2010 (8) TMI 1087 - AT - Income Tax

Summary

Issues Involved: Confirmation of notional interest on debit balance of partners, Interpretation of section 40(b) of the IT Act.

Confirmation of Notional Interest on Debit Balance of Partners:
The Appellate Tribunal ITAT Ahmedabad heard the appeal by the assessee against the order of the CIT(A)-XX, Ahmedabad for the assessment year 2007-08. The Assessing Officer (AO) directed to charge interest on the debit balance of partners @12% and made an addition of Rs. 1,56,535 u/s 40(b) of the IT Act. The assessee contended that no interest was charged on the debit balance as per the partnership deed, which allowed partners to change the rate of interest. The CIT(A) confirmed the addition, citing the appearance of the debit balance against the partners. However, the Tribunal held that the addition was unjustified, referring to the decision of the Gauhati High Court and the Supreme Court. It emphasized that section 40(b) allows deduction of expenditure, but does not provide for charging notional interest on the debit balance of partners. The Tribunal noted that the partners had mutually decided not to charge interest on the debit balance in the current year. Therefore, it concluded that the AO was not justified in directing to charge notional interest, and deleted the addition.

Interpretation of Section 40(b) of the IT Act:
The Tribunal analyzed the provisions of section 40(b) of the IT Act, which allows deduction of expenditure while computing business income. It highlighted that section 40(b)(iv) permits the payment of interest to partners as an allowable deduction if authorized by the partnership deed. However, the Tribunal noted that the provision does not authorize charging notional interest on the debit balance of partners. It emphasized that the partnership deed in this case did not specify charging interest on the debit balance. The Tribunal further reiterated that the partners had decided not to charge interest on the debit balance for the current year. Therefore, it concluded that the AO's direction to charge notional interest was unwarranted. By considering the facts and circumstances, the Tribunal set aside the orders of the authorities below and allowed the appeal of the assessee.