2022 (1) TMI 926 - AT - Income Tax

Disallowance of interest expenditure - Corresponding to interest on debit balance of partner - amounts withdrawn by the partner for the payment of income-tax from the partnership firm - AR submitted that undisputedly the assessee had withdrawn the amounts for the purpose of payment of tax and had claimed interest paid on the debit balance on account of excess borrowings, whereas, the firm had shown interest charged from the assessee as its income - only reason for which AO made the impugned disallowance is that the assessee had made withdrawals for the purpose of payment of taxes and had claimed interest such paid as expenditure - HELD THAT - We agree with the contention of the Ld. AR that since the assessee partner is entitled to interest received on the credit balance of capital, which becomes his income , similarly, the assessee / partner is also liable to pay interest on the debit balance / excess withdrawals from the partnership firm and by the same reasoning and logic it become as expenditure which is to be deducted while computing the taxable income of a partner of the firm. In our view too, once the partner has withdrawn an amount from the firm, it becomes immaterial as to what end it put to use. The amounts withdrawn may be utilised by the assessee / partner for the purpose of meeting house-hold expenses, making investments or even for the purpose of paying tax and it is not within the purview of the Income-tax authorities to determine and dictate as to how the funds so withdrawn are put to use by the assessee / partner. Although, it is a settled proposition that the tax paid in respect of income is not a deductible expense, it is not the case here. Both the lower authorities below to have entirely misconstrued the factual matrix and have proceeded on an assumption that the assessee / partner was claiming expenditure in respect to income tax / advance tax paid, whereas, the assessee has only claimed expenditure in respect of interest on excess withdrawals made, which were utilised for the purpose of paying income tax / advance tax. Therefore, in our considered opinion, both the lower authorities have entirely missed the case in point and have made the impugned disallowance which cannot be sustained - we direct the Assessing officer to delete the impugned disallowance .

Summary

Issues:
- Challenge to common order of Commissioner of Income Tax (Appeals) for assessment years 2015-16, 2016-17, and 2017-18.
- Disallowance of interest expenditure claimed by the assessee.
- Invocation of section 153A for assessment u/s 143(3) without incriminating material.
- Legal validity of interest expenditure disallowance by Assessing officer.
- Appeal before the Tribunal to challenge disallowance of interest.

Analysis:

Issue 1: Challenge to Common Order of Commissioner of Income Tax (Appeals)
The assessee challenged the common order of the Commissioner of Income Tax (Appeals) for the assessment years 2015-16, 2016-17, and 2017-18. The appeals involved identical issues related to interest expenditure and were heard together and disposed of through a common order.

Issue 2: Disallowance of Interest Expenditure
The Assessing officer disallowed interest expenditure claimed by the assessee on the grounds that it was paid to M/s Sham Fashion Mall for excess borrowings and used for payment of income tax/advance tax. The First Appellate Authority upheld the disallowance in all three years. The Tribunal considered the argument that interest paid by the partner on the debit balance is deductible expenditure and found the disallowance to be erroneous and unsustainable.

Issue 3: Invocation of Section 153A for Assessment
The assessee challenged the invocation of section 153A for assessment u/s 143(3) without incriminating material. The Tribunal noted that the Assessing officer made the disallowance based on withdrawals for tax payments and claimed interest paid as expenditure. The Tribunal found the disallowance to be incorrect as it was not related to income tax/advance tax paid but to interest on excess withdrawals.

Issue 4: Legal Validity of Interest Expenditure Disallowance
The Assessing officer disallowed interest expenditure on the assumption that it was claimed in relation to income tax/advance tax paid. However, the Tribunal clarified that the expenditure was on interest for excess withdrawals, not tax payments. The Tribunal held that the lower authorities misconstrued the case and directed the Assessing officer to delete the disallowance in all three years under consideration.

Issue 5: Appeal Before the Tribunal
The Tribunal partially allowed all three appeals, setting aside the orders of the Commissioner of Income Tax (Appeals) and directing the Assessing officer to delete the disallowance of interest expenditure. The decision was pronounced on 28.12.2021 by the Tribunal.

This detailed analysis covers the key issues raised in the legal judgment regarding the disallowance of interest expenditure and the invocation of section 153A for assessment without incriminating material.