2023 (4) TMI 100 - AT - Income Tax

Disallowance on account of interest payment on secured loans by the assessee firm to its partners - Addition made on non-deduction of TDS and non-authorisation of interest payment to partners by the deed of partnership - CIT-A deleted the addition - HELD THAT - Instead of obtaining complete set of deed of partnership from the assessee during assessment proceedings, the Ld. AO chose to make the impugned disallowance on the basis of missing para 10 to 18 of the deed of partnership and the last page thereof. This is not fair. The assessee was clearly denied the opportunity of producing the complete set of deed of partnership during assessment proceedings. The assessee made an application under rule 46A of the Income Tax Rules, 1962 for filing complete set of deed of partnership which the Ld. CIT(A) rightly admitted as additional evidence. Para 10 thereof mentions that the partners shall be entitled to interest on their loan accounts with the firm at such rates as are prescribed under the Act. In this view of the matter, we hold that the Ld. CIT(A) was perfectly justified in deleting the impugned disallowance. Ground No. 1 of the Revenue being devoid of any legal substance is rejected. Addition u/s 68 - no authentic evidence/detail is produced - Whether impugned transaction is covered as short term capital gain in the hands of the assessee firm? - CIT(A) allowing the long term capital loss instead of short term capital gain as computed by AO in remand report - Whether assessee failed to substantiate the claim? - HELD THAT - Perusal of assessment order reveals that it was explained by the assessee during assessment proceedings that the said amount represents profit on sale of land/building. Sale proceeds have been accepted through banking channels. TDS under section 194A has been deducted which is duly reflected in Form 26AS. The transaction is genuine yet the Ld. AO made the impugned addition for the only reason that no authentic evidence/detail is produced. CIT(A) under Rule 46A admitted purchase as also sale deed and confronted the Ld. AO who in his remand report admitted that addition under section 68 needs to be deleted and contended that the impugned transaction is covered as short term capital gain in the hands of the assessee firm. Sale deed/conveyance deed revealed that the land was allotted to the firm in the year 2008 i.e. beyond a period of 36 months. On appreciation of the entire evidence on record and remand report of the Ld. AO, the CBDT circular No. 471 dated 15.06.1986 and the decision of South India Corporation Ltd. vs. ACIT 2019 (7) TMI 27 - MADRAS HIGH COURT CIT(A) reached the conclusion that the transaction of sale of industrial plot together with building constructed thereon is a long term capital asset. Land was allotted in the year 2008 relevant to AY 2009- 10 and building was constructed thereon. The department has been allowing depreciation year after year. Hence, possession of land cannot be disputed. The Ld. CIT(A) recorded the finding that the computation of capital gain as provided by the assessee is correct and in accordance with law. Nothing has been brought on record by the Revenue to dismantle the above finding of the fact recorded by the Ld. CIT(A) - Appeal of the Revenue stands dismissed.

Summary

Issues Involved:
1. Deletion of disallowance of interest paid to partners.
2. Deletion of addition under section 68 of the Income Tax Act.
3. Allowing long-term capital loss instead of short-term capital gain.

Summary:

Issue 1: Deletion of Disallowance of Interest Paid to Partners

The Revenue challenged the deletion of the disallowance of Rs. 29,80,679/- made by the AO on account of interest paid to partners. The AO disallowed the interest for two reasons: non-deduction of TDS and lack of authorization in the partnership deed. The CIT(A) found that the complete partnership deed, which authorized interest payments, was not initially submitted. The CIT(A) admitted the complete deed as additional evidence, verifying that it authorized interest payments. The CIT(A) also noted that under section 194A(3)(iv) of the Act, TDS was not required for interest paid by a firm to its partners. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's ground.

Issue 2: Deletion of Addition under Section 68 of the Income Tax Act

The AO added Rs. 3,46,50,000/- to the assessee's income under section 68, questioning the genuineness of the sale proceeds from land/building. The CIT(A) admitted additional evidence, including purchase and sale deeds, and found the transaction to be genuine. The CIT(A) noted that the land was allotted in 2008, making it a long-term capital asset. The Tribunal upheld the CIT(A)'s decision, finding no reason to dispute the genuineness of the transaction and the classification as a long-term capital asset.

Issue 3: Allowing Long-Term Capital Loss Instead of Short-Term Capital Gain

The AO classified the transaction as a short-term capital gain, while the CIT(A) treated it as a long-term capital asset, allowing a capital loss of Rs. 9,770/-. The CIT(A) based this on the allotment date of the land in 2008 and subsequent construction, supported by depreciation claims allowed by the department. The Tribunal upheld the CIT(A)'s findings, agreeing that the transaction was correctly classified as a long-term capital asset and the computation of capital gains was accurate.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The Cross Objection by the assessee, being in support of the CIT(A)'s order, was also dismissed as infructuous. The final order pronounced on 29th March 2023, dismissed both the Revenue's appeal and the assessee's Cross Objection.