2023 (11) TMI 1101 - AT - Income Tax

Interest claimed against remuneration from the Partnership firm under the head income from business profession - Setoff / adjustment of interest expenditure with interest received from partnership firm - main source of income to the assessee is only the remuneration and profit earned from the partnership firm - as per assessee he has claimed interest expenditure against the above remuneration for the reason that assessee has borrowed funds and introduced the same in the partnership firm and since the borrowing has a direct connection with the funds introduced in the partnership firm it is a claimable expenditure against the income earned by the assessee from the firm - HELD THAT - The main source of income is only from these firms and income from other sources. The assessee has also brought to our notice the funds received from loan creditors and also transferring the same amount to the partnership firm. Since the main source of income to the assessee is only the remuneration and profit earned from the partnership firm and whatever the capital borrowed by the assessee was directly introduced in the partnership firm. By looking at the balance sheet, submitted before us, we observe that assessee has own capital and borrowings from family members which is equivalent to the property owned by the assessee. There is direct link with the loan creditors and the capital introduced in the partnership firm. Therefore, it establishes that the funds borrowed by the assessee is directly introduced in the partnership firm. Whether the assessee can claim the interest expenditure against the remuneration received from the firm? - As salary or remuneration received from the firm is no doubt compensation for the services rendered but it is considered as income from business otherwise as a return of share of profits to the partners of the firm. Therefore, the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital u/s. 67(3) . As relying on Santosh Kumar Agrawal 2000 (7) TMI 971 - ITAT MUMBAI assessee has introduced the capital in the firm by borrowing funds from various loan creditors, it has direct nexus with the remuneration and other profits earned by the partners. In this case, assessee has earned only remuneration income from the firm and incurred interest expenditure, therefore should be allowed to claim the interest expenditure. CIT(A) has not addressed the issue under consideration and took it to a different dimension questioning the genuineness of the loan borrowed by the assessee. No concrete findings were given by the Ld.CIT(A) on the borrowings and also did not proceeded to make proper investigation to reach a logical conclusion, rather he proceeded to confirm the additions made by the Assessing Officer. Assessee appeal allowed.

Issues Involved:
1. Condonation of Delay in Filing Appeal
2. Disallowance of Interest Claim
3. Genuineness of Loan Transactions

Summary:

1. Condonation of Delay in Filing Appeal:
The assessee filed the appeal with a delay of 53 days, citing reasons such as using another person's email ID and not receiving the appellate order in time. The affidavit submitted by the assessee explained the delay, emphasizing there was no malafide intention. The tribunal considered the submissions and, following the Supreme Court's liberal approach in *Collector, Land Acquisition v. MST. Katiju and others*, condoned the delay to ensure substantial justice.

2. Disallowance of Interest Claim:
The assessee declared income under "Income from Business," "Capital Gains," and "Other Sources," and claimed interest of Rs. 31,55,304 against remuneration received from a partnership firm. The Assessing Officer (AO) disallowed the interest claim, citing lack of proof of nexus between the interest paid and the remuneration, absence of documentary evidence, and no apportionment of interest paid. The CIT(A) upheld the AO's decision, noting the absence of credible evidence for the unsecured loans and lack of third-party verification.

3. Genuineness of Loan Transactions:
The CIT(A) questioned the genuineness of the loans taken by the assessee, highlighting the lack of documentary proof, confirmations from lenders, and audited accounts. The assessee argued that the borrowed funds were introduced as capital in the partnership firm and that the interest expenditure should be allowed against the remuneration received. The tribunal observed that the assessee had introduced capital in the partnership firms and had a direct link between the borrowed funds and the capital introduced.

Tribunal's Decision:
The tribunal referred to the case of *Santosh Kumar Agrawal v. ACIT*, which held that interest paid on borrowed funds introduced as capital in a partnership firm is deductible against remuneration received from the firm. The tribunal found that the assessee had established a direct nexus between the borrowed funds and the remuneration received. Consequently, the tribunal allowed the appeal, permitting the interest expenditure claim and noting that the CIT(A) failed to address the issue properly and did not conduct a thorough investigation.

Conclusion:
The appeal filed by the assessee was allowed, with the tribunal condoning the delay in filing and permitting the interest expenditure claim against the remuneration received from the partnership firm. The tribunal emphasized the need for substantial justice over technical considerations.

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