2024 (10) TMI 419 - AT - Income Tax

Addition on account of interest on capital of assessee lying with the partnership firm - addition was made on account of interest on capital contribution to partners and remuneration was added thereby reduced the claim of deduction u/s 80IB - AO made addition of 12% of interest on capital of assessee - HELD THAT - As we find that in the case of Alidhara Taxpro Engg. (P) Ltd. 2009 (3) TMI 74 - GUJARAT HIGH COURT held that mere incorporation of interest on partners capital account and remuneration does not signify that the same are mandatory in nature. As we have noted above, in the present case the appellant has not charged any interest and remuneration as per partnership deed therefore, the appellant firm cannot be compelled to charge interest or remuneration. Further in the case of Myhome Developers 2021 (3) TMI 345 - GUJARAT HIGH COURT has held that though the clauses of the partnership deed provided for interest on partner's capital and remuneration, the same is subject to their mutual agreement. The clauses contained are only enabling provision not mandatory in nature so as to lead to an inference that, the assessee had to pay interest on capital and remuneration to its partners. No justification for making addition of interest when neither the assessee has claimed interest on its capital lying with the firm nor the said firm has paid any interest to the assessee. Hence, there is no justification for making addition by the AO and same is deleted. Appeal of assessee is allowed.

Summary

Issues:
1. Validity of reopening of the appellant's case under section 148 of the Income Tax Act.
2. Addition made by the Income Tax Officer regarding interest on capital receivable from the partnership firm of M/s Shrusti Corporation.

Analysis:
1. The appeal involved challenging the validity of the reopening of the appellant's case under section 148 of the Income Tax Act. The appellant contended that the reopening was based on a mere change of opinion, which is impermissible in law. The appellant argued that since the partnership firm was allowed deductions under Section 80IB in previous years and the case of the firm was reopened for similar issues, the appellant's case should not have been reopened. The appellant also highlighted the partnership deed, which provided an option for the firm to pay interest on partners' capital. The appellant relied on various decisions to support the argument that such payments were not mandatory. The Tribunal considered these arguments and case laws, ultimately ruling in favor of the appellant, stating that there was no justification for the addition made by the Assessing Officer. Therefore, the addition was deleted, and the appeal was allowed.

2. The second issue revolved around the addition made by the Income Tax Officer regarding interest on the capital of the appellant lying with the partnership firm of M/s Shrusti Corporation. The Assessing Officer calculated 12% interest on the appellant's capital, resulting in an addition of Rs. 6,59,035. The appellant argued that no interest was paid on the capital contribution to the partnership firm, and the partnership deed did not mandate such payments. The Tribunal referred to relevant case laws, including decisions by the jurisdictional High Court, which emphasized that clauses in partnership deeds regarding interest on capital were enabling provisions, not mandatory. The Tribunal found no justification for the addition and ruled in favor of the appellant, deleting the addition. As a result, the second ground of appeal was allowed.

3. Since relief was granted to the appellant on merit regarding the addition of interest on capital, the adjudication of other grounds related to the validity of reopening became academic. Consequently, the appeal of the appellant was allowed, and the order was announced in open court on 26th September 2024.