2022 (8) TMI 195 - AT - Income Tax

Payment of interest on capital contribution made by the appellant to the firm - Taxability of the remuneration received from the partnership firm and interest on capital contribution made by the partner of the firm in the absence of any business income in the hands of the firm - contention of the appellant is that in the absence of any business income in the hands of the firm, the question of allowance of any deduction under the provisions of section 40(b) does not arise - HELD THAT - The reasoning of the CIT(A) that there was no disallowance made by the Assessing Officer u/s.40(b) and, therefore, the question of applicability of proviso does not arise, in our considered opinion, is unreasonable. The question of disallowance by the Assessing Officer arises only in the event of claim for allowance by the firm. When there was no claim made by the assessee firm u/s. 40B, the question of disallowance does not arise. Therefore we are of the considered opinion that the matter requires a remission to the file of the Assessing Officer to decide the issue on hand with reference to the assessment record of the assessee firm in accordance with law as enunciated by us after affording a reasonable opportunity of being heard to the assessee firm. Thus, the grounds raised by the assessee stand partly allowed for statistical purposes.

Issues Involved:
1. Taxability of remuneration received from a partnership firm.
2. Taxability of interest on capital contribution made by a partner of the firm.
3. Applicability of provisions under section 40B of the Income Tax Act, 1961.

Analysis:

Issue 1: Taxability of Remuneration:
The appellant, an individual deriving income from a partnership firm, contested the taxability of remuneration received from the firm due to the absence of business income in the firm's hands. The Assessing Officer brought the remuneration amount to tax, which was upheld by the Ld. CIT(A). The appellant argued that without business income in the firm, remuneration should not be taxed. The tribunal noted that the remuneration was credited to the appellant's account despite no business profits in the firm. The tribunal explained that under section 28(v) of the Act, interest on capital contribution is taxable as business income in the hands of the partnership firm. The tribunal found the reasoning of the Ld. CIT(A) regarding the applicability of proviso to be unreasonable. Thus, the tribunal remanded the matter to the Assessing Officer for further examination in accordance with the law.

Issue 2: Taxability of Interest on Capital Contribution:
The Assessing Officer taxed the interest on capital contribution made by the partner of the firm, which was contested by the appellant on similar grounds of the absence of business income in the firm. The tribunal clarified that interest on capital contribution is chargeable against the profits of the firm and is taxable as business income under section 28(v) of the Act. The tribunal emphasized that the proviso to section 28(v) adjusts the income chargeable if certain deductions are not allowed under section 40B. The tribunal highlighted that the question of disallowance under section 40B arises only if a claim is made by the firm, which was not the case here. Therefore, the tribunal partly allowed the appellant's grounds for statistical purposes, remanding the issue to the Assessing Officer for a proper decision.

Issue 3: Applicability of Section 40B:
The tribunal examined the applicability of section 40B concerning the deduction of remuneration and interest paid by the firm to partners. The tribunal emphasized that the allowability of such deductions is subject to the provisions of section 40B. The appellant's argument that in the absence of business income, no deduction under section 40B arises was considered by the tribunal. The tribunal concluded that the Assessing Officer needs to decide the issue by reviewing the assessment record of the firm and providing a reasonable opportunity for the firm to present its case.

In conclusion, the tribunal partly allowed the appeal for statistical purposes, remanding the matter to the Assessing Officer for a thorough examination in accordance with the law. The decision highlighted the importance of considering the provisions of section 40B and the taxability of remuneration and interest on capital contribution in the context of partnership firm income.

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