2023 (1) TMI 373 - AT - Income Tax

Addition of introduction of capital by one partner u/s.68 - CIT(A) deleted the addition accepting the explanation that the cash drawing of Rs.10 lakhs on 05.03.2011 was available with him but restricted the addition at Rs.11 lakhs being unexplained - HELD THAT - We notice that there is no dispute that there is returned income for assessment year 2012-13 of Rs.20,19,656/- and admittedly, there is a withdrawal of Rs.6,77,130/- during the year as cash as admitted by AO in assessment order while rejecting the assessee s explanation. There is no dispute that out of Rs.21 lakhs, the CIT(A) accepted the explanation of Rs.10 lakhs availability with the assessee which is out of withdrawal from the firm on 05.03.2011 just one month before. For balance Rs.11 lakhs, we are of the view that the assessee is able to explain the same out of the returned income of Rs.20,19,656/- and withdrawals admitted by AO at Rs.6,77,130/-. Hence, we delete the addition on merits and allow the appeal of assessee on this ground. This issue of assessee s appeal is allowed. Disallowing interest on debt balance of partners - HELD THAT - As we noted that first of all there is no evidence that the assessee has diverted interest bearing funds for this debt balance of partners account. AO is unable to bring nexus that the interest bearing funds were diverted towards partner s debt balance. Secondly, can the notional interest be charged for making disallowance u/s.37 of the Act or not - interest can be disallowed if the assessee has diverted interest bearing borrowed funds for the purpose of non-business. But here there is no information that how much is borrowed funds and moreover only packing credit is meant for exports against orders. No reason that any diversion of these funds for debt balance of the partners - there cannot be any notional interest charged for taxing in the partner s debt balance specifically when there is no discussion in the partnership deed, if any, has provided any charging of interest on debt balance and rates specified therein. Since these evidences are not brought on record by the AO or there is no discussion, simpliciter the notional interest cannot be charged and cannot be disallowed u/s.37 - we delete the addition and allow this issue of assessee s appeal. Addition by disallowance of interest on TDS - HELD THAT - We noted that this issue is covered in favour of Revenue and against assessee by the decision of ITAT, Ahmedabad in the case of ITO vs. Royal Packaging 2011 (4) TMI 1489 - ITAT AHMEDABAD wherein it is held that interest on late payment of direct taxes is not deductible. Hence, we confirm the addition and dismiss this ground of assessee s appeal.

Summary

Issues:
1. Delay in filing the appeal
2. Addition of introduction of capital by a partner
3. Disallowance of interest on debt balance of partners
4. Disallowance of interest on TDS

Issue 1: Delay in filing the appeal
The appeal was delayed by 28 days due to the appellant receiving the appellate order after the due date. The appellant filed a condonation petition stating a 20-day delay, attributing the error to incorrect dates mentioned in the form. The Tribunal, considering the nature and minimal delay, condoned the delay and admitted the appeal.

Issue 2: Addition of introduction of capital by a partner
The AO added the introduction of capital by a partner as unexplained, leading to an appeal. The CIT(A) accepted part of the explanation but restricted the addition to Rs.11 lakhs due to lack of clarity on the source of the remaining amount. The Tribunal, after reviewing the case, found the appellant's explanation satisfactory, linking the amount to returned income and withdrawals, leading to the deletion of the addition.

Issue 3: Disallowance of interest on debt balance of partners
The AO disallowed interest on the debt balance of partners, alleging diversion of borrowed funds for non-business purposes. The CIT(A) upheld the disallowance, emphasizing the lack of satisfactory explanations. The Tribunal, however, found no evidence of diversion of interest-bearing funds and questioned the validity of charging notional interest without clear proof of diversion. As a result, the Tribunal deleted the addition, ruling in favor of the appellant.

Issue 4: Disallowance of interest on TDS
While the AO did not disallow interest on TDS, the CIT(A) disallowed it, citing a precedent where such interest was non-deductible. The Tribunal, in line with the precedent, confirmed the disallowance, dismissing this ground of the appellant's appeal.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the appellant on issues related to the addition of capital by a partner and the disallowance of interest on the debt balance of partners. However, the disallowance of interest on TDS was upheld.