2013 (8) TMI 1054 - AT - Income Tax

Summary

Issues involved: Interpretation of u/s 28 of the Income Tax Act 1961, treatment of interest on partner's debit balance, applicability of deemed dividend u/s 2(22)(e) of the IT Act.

Interpretation of u/s 28 of the Income Tax Act 1961:
The Revenue contended that the CIT(A) erred in not appreciating the application of section 28 of the IT Act, which states that the value of any benefit or perquisite arising from business or profession is chargeable under the head profit and gain from business or profession. The Revenue argued that interest-free loans to partners resulted in diverting funds, thus falling under section 28. However, the CIT(A) found that taxing income on a notional basis is not sustainable in the eyes of the law, especially when no actual interest was paid or received. The Tribunal upheld this finding, emphasizing that no interest was charged on the partners' debit balance, and the partnership deed did not mandate interest payments, leading to the dismissal of the Revenue's appeal.

Treatment of interest on partner's debit balance:
The Assessing Officer had charged interest on the net debit balance of partners at 12%, resulting in an addition of `20,61,845. The CIT(A) disagreed with this approach, stating that taxing income on a notional basis without actual interest payments is not valid. The Tribunal concurred, highlighting that no interest was charged on the partners' debit balance, and the absence of any provision for interest in the partnership deed further supported the deletion of the addition. The Tribunal emphasized that the charging of interest by the Assessing Officer was merely taxing notional income, leading to the dismissal of the Revenue's appeal.

Applicability of deemed dividend u/s 2(22)(e) of the IT Act:
The Revenue argued that the partners' overdrawn funds should be treated as deemed dividend u/s 2(22)(e) of the IT Act, as these payments were akin to advance or loans benefiting the partners. However, the Tribunal noted that the concept of deemed dividend applies to companies, not partnership firms. As the assessee in this case was a partnership firm, the Tribunal found no merit in the Revenue's appeal and dismissed it.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the addition of interest on the partner's debit balance, emphasizing the absence of actual interest payments and the notional nature of the income. The Tribunal also clarified that the concept of deemed dividend does not apply to partnership firms, leading to the dismissal of the Revenue's appeal.