2015 (12) TMI 608 - AT - Income Tax

Diversion of interest bearing funds to one of its partner Shri Deepak Khanna for non business purposes - CIT(A) deleted the addition - Held that - The interest in the case of firm has to be calculated on both the accounts of the partner in debit and credit by the Assessing Officer not only debit balance of the partner. The firm had not charged or paid any interest to the partner either on debit or credit since inception. Therefore, there is no justification in calculating the disallowance on debit balance of one of the partner namely Shri Deepak Khanna. The ld DR has also not controverted the finding given by the ld CIT(A). Therefore, we uphold the order of the ld CIT(A). - Decided against revenue

Summary

Issues Involved:
Appeal against deletion of addition of interest-bearing funds diverted to a partner for non-business purposes.

Analysis:
1. The Assessing Officer observed a debit balance in the partner's capital account without any interest charged, leading to the addition of Rs. 11,43,263 under the Income Tax Act, 1961.
2. The Assessing Officer held that interest on capital should be governed by the partnership deed, and partners cannot claim interest if not allowed in the deed.
3. Citing relevant case laws, the Assessing Officer disallowed the amount based on the partnership deed's terms and prevailing market rates.
4. The CIT(A) allowed the appeal, noting that the partnership deed permitted interest-free withdrawals by partners and that the interest calculation would nullify interest from other partners.
5. The AR for the assessee argued that interest on capital is as per the partnership deed, and interest should be paid on cumulative capital accounts of both partners.
6. The AR referred to a Supreme Court decision to support that interest-free advances given in earlier years should not be disallowed in subsequent years.
7. The ITAT upheld the CIT(A)'s decision, stating that interest should be calculated on both partners' accounts, and since no interest was charged or paid since inception, the disallowance on one partner's debit balance was unjustified.

This detailed analysis covers the issues involved in the legal judgment comprehensively, highlighting the arguments presented by both parties and the rationale behind the final decision.