisions. Conversely, the Tribunal supported the Assessing Officer's stance on the addition of 'bogus purchase,' highlighting the absence of conclusive evidence to verify the transactions.