2013 (12) TMI 1364 - AT - Income Tax

Issue regarding the relevant head of income - Held that - If an income falls under more than one head, the assessee has the option of choosing for the purpose of income tax, such head which makes the burden on his shoulders lighter - In the absence of any evidence brought by the authorities below to disprove/disbelieve the claim of the assessee treating the impugned receipt under the head business income , the authorities below are not justified in treating the same under the head income from other sources - Admission by the assessee made during the survey cannot be the sole basis for taking a decision by the revenue authorities during the assessment proceedings. Disallowance of interest paid to firm - Held that - As per clause 12 of the Partnership deed, the partners are entitled to interest on the credit balance in the capital account, as prescribed u/s 40(b)(iv) of the I.T. Act 1961 @ 12% - The partners are also liable to pay interest on the debit balance in capital account on similar basis - the claim of the assessee is emanating out of contractual obligation and is in consonance with the provisions of law - Decided in favour of assessee.

Summary

Issues:
1. Treatment of disclosed amount as 'income from other source' instead of 'business income'
2. Disallowance of interest paid by the assessee to the firm in which he is a partner

Issue 1: Treatment of disclosed amount as 'income from other source' instead of 'business income'

The appeal was against the order treating an amount disclosed during survey proceedings as 'income from other source' instead of 'business income'. The assessee, a partner in a firm, had declared an amount as business income, but the AO treated it differently due to lack of evidence and non-filing of a report u/s 44AB. The CIT(A) upheld the AO's decision, suspecting an attempt to reduce tax liability. The assessee argued the income was from referral and commission business, citing relevant case laws. The Tribunal noted discrepancies in the AO's and CIT(A)'s reasoning, emphasizing the assessee's right to choose a head of income. It highlighted that a statement under section 133A doesn't automatically bind the assessee, and non-compliance with section 44AB doesn't preclude income disclosure under 'business.' Relying on case laws, the Tribunal directed the income to be treated as 'business income,' allowing the appeal.

Issue 2: Disallowance of interest paid by the assessee to the firm in which he is a partner

The appellant, a partner in a firm, paid interest on an overdrawn balance in his capital account, claiming it as a business loss. The AO allowed the loss, but the CIT(A) disallowed a portion without providing reasoning. The Tribunal examined the partnership deed, noting entitlement to interest as per the IT Act and contractual obligations. It observed the firm's assessment treated the interest as income. Considering the contractual nature of the interest payment, the Tribunal set aside the lower authorities' decision, allowing the appeal.

In conclusion, the Tribunal allowed the appeal, directing the disclosed amount to be treated as 'business income' and overturning the disallowance of interest paid by the appellant to the firm.